Avoiding The Dire Strait

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Abu Dhabi has taken another step in its programme to guarantee oil exports, calling for bids to construct a pipeline bypassing the Strait of Hormuz and connecting its oil field at Habshan with Fujairah on the Gulf of Oman.

On July 4, Abu Dhabi's state-owned International Petroleum Investment Company (IPIC) announced it had invited six firms to take part in the tender for the engineering and design contract for the Abu Dhabi Crude Oil Pipeline (ADCOP), with bids due to be evaluated in August.

The six firms are the UK companies Penspen International and JP Kenny Limited, the Chicago Bridge & Iron Co and VECO Engineering of the US, France's Technip and Worley Parsons of Australia.

Preliminary work on the line is expected to begin late this year. When completed, the 320km pipeline will carry 1.5m barrels per day (bpd), well over half the daily output of the United Arab Emirates (UAE).

At one point just 34 miles wide, the Strait of Hormuz has long been one of the busiest waterways in the world and serves as the lifeline of the West's oil and gas supplies. More than 13m bpd of oil passes through the strait daily, representing over 15% of the world's supplies, according to the International Energy Agency.

The planned pipeline will both ease congestion in the Strait of Hormuz and provide for a more secure route to transport Abu Dhabi crude. Long running concerns that Iran could seek to block traffic in the strait if there was a further ramping up of tension between Tehran and the West over Iran's controversial nuclear programme have served as an added spur to the project.

This tension and the price of crude escalated in June when Ayatollah Ali Khamenei, Iran's supreme leader, suggested that his country could move to disrupt oil supplies flowing through the strait if the West took military action against Iran.

US naval exercises in the region in late May, which were meant to reassure Washington's partners in the Gulf that it could protect the sensitive oil supply route, prompted oil prices to spike at over $70 a barrel. It is just this sort of instability that the ADCOP is designed to avoid.

The ADCOP project will also involve the construction of storage and terminal facilities at Fujairah, and could also be used to supply a new refinery with a processing capacity of 500,000 bpd according to IPIC.

When the plans for the pipeline started to take shape in March this year, the project was warmly greeted by the industry. According to Mustafa Alani, a security analyst for the Dubai-based Gulf Research Centre, the pipeline could help to ease the volatility in the oil price market.

"Crisis after crisis is threatening stability," he said in a news agency report on March 21. "We need a permanent solution. Any threat, real or imaginary, will increase the price a dollar or two. This project will give a new boost to the stability of oil."

The ADCOP scheme is not the only idea the Gulf states have to secure their export routes. Dubai is considering building a $2bn liquefied natural gas storage plant in Fujairah with a capacity of 1.8m cu metres. There is also the proposed Trans-Gulf Strategic Pipeline, a far greater endeavour than the IPIC's project.

The Trans-Gulf plan would involve building a 2,500 km long pipeline linking Kuwait, Saudi Arabia, the UAE and running to Muscat in Oman or to Yemen to avoid the Strait of Hormuz. If built, it could carry up to 5m bpd of crude, and along with the ADCOP reduce tanker traffic in the strait by an estimated 40%, according to the Gulf Research Centre.

ADCOP and the other projects under discussion would offer a number of other advantages. It would free up ports inside the Gulf for other trade, reduce shipping time and offers the possibility of lower fuel prices. This would be both as a result of traders dropping their "Iran premium", a tariff imposed to hedge against any threat posed by Tehran to block supplies, and a reduction of high insurance costs on tankers operating in the Gulf.

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