Saudi Arabia Aims to Restore a Third of Lost Oil Output Monday – The Wall Street Journal

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One of the main targets of the attack was a large crude-processing plant in Abqaiq.


Photo:

Al-Arabiya/Associated Press

By

Benoit Faucon in London,

Summer Said in Dubai and

Amrith Ramkumar in New York

Saudi Arabia’s national oil company expects to restore roughly a third of crude output disrupted in a weekend attack by day’s end Monday, Saudi officials said, but the strikes will likely leave the country short of full production capacity for weeks.

The damage from Saturday’s attacks risks sending shock waves through energy markets and damaging the kingdom’s long held position as the world’s most predictable and prodigious supplier of crude. Officials had earlier expressed hope that Saudi Arabia could resume full production by the start of the week.

The strikes knocked out 5.7 million barrels of daily production, and the officials said they still believe they can fully replace it in coming days. That would require tapping oil inventories and using other facilities to process crude. One of the main targets of the attack was a large crude-processing plant in Abqaiq.

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“We should be able to have 2 million barrels a day back online…by tomorrow,” said one person familiar with the matter.

Government-owned Saudi Arabian Oil Co., known as Aramco, has determined that its facilities were hit by missiles, people familiar with the matter said. A U.S. government assessment determined that up to 15 structures at Abqaiq suffered damage.

Aramco’s CEO,

Amin Nasser,

said early Sunday that work is under way to restore production. The company will issue a progress update sometime Tuesday. It will take weeks to return to full production capacity at the damaged facilities, according to people familiar with damage estimates in Saudi Arabia.

The assessments came as Aramco executives and Saudi officials evaluated the damage to Abqaiq and Hijra Khurais, one of Saudi Arabia’s largest oil fields. The strikes forced the country to suspend more than half of its output, which represents over 5% of global supply.

Iranian-aligned Yemeni Houthi rebels claimed responsibility for the attack, though the U.S. has said it believes Iran is responsible, which Tehran has denied.

“It is definitely worse than what we expected in the early hours after the attack, but we are making sure that the market won’t experience any shortages until we’re fully back online,” said a Saudi official.

Before strike, left. After strike, right, where a satellite image from Planet Labs Inc. shows black smoke rising from Saudi Aramco’s Abqaiq oil-processing facility after it was hit.


Photo:

Planet Labs/Associated Press

Saudi Arabia has for decades been the stable oil producer global markets turn to in times of crude crisis. But the attack at the heart of its oil complex is testing Riyadh’s role, potentially triggering a spike in fuel prices.

The International Energy Agency, a Paris-based group representing top energy-consuming nations, said it was in contact with Saudi authorities and major producer and consumer nations. “For now, markets are well supplied with ample commercial stocks,” the group said. “The IEA is monitoring the situation in Saudi Arabia closely.”

Western capitals said they were ready to release emergency stocks if necessary, and Saudi officials discussed shipping their own extra inventory to meet short-term supply needs, according to people familiar with the matter.

The U.S. is somewhat protected from any possible supply shock, due to its own production. In the near term, many analysts expect the biggest effects to be felt in Asia, estimating that China, Japan, India, Korea and Taiwan account for roughly four million barrels a day of consumption of crude from Saudi Arabia.

Markets haven’t seen a shutdown on this scale since Iraq invaded Kuwait in 1990. That conflict, which led to an international military intervention, saw the loss of four million barrels a day. The IEA last carried out an emergency release of its strategic reserves when a Libyan civil war in 2011 took out production capacity of 1.7 million barrels a day. The U.S., with its Strategic Petroleum Reserve, often acts alongside the IEA, but could also act on its own.

The U.S. is now the world’s largest crude producer and among the top exporters of oil and gas. For the first time in decades, a U.S. president would be in a position to help stabilize the oil market in the event of a prolonged outage—a remarkable turnaround from the 1990s and 2000s, when the country had far greater dependency on foreign crude.

While the U.S. still imports significant volumes, including from Saudi Arabia, President Trump could authorize an emergency release of stockpiled crude that could help mitigate price increases, analysts said. The U.S. reserve holds more than 600 million barrels of oil. He could also temporarily ease sanctions on Venezuela or Iran or alter trade restrictions that have affected U.S. crude exports.

The U.S. also has the capability to lift output at home. A significant boost in prices would be a shot in the arm for shale producers, who have been under tremendous pressure from investors to restrain spending and focus on profits.

But sustained Saudi outage of several million daily barrels would rattle markets, because of the lack of other players big enough to step in and provide enough supply to cover the shortfall longer term.

Even if Saudi officials were successful in restoring all or most of the lost production, the attack demonstrates a new vulnerability to supply lines across the oil-rich Gulf.

Tankers have been paying sharply higher insurance premiums, while shipping rates have soared in the region after a series of maritime attacks on oil-laden vessels, which the U.S. has blamed on Iran.

Saudi Arabia has also long been the target of attacks from Houthi rebels, but the country had until now avoided an attack that disrupted such a big share of its output.

Hijra Khurais produces about 1.5 million barrels a day and Abqaiq, the world’s biggest crude-stabilization facility, processes seven million barrels of Saudi oil a day, turning crude into specific grades, such as Arabian Extra Light.

“It’s the mother ship of the Saudi energy system,” Helima Croft, global head of commodity strategy at RBC Capital Markets, said of Abqaiq. “This is probably the worst infrastructure attack we’ve seen in the kingdom.”

Underscoring the heightened risks, a tanker owned by Bahri, the Saudi Arabian oil shipper, had increased its security while sailing in the Persian Gulf Saturday, according to the vessel’s captain. Safety measures included creating a restricted area on the shore side of the ship, deterring waterside access to the ship and additional security briefings to the crew.

Aramco has long been known for robust redundancy measures, which may help Saudi Arabia quickly restore production. The attack will be a crucial test of how effective those redundancies are.

The Ghawar field, the world’s largest, and the Shaybah field, which produces a million barrels a day, also reported disruptions due to Abqaiq’s problems, the people familiar with the matter said.

The strikes are the latest assaults in recent months by the Houthis and Iranian-backed armed groups in Iraq, which have hit Saudi airports, a desalination plant and oil infrastructure. Since the Houthis took control of Yemen’s capital, San’a, in 2014 in a civil war, a Saudi-led coalition has fought to reinstate a government there supported by regional powers.

Tensions between Iran and the U.S. and its allies including Saudi Arabia have helped push the price of Brent crude, the global benchmark, up 12% to $60 a barrel this year. Oil is still well below its April highs on worries that softening demand will result in a supply glut. U.S. crude is at about $55 a barrel.

In normal times, the kingdom would have stepped in to bring relief to global markets rattled by geopolitical concerns. But the incident comes as its oil stocks are historically low and calls into question its cushion of spare capacity—idle wells it can normally open at will.

“Saudi Arabia has also depleted its crude oil stocks to the lowest levels in 10 years, so the country alone does not have the same robustness to Middle East interruptions as it used to have,” said

Magnus Nysveen,

head of analysis at Rystad Energy.

Some analysts remain optimistic that energy markets will eventually stabilize. One reason: Inventories in industrialized nations have been rising this year. Stockpiles in Organization for Economic Cooperation and Development countries rose to 2.93 billion barrels in July and were about 20 million barrels above their five-year average, the IEA said in a recent report.

—Sarah McFarlane and Bradley Olson contributed to this article.

Write to Benoit Faucon at benoit.faucon@wsj.com, Summer Said at summer.said@wsj.com and Amrith Ramkumar at amrith.ramkumar@wsj.com

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