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Saudi Aramco Says It Can Keep Oil Flowing If Hormuz Hit

Heesu Lee
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Oil Tankers Dodge Top Mideast Refueling Hub After Ship Attacks

(Bloomberg) -- Oil tanker owners are avoiding sending their ships to the Middle East’s main refueling hub after a spate of attacks on vessels in the past two months ratcheted up tensions and highlighted the growing risks of operating in the region.Strikes on tankers just outside the Persian Gulf in mid-June were the second in a month near the Strait of Hormuz, the chokepoint through which about a third of global seaborne oil moves. Now demand for ship fuel at Fujairah, the United Arab Emirates coastal shipping hub close to the Strait, has waned as some tankers stay away, traders involved in the regional market said.“Only expect issues to get worse before they get better,” said Matt Stanley, a senior broker at Star Fuels in Dubai. Fujairah is seeing “a significant drop in demand owing to war-risk premiums” that are levied by ship insurers, he said.The root cause of the slump -- whether ships are avoiding the Middle East altogether or just skipping Fujairah -- isn’t completely clear. But since the attacks in early May, insurance costs have soared and some owners turned wary of sending their carriers to the region. One of the largest, Frontline Ltd., even temporarily paused trading from the Persian Gulf.Fujairah provides tankers with fuel, supplies and repairs as they ply the route from the Persian Gulf through the Strait of Hormuz to refineries the world over.Local officials say that there’s been no slump in refueling from facilities at the port itself, but that only captures a fraction of the trade. Carriers are also supplied at anchorage areas -- where four tankers were attacked in early May -- and it’s there that brokers and traders are reporting the drop-off.There is no public data for overall sales, but the brokers and traders say there’s been drop of about 15% since the May attacks, although their estimates vary sharply. One broker said bunker demand had declined more than 30% to as little at 500,000 tons a month.Facts Global Energy estimates sales have slumped to about 650,000 tons a month, a drop of about 13% compared with the period before the incidents. Volumes reached as much as 1 million tons in 2016, but had been slipping since then.Environmental RulesOfficials at the port and in the local government declined to comment on the volume of ship-fuel being traded offshore.The amount of refined products transferred into and out of storage tanks at the port probably reached the highest level this year during June, said William List, director of operations at the Fujairah Oil Tank Terminal. That didn’t include data on offshore bunkering, he said.Government economic adviser Salem Khalil said any decline in bunker volumes would likely be due to new environmental rules that will take effect next year. Fujairah expects demand at the port to increase in 2020, he said.Multiple ChallengesThe attacks are just the latest challenge for Fujairah, which has developed in recent years into a trading center for crude oil and refined products, as well as fulfilling its traditional role as a refueling hub.Iran, the region’s main producer of the high-sulfur fuel oil that most ships use today, is under pressure from U.S. sanctions that threaten buyers of the country’s oil with financial penalties. Demand for that type of fuel is also set to plummet next year when the United Nations’ International Maritime Organization will require ships either to burn cleaner fuel or scrub their emissions.Ships won’t shun Fujairah entirely because there are few alternatives close by with the same range of services, the traders said. One possibility, though, is to go to Singapore for carriers that are making return trips from Asia. That can be advantageous for tanker owners anyway if they are considering sailing to West Africa to seek their next cargoes.Vessels that go to Fujairah solely for fuel and servicing would be more likely go elsewhere, the traders said. However, a large proportion of tankers sailing through Hormuz to load crude or fuel in the Gulf will probably keep visiting the port as those ships will have paid higher insurance premiums already, they said.\--With assistance from Alaric Nightingale and Julian Lee.To contact the reporter on this story: Anthony DiPaola in Dubai at adipaola@bloomberg.netTo contact the editors responsible for this story: Nayla Razzouk at nrazzouk2@bloomberg.net, Alaric Nightingale, John DeaneFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

(Bloomberg) -- Saudi Arabian Oil Co. has the experience and infrastructure it needs to keep crude flowing should supply through the Strait of Hormuz be disrupted, according to the chief executive officer of the state-run producer.

“We are increasing our readiness,” Amin Nasser said in an interview in Seoul on Tuesday. “We can supply through the Red Sea and we have the necessary pipelines and terminals.”

Brent crude has jumped about 8% since mid-June as worsening relations between the U.S. and Iran have magnified fears that shipments could be disrupted through the Strait of Hormuz, a narrow choke-point through which about one-third of all seaborne crude flows. There have been a series of attacks on tankers over the past few weeks and the downing of an U.S. Navy drone, which American officials have blamed on Iran.

“It’s a concern for the whole world because that is an important supply route for a lot of crude, not only from Saudi Arabia,” Nasser said.

Saudi Aramco operates a pipeline with a capacity of 5 million barrels a day that carries crude 1,200 kilometers (746 miles) between the Gulf and Red Sea, enabling it to ship oil from both sides of the country. But that compares with the company’s total exports of around 7 million barrels a day, meaning it would need to find other ways of getting any remaining oil to the market.

In mid-May, flows through the cross-country link were halted after two pumping stations were hit by a drone attack by Yemen’s Iranian-backed Houthi rebels.

The state-run company, which is the world’s biggest oil exporter, traces its beginnings to the 1930s and kept pumping crude through the Iran-Iraq war and the two Gulf Wars. Aramco would draw on that experience to keep supplies flowing, Nasser said.

“We had experience through the Gulf conflict but we have always met our commitments to our customers,” he said. “So we have a track record of building enough flexibility in the system to manage a situation or a crisis.”

Stakes in Korea

Nasser is visiting South Korea this week along with a Saudi delegation including Crown Prince Mohammed bin Salman. Saudi Aramco has been the biggest shareholder of South Korea’s S-Oil Corp. since 1991 and it bought a 17% stake in Hyundai Oilbank Co. for $1.2 billion in April.

Hyundai Oilbank’s purchases of Saudi crude are set to rise from the current level, Nasser said. The company bought about 15.5 million barrels of oil from the kingdom last year, according to Korea National Oil Corp. data. Separately, S-Oil will announce Wednesday plans to start another feasibility study on further expanding its refining capacity, which will be bigger than the latest capacity addition at its Ulsan plant, he said, without giving further details.

See also: Tanker Attacks Making U.S. Oil More Attractive for South Korea

While Saudi Arabia was South Korea’s biggest oil supplier last year, with shipments of 885,000 barrels a day accounting for about 29% of total imports, crude from the U.S. jumped more than fourfold during the same period, KNOC data showed.

With rising geopolitical risks in the Gulf region and the Organization of Petroleum Exporting Countries and its allies trimming output, Korean processors may further boost purchases from America. Still, Nasser said he’s not worried about the competition from the U.S.

“We are not concerned,” he said. “We have the lowest cost position with an excellent infrastructure to supply to our customers. In the past, we have never failed to supply and meet our deliveries. We also have different types of crude, which is critical.”

(Adds details on Aramco’s Korean investments from 9th paragraph.)

To contact the reporter on this story: Heesu Lee in Seoul at hlee425@bloomberg.net

To contact the editors responsible for this story: Serene Cheong at scheong20@bloomberg.net, Alexander Kwiatkowski, Andrew Janes

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.