UAE’s Hormuz Bypass Oil Pipeline Faces Another Year’s Delay

Abu Dhabi’s 1.5mn b/d capacity Strait of Hormuz bypass oil pipeline will not be ready for at least another 12 months. The pipeline was first scheduled for completion by the end of 2010, but has faced constant delays due to engineering and design problems resulting in holes and corrosion. As Iran carries out war games in the Gulf, shadowing US warships, Washington and London advise Israel not to attack Iran. Most of India’s oil tankers will lose European insurance that they depend on if they visit Iran after 1 July, and Tokyo is close to a deal with the US on its cuts to Iranian crude imports ,Nick Wilson writes.

Abu Dhabi’s state-owned International Petroleum Investment Company (IPIC) contracted the building of its Strait of Hormuz bypass pipeline to the China Petroleum Engineering and Construction Corporation subsidiary of state-owned China National Petroleum Corporation (CNPC). The contractor did not equip the pipeline with adequate corrosion protection, resulting in corroded pumps. The contractor’s welders also did a poor job, leaving lengths of the pipeline with holes in it. “The kit has been sitting out in the desert for a year,” an industry insider tells MEES. “No one’s prepared to admit it to the senior authorities, but the project is a disaster – it’s embarrassing,” he said. The damaged reputation of China’s firms – the project was billed as a triumph of UAE-China collaboration – makes it harder for Beijing’s companies to win significant concessions in Abu Dhabi’s upstream sector. Another factor possibly souring relations between the two countries is Beijing’s support for Iran, and its key ally Syria, during the current twin crises of Tehran’s nuclear ambitions and the uprising against Syria’s President Bashar al-Asad.

The pipeline project also faces a different problem. Coordination and communication between Abu Dhabi's state-owned oil firms can be poor – even departments in the same company often don’t exchange key information. “Abu Dhabi did not factor in the line fill [amount of oil that would be off the market by being in the pipeline],” the source said, and is balking at committing the estimated 2.98mn barrels needed to fill the 370km, 48-inch pipeline. “It’s a massive cost to Abu Dhabi to fill in the pipeline,” he said. As a comparison, the 1,768km Baku-Tbilisi-Ceyhan pipeline took six months to fill up and this involved the first two months of production from its supplying field. But in this case it was the only way to get it to market and was factored in from the beginning.

The Gulf Cooperation Council (GCC) has been discussing building a Hormuz bypass pipeline for decades. Two of its members – Qatar and Kuwait – are reliant on the strait for 100% of their hydrocarbon exports. And the UAE and Saudi Arabia cannot re-rout all of their exports that currently go via the strait through pipelines instead. In the mid-1980s, an Omani official tells MEES, a pipeline was proposed from Saudi Arabia through the UAE into Oman. But when the GCC report was published it had used maps showing a disputed boundary line between Saudi Arabia and Oman. Muscat protested, the GCC report was recalled and its copies destroyed, “and that was the end of the pipeline” he said. In 2006 a GCC oil ministers’ meeting in Abu Dhabi decided to shelve further GCC Hormuz bypass pipeline projects – a decision the council may well regret if conflict starts.

Security Concerns

Abu Dhabineeds energy security at a time of increasing tensions between Sunni Gulf Arab rulers allied to the West, and Iran – which has repeatedly threatened to block the strait. Saudi Arabia’s Interior Ministry said on 20 February its security forces would use “an iron fist” against Shi'ite protestors in the eastern region of the kingdom, which faces the Gulf. Riyadh has blamed an unnamed foreign power, widely interpreted to mean predominantly Shi'ite Iran, for supporting alleged attacks on its security forces in its Eastern Province.

That same day in adjacent state Bahrain, police used water cannon and tear gas and clubbed anti-government protestors who tried to approach Pearl Roundabout in Manama. The roundabout was at the center of an uprising last year of mainly Shi'ites – who are the majority of the population – demanding democracy. The peaceful protests were crushed by the authorities.

On 18 February Britain’s Foreign Secretary William Hague warned of a possible nuclear “cold war” in the Middle East. The following day he claimed that Tehran is plotting terrorist attacks around the world, adding there was “no specific information” about a threat to the London Olympics.

Mr Hague also told Israel not to attack Iran, which carried out war games on 20 February in an exercise to protect nuclear sites that Israel may strike. He said sanctions and negotiations had to be given “a real chance” to convince Iran to abandon its nuclear ambitions. British newspaper The Guardian quoted him as saying in an interview: “I don’t think a wise thing at this moment is for Israel to launch a military attack on Iran. They would either be attacked and there would be a war, or there would be a cold war in which Iran for the long term would be subject to these very intense economic sanctions and they would find that other nations in their region developed nuclear weapons.”

Pior to this the Chairman of the US Joint Chiefs of Staff, General Martin Dempsey, also spoke out against a potential Israeli military strike. General Dempsey told CNN: “I think it would be premature to exclusively decide that the time for a military action was upon us. The economic sanctions and international cooperation that we’ve been able to gather around sanctions is beginning to have an effect. I think our diplomacy is having an effect, and our preparedness.”

Oil Supply Squeeze

Meanwhile, Tokyo is close to a deal with Washington on the size of cuts refiners must make in imports of Iranian crude oil to avoid US sanctions. The countries announced this on 21 February after Yomiuri newspaper reported they had agreed an 11% cut.

Under the EU sanctions India’s largest tanker owner, state-owned Shipping Corporation of India, will lose EU insurance from July 1 for any of its vessels that enter Iran. Unlike Japanese and Chinese tankers, Indian ships are reliant on European insurers.

Iran said on 19 February it had stopped exporting oil to France and Britain and warned it would cut supplies to other EU countries if the bloc remained “hostile” to the Islamic Republic. The European Commission said it was not concerned about even an abrupt halt in Iranian oil exports to Europe – several member countries, including Britain, had already stopped importing Iranian oil in anticipation of the cut-off date of 1 July. The International Energy Agency (IEA) estimates France’s average imports from Iran at only 58,000 b/d.

© Copyright MEES 2012.