The Cooperation Council for the Arab States of the Gulf (GCC) announced Tuesday, March 20, 2007, that it will discuss in upcoming meetings the construction of two oil pipelines designed to bypass the Strait of Hormuz, the world’s most strategic oil “chokepoint.” The announcement that the GCC’s pipeline negotiations are moving forward comes on the heels of Iranian Prime Minister Ahmednejad’s January 8, 2007, statement threatening to blockade oil shipments through the Strait of Hormuz if the West continues to pressure Iran concerning its nuclear program. Though planning for the pipelines have been underway for some time, al-Qaeda terrorist groups and Iranian threats to disrupt oil supply accelerated the pipelines’ construction.
Any attack that successfully halted the flow of oil through the Strait of Hormuz, a 54 kilometer wide strait that ferries approximately 25 percent of daily global oil supply, would be catastrophic to the world economy. Therefore, the GCC’s proposed pipeline projects, which will redirect 40 percent of crude oil currently ferried through the Strait of Hormuz through underground tunnels, are welcomed and supported by economists and politicians alike.
The first and smaller of the planned projects, the “Abu Dhabi Crude Oil Pipeline (ADCOP) Project” will bypass the Strait of Hormuz by cutting across the UAE then terminating at the Fujairah refinery, insuring the export of Abu Dhabi’s oil if the strait becomes unnavigable. Abu Dhabi has fast-tracked the pipeline’s construction signing agreements on January 30, 2007, between the state-owned International Petroleum Investment Company (IPIC) and China Petroleum Engineering & Construction Corporation (CPECC) to initiate the construction. When completed, the ADCOP will stretch 360 kilometers and have the capacity to transport 1.5 million barrels per day (bpd). Construction of the ADCOP is slated to begin this year and be completed after two years of construction.
Debate is underway concerning the construction of a second, larger pipeline called the “Trans-Gulf Pipeline (TGP).” The TGP will have a transport capacity of 5 million bpd and will take upwards of ten years to build. The TGP will originate in several Gulf countries, crossing an expanse in excess of 2,400 kilometers, and then terminate in a new export terminal located outside of the straits, possibly in Oman. The exact route of the pipeline is yet to be determined. Currently, six possible routes are under consideration. One possible route would start in Iraq, pass through Kuwait, Saudi Arabia, and the UAE, and then terminate in the Omani capital of Muscat. Other routes slate possible termination in Yemen or Fujairah, UAE.
Security Benefits and Enhanced Pricing Stability
Friday, March 23, 2007’s, kidnapping of 15 British Naval officers resulted in the highest crude oil price in three months. With tension set to increase between the West and Iran in the near term, the existence of the so-called “terror risk premium” (now dubbed the Iranian risk premium), will produce unpredictability in the oil market and raise the price of oil futures. Currently, the terror risk premium, (the dollar amount added to the cost of crude oil due to political instability and associated costs of security personnel), hazard insurance, and ship insurance, is estimated to cost $10-$15 per barrel. Iranian threats and al-Qaeda operations against Saudi refineries, oil tankers, and oil pipelines could increase the cost associated with the “terror risk premium” at any given time, not to mention stop the flow of significant quantities of oil, thus further impacting prices.
If constructed, the Abu Dhabi Crude Oil Pipeline and the TGP together redirect 40 percent or approximately one-eighth of the world’s oil supply around the Strait of Hormuz. Buried under ground, the proposed pipelines would be more secure than those of Saudi Arabia, which struggles to secure its 10,000 miles of pipelines through the use of fences, security personnel, and sophisticated surveillance systems, and Iraq, which lost $6.25 billion in 2005 oil revenues due to attacks on its oil infrastructure. Though the largest pipeline will require up to ten years to complete, the promise of a more secure oil supply is welcome.
Forecast
Attacks against oil infrastructure will continue in the near term; al-Qaeda’s Zawahiri declared disruption of the West’s oil supply a more valuable fete than killing American soldiers. The completion of the Crude Oil Pipeline and the Trans Gulf Pipeline will bring increased stability to oil pricing and oil transport security. Until the pipeline’s completion, however, there will be an increased threat to construction workers and oil facilities linked to the pipelines. Attacks are undoubtedly already being planned to target pipeline construction sites. If successfully implemented, these attacks, as well as heightened tension surrounding Iran, will lead to spikes in the price of oil in the future.
