Aramco Wants 10 Million Barrels a Day Around Hormuz

Aramco plans to expand its East-West Crude Oil Pipeline to 10 million barrels a day, up from about 7 million today, to bypass the Strait of Hormuz. But a former U.S. Treasury official says the extra capacity may barely dent world fuel prices.

Aramco CEO Amin Nasser announced the plan this week in his first interview since the war began, speaking to Al Arabiya Business. The company is also running engineering studies on additional export routes. Energy Minister Prince Abdulaziz bin Salman told the WPC Energy Congress in Riyadh earlier this month that the expansion would take two to three years.

The project aims to cut Saudi dependence on Hormuz, which has been largely choked since the U.S. and Israel launched a joint military attack on Iran on Feb. 28. Saudi output fell below 7 million barrels a day for much of the war's first six months, down from more than 10 million before the conflict. It recovered to about 8 million in September, according to the International Energy Agency.

How the bypass works

The Petroline runs roughly 750 miles across Saudi Arabia, from the Abqaiq processing hub near the Persian Gulf to the Red Sea port of Yanbu. Before the war it typically carried about 2 million barrels a day. Aramco ramped it up within weeks and hit its full 7 million-barrel capacity by late March, though about 2 million of those barrels fed domestic refineries rather than export markets.

The pipeline already pays. It helped Aramco post a 25% jump in first-quarter profit. Adding another 3 million barrels a day of capacity would rank as a major undertaking, and the payoff is uncertain.

What would the expansion change for prices?

Gilbert Metcalf, a visiting professor at MIT Sloan and former deputy assistant secretary for environment and energy at the U.S. Treasury, doubts the impact will be large.

"If—and this is a big if—the Saudis can increase pipeline flow to 10 million barrels per day, it will put about 2% more oil into the global marketplace," Metcalf told Fortune. "That could lower prices a bit, but there's a lot of uncertainty here. The pipeline is vulnerable to drone and missile attacks, as is much of the Saudi petroleum infrastructure. And it's not entirely clear that there is available refinery capacity to process the oil."

How exposed is the pipeline to attack?

The vulnerability is documented, not theoretical:

• Houthi drones struck a pumping station in May 2019, the line's first hit.
• An April 9 strike on a pumping station cut throughput by about 700,000 barrels a day; Saudi Arabia restored full capacity days later.
• On Sept. 10, drones hit the line in the Riyadh and Medina regions. Saudi officials said the drones were launched from Iraq. The attack forced a precautionary shutdown that lasted until Sept. 22, according to Kpler.
• A Saudi energy-sector source told AFP that an Oct. 4 attack on a Khurais pumping station halted flows again, though Bloomberg reported oil continued to move.

The Red Sea end faces pressure too. Yemen's Houthis declared a maritime blockade of Saudi Arabia in July and have repeatedly attacked Saudi tankers. In September they seized control of the area around the Bab al-Mandab Strait, the southern gateway to the Red Sea, which southbound tankers leaving Yanbu must pass through.

Does a bigger Petroline ease Hormuz pressure?

Metcalf says no. "I don't think moving more oil to the pipeline takes much pressure off opening the Strait of Hormuz," he said. "Despite what the U.S. Treasury and Energy Departments are saying, it does not appear that oil is flowing through Hormuz at anywhere near levels observed before the U.S. and Israeli attacks on Iran. Add to that threats in the Bab al-Mandab Strait and it's clear that risks for Saudi oil production are as high now as they've ever been."

Tanker data backs his skepticism. Energy Secretary Chris Wright said this month that Gulf crude flows had recovered to between 80% and 90% of prewar levels. Kpler figures show Hormuz exports averaged just under 9 million barrels a day in September, roughly 44% of February's level. The UAE is fast-tracking a new pipeline of its own.

What does this mean for Aramco's position?

The Saudi government owns about 81.5% of Aramco. The Public Investment Fund holds 16%, and roughly 2.5% trades publicly. The world's largest oil company plans to raise gas output 80% by 2030 from 2021 levels.

Even that scale may not restore the kingdom's regional standing. "The irony is that the balance of regional power has tilted from Saudi Arabia towards Iran as a result of the attacks on Iran," Metcalf said. "This would have been unthinkable just a year ago."

Until Hormuz and Bab al-Mandab reopen to normal traffic, an expanded Petroline buys Saudi Arabia throughput, not leverage.