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

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Saudi Arabia is running tests on a critical oil pipeline that was recently knocked out by drone strikes, a step toward restoring flows and reviving a major export route that bypasses the Strait of Hormuz.

The East-West pipeline is being tested for structural integrity and pressure, according to people familiar with the matter. If successful, crude exports from the Red Sea port of Yanbu could restart within a couple of days, they added.

The pipeline has become one of the world's most important pieces of energy infrastructure during the Iran war, serving as a workaround for sharply curtailed tanker traffic out of the Persian Gulf.

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 Iran-Iraq 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 could repairs take?

The pipeline was previously attacked in April, damaging a pumping station and cutting capacity by about 700,000 barrels a day. 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.

It wasn't immediately clear how much capacity Saudi Aramco, the kingdom's flagship oil company, can restore at the pipeline. People familiar with the matter have previously said it could take up to 8 weeks to return the pipeline to full operating capacity.]

How did Saudi Arabia respond to the outage?

To keep exporting oil, Saudi Arabia rerouted deliveries back through the Strait of Hormuz, a chokepoint it had sought to avoid earlier in the war.

To do so, Aramco is making shuttle runs through the risky waterway. Ships load crude at its Ras Tanura port in the Persian Gulf, sail through Hormuz and then transfer cargoes at sea to other vessels that complete deliveries to Asia. The ships then return to pick up more crude and repeat the process.

In the past two weeks, Saudi oil flows through Hormuz have climbed back to roughly 2.4 million barrels a day, a level last seen in early July, according to ship tracker Kpler.

The shuttle runs are an expensive and risky workaround. Freight costs have surged as more ships are tied up moving oil through Hormuz. The cost of transporting crude from Ras Tanura to China's Ningbo port has risen from around $4.5 million to nearly $63 million a trip, according to Michael Haigh, head of commodities research at Société Générale.

What does the outage mean for oil prices and global supplies?

Before the pipeline outage earlier this month, roughly 4 million barrels a day-around 4% of global supply-were flowing through it, analysts estimate. The impact of the outage on oil prices will depend on how much of those flows Saudi Arabia is able to restore.

Oil prices fell Tuesday following reports of the pipeline's potential restart, with Brent crude, the international benchmark, dropping around 2% to below $100 a barrel after rising earlier in the day.

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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