What is Saudi Arabia's East-West Pipeline and Why is it Rocking Oil Markets?

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Saudi Arabia is racing to repair a critical oil pipeline shut down by drone attacks last week. The disruption threatens to remove another major source of crude from global markets.

The kingdom is trying to resume partial operations on the pipeline within days, though repairing damaged pumping stations and fully restoring capacity could take as long as six to eight weeks, according to people familiar with the matter.

The East-West pipeline has become one of the world's most important pieces of energy infrastructure during the Iran war, a workaround to sharply curtailed tanker traffic through the Strait of Hormuz.

Here's what to know:

What is Saudi Arabia's East-West pipeline and what happened to it?

Stretching 750 miles across Saudi Arabia from the kingdom's oil-producing heartland on the Persian Gulf to the Red Sea port of Yanbu, the East-West pipeline has become a vital wartime artery, allowing Saudi crude to reach global markets without passing through the Strait of Hormuz. It was built in the early 1980s when the Tanker War threatened shipping in the Persian Gulf.

The pipeline can carry up to 7 million barrels a day-about 2 million for domestic Saudi refiners and the rest for export-but had never operated at full capacity for an extended period before the war.

Saudi Arabia said the pipeline was hit in multiple attacks in the Riyadh and Medina regions on Sept. 10, which caused injuries. It said the drones were fired from Iraq, where authorities have struggled to control Iran-backed militias that have repeatedly targeted Saudi infrastructure.

Saudi authorities said they shut the line as a precaution but haven't disclosed the full extent of the damage or announced when pumping will resume.

How long can Saudi Arabia keep exporting without it?

Saudi Arabia can keep loading crude at Yanbu with the pipeline shut by drawing on oil already stored at the Red Sea port. But the cushion is thin: Data provider Kpler estimates Yanbu crude inventories stood at just 9 million barrels on Monday, and down more than 7 million barrels over the past two months. The full capacity of the tanks at Yanbu is around 24 million barrels.

Janiv Shah, an oil analyst at Rystad Energy, said that his working assumption is that Yanbu has around three days of crude export cover, with a range of two to six days depending on the inventory level when the pipeline was shut.

How long the Yanbu storage lasts depends on the pace of exports. Saudi crude-oil exports from Yanbu had surged above 4 million barrels a day from April through June as the kingdom redirected more crude away from the Strait of Hormuz.

But after Iran-backed Houthi rebels in Yemen announced a blockade of the kingdom and stepped up attacks on Saudi shipping in the Red Sea, loadings fell to just 1.1 million in August, according to financial-data provider LSEG.

Saudi Arabia could buy at least another week by drawing on additional crude stored in Egypt, extending the window before Red Sea exports would have to fall more sharply, according to the people familiar with the matter.

A prolonged pipeline outage could also force Saudi Arabia to cut production further after output already fell sharply during the war. Crude production dropped in August to 6 million barrels a day, the lowest in more than three decades, according to the International Energy Agency, versus an average of about 9.4 million barrels a day last year.

How long could repairs take?

The pipeline was attacked in April, damaging a pumping station and cutting capacity by about 700,000 barrels a day, but Saudi Arabia restored full capacity within days.

This time, a partial restart could come much sooner than a full repair, according to people familiar with the matter. The East-West system consists of two parallel pipelines that use separate pumping infrastructure, meaning one line could potentially resume operations after safety checks even while repairs continue on the other.

Restoring damaged pumping stations is more complicated, however, and full repairs could take as long as six to eight weeks even under favorable conditions, they said.

Michael Haigh, head of commodities research at French bank Société Générale, estimated that depending on the degree of the damage, repair work could last three to seven days at best but it would more likely take one to three weeks. If the pumping stations have suffered major structural or electrical damage, restoration would likely take five to six weeks.

What does the outage mean for oil prices and the global supply deficit?

Before last week's shutdown, roughly 4 million barrels a day, or around 4% of global supply, were flowing through it, analysts estimate. The impact of the outage on oil prices will depend on how fast Saudi Arabia is able to restore flows.

Oil prices jumped on Monday, with Brent crude, the international benchmark, rising more than 4% to above $109 a barrel, the highest level since May.

For now, analysts are sticking with their previous near-term price forecasts given uncertainty about the duration of the pipeline's closure.

"The situation is fluid as we continue to see sizable volumes of oil still moving through the Strait of Hormuz," said analysts at Dutch bank ING, who continue to estimate that Brent futures would average $80 a barrel in the fourth quarter this year.

The pipeline mostly transferred Saudi Arabia's medium-sour crude grades, analysts said. Finding a replacement for that grade will be challenging, said Rystad's Shah. The closest alternatives would be crude from oil fields in Oman and the U.A.E., but these locations face their own challenges transporting oil to Asia, Shah said.

"A short duration will have less impact on the markets," said June Goh, senior oil market analyst at Sparta Commodities. However, the uncertainty may already cause European and Asian refineries that are reliant on Saudi crude to reduce output while they wait for replacement crude, she said.

 

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