TEMPO.CO, Jakarta - Oil and gas exports from the Gulf face renewed disruption as fighting between the U.S. and Iran intensifies. For both countries control of the Strait of Hormuz is key.
Over the past months, Iran has shown that it can control or at least disrupt the strait, says Guntram Wolff, a senior fellow at Bruegel, a think tank, and a professor of economics at the Free University in Brussels.
"Several months of bombing campaigns have not undone Iran's ability to control the Strait of Hormuz," said Wolff, leaving the U.S. with the challenge of trying to get the upper hand.
This week, traffic in the strait has again nearly stopped as Iran attacked tankers and fired drones and missiles at military facilities in Bahrain, Kuwait and Jordan.
The U.S. launched more strikes on Iran and restarted a naval blockade of its ports. It also revoked a sanctions waiver that let Iran openly sell its oil, which brought in much-needed money.
Pre-war oil and gas flows through Hormuz
Before the war started on February 28, the Strait of Hormuz was a toll-free international waterway and was the gateway for around 20 percent of global liquefied natural gas (LNG), according to the International Energy Agency.
Additionally, around 20 percent of the world's oil was transported out of the Persian Gulf via the waterway to the Arabian Sea and beyond. The lion's share went to Asia.
For the past few years, that has meant an average of around 20 million barrels a day, according to the U.S. Energy Information Administration.
Flows through the Strait of Hormuz fell to about 14.6 million barrels a day in the first quarter and have declined sharply since the conflict escalated.
A preliminary U.S.-Iran ceasefire deal signed on June 17 brought some relief for shipping but is no longer in force. In the past weeks, U.S. forces have hit hundreds of Iranian military targets.
Analysts warn that further attacks on Iran could prompt retaliation against Gulf oil and gas infrastructure, including refineries, ports and pipelines, making the war costly for the whole region and cause oil shortages.
"The limited progress achieved following the June ceasefire has now effectively unraveled," warned Greek maritime risk-management firm MARISKS after the escalation in the region. "The likelihood of further escalation remains very high."
The importance of oil and gas pipelines
Early in the war, there were reports that Iran was charging $2 million per ship to use the waterway. Recently, they have demanded that ships use a northern route through Iranian waters.
At the same time, the U.S. Navy has been escorting ships through a southern route that hugs the shores of Oman on the opposite side of the strait.
Currently, Iran, Iraq, Kuwait, Qatar and Bahrain rely on the Strait of Hormuz to deliver the majority of their oil exports.
Though shipping is the cheapest way to move oil, ships are caught in the middle of a tug-of-war over the strait, and oil and gas producers are looking for alternatives.
Some, like Saudi Arabia (East-West Pipeline/Petroline) and the United Arab Emirates (Abu Dhabi Crude Oil Pipeline), already have export routes that avoid the strait. But these pipelines can only reroute a maximum of 8.8 million barrels of oil a day, according to the International Energy Agency.
New routes, new risks for Gulf oil exporters
Since existing pipelines cannot replace normal Hormuz volumes, expanding new pipeline capacity is one of their only options. Yet such projects take years and billions of dollars. And if they lead to the Red Sea, they too may no longer be safe as the conflict moves beyond the Strait of Hormuz.
Saudi Arabia's East-West Pipeline connects Abqaiq on the eastern Gulf coast to the port of Yanbu on the Red Sea.
But to reach the Arabian Sea and Asian markets, tankers leaving Yanbu must pass the Bab el-Mandeb Strait, another tight waterway, where Yemen-based Iran-backed Houthis can attack.
Besides causing those ships problems, it could open a second front in the war and force other ships headed toward the Suez Canal to detour around the southern tip of Africa.
Still, the United Arab Emirates (UAE), which can avoid the Strait of Hormuz and the Red Sea, is doubling down on alternatives and wants to expand existing infrastructure and build a new port and container terminal on its east coast, according to numerous reports.
Several other pipelines in Iraq, Jordan, Kuwait and Turkey are either operating or are under development. However, their capacity is modest, and they cannot compensate for a major disruption in the Strait of Hormuz.
For Iran, it seems like all or nothing
Pointing to Saudi Arabia's East-West Pipeline and the UAE's Abu Dhabi Crude Oil Pipeline, MARISKS warned that Iran's direct threat against the Gulf's alternative oil export infrastructure is "perhaps the most significant development" in the current situation.
"Iran's message is equally clear: Either all regional energy producers can export, or no one does."
No matter what happens next, Iran has shown it is ready to raise the economic cost of any attack on its country by threatening global energy supplies through a blockade of important waterways or pummeling other Gulf oil and gas infrastructure in retaliation.
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