The Habshan – Fujairah pipeline was commissioned earlier this year. At full capacity the cross-country pipeline will be able to handle 67% of Abu Dhabi’s oil production. Arsalan Iqbal of Contax Partners examines what this crucial bit of infrastructure does for the UAE, and its implications for relations with Iran
The future of GCC economies depends heavily on the output capacity of major oil producing countries, however, the transit of petroleum products from this region remains of equal importance as nearly 17 million barrels of oil are shipped daily through a single source: the Strait of Hormuz.
Contax Partners believes that the changing political and economic landscape has been, and shall continue to be, influenced by developments in the oilfield.
One such noteworthy development has been the inauguration of the Habshan-Fujairah pipeline in the UAE, which promises to change the way oil is transported from the Middle East and reflects positively on the stability of oil and gas supply.
The Strait of Hormuz
The Strait of Hormuz is a 21- nautical mile wide passage and accounts for approximately 20% of the entire world’s oil flows sourced from the Middle East region and 35% of all petroleum traded via sea.
The criticality of this passage cannot be easily dismissed because of its strategic geographic location and lack of any routing alternatives. Only a width of 3 kilometers in each direction is accessible for deep-water vessels and for regional economies these channels alarmingly fall within Iranian territorial waters.
Following intense global pressure and sanctions on Iran, the use of the Strait as a bargaining tool has become a harsh reality and fears exist that this could become a vital chokepoint affecting oil trade.
Hypothetically, if Iran did block the Strait of Hormuz, countries that supply as much as 85% of their oil to South East Asia and the subcontinent would be impaired in meeting their obligations.
Abu Dhabi, holding approximately 90% of the UAE’s 97 billion barrels of oil reserves, would also be jeopardized as a supplier in global petroleum markets.
In a recent and very favorable outcome, however, the commissioning of the Habshan-Fujairah oil pipeline (also referred to as the Abu Dhabi Crude Oil Pipeline or ADCOP) has eased fears of a supply impasse, and has greatly reduced the significance of Iran’s potential threat.
Abu Dhabi may now transport up to 56% of the UAE’s total daily output of 2.7 m bpd through the Eastern port of Fujairah and circumvent any threat of a supply blockade.
Once the pipeline is upgraded to its total intended capacity of 1.8 m bpd, it will account for transport of approximately 67% of the country’s oil capacity.
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Habshan-Fujairah pipeline
Spanning 362 kilometers and capable of carrying 1.5bpd of crude oil from the Habshan collection point in Abu Dhabi to the port of Fujairah, the Habshan-Fujairah pipeline has given great leverage to the UAE in securing the future of its supply routes.
Built by the China Petroleum Engineering & Construction Corporation at a cost of $3.3 billion, the pipeline includes a 14 kilometer offshore section, oil storage tanks, terminals and offshore mooring devices.
The pipeline will help offset reliance on regional oil terminals and enable the UAE government to avoid shipping congestion through the Strait of Hormuz.
Subsequently, by catering to deep water vessels in the open sea, it would make cargo operations more efficient and less risk-prone; vessels would therefore be subject to reduced insurance and freight costs.
Some analysts estimate that transport costs may fall by approximately 25% when the Habshan-Fujairah pipeline becomes fully operational due to lower maritime terrorism risks and wartime premiums.
Greater Role of Fujairah
The development of the Habshan-Fujairah pipeline was originally intended as an internal strategic move to aid in the development and economic integration of the Fujairah emirate within the UAE.
As a weak economy, Fujairah was reliant on the federal government for development through subsidies and grants. In a far-sighted move by the UAE to capitalise on favorable geography and consolidate Fujairah’s position as a leading oil bunkering port, the new pipeline will help the UAE diversify its supply routes.
The Strait of Hormuz chokepoint can now be circumvented altogether and, at the same time, economic sustainability may be pursued in Fujairah.
Domestically, while this emirate does not produce any oil or gas of its own, it handles approximately 1 million tonnes per month of marine transportation including fuel and related products.
Furthermore, the Abu Dhabi government has also commissioned a refinery in Fujairah to process 200,000 bpd at a total cost of US$3 bn. In turn, this promises to be the catalyst to generate new activity, employment and opportunities for future expansion in the region. The clustering effect is already somewhat visible, with the construction of a new $817 million hotel and resort project underway to boost tourism.
Soon after the commissioning of the Habshan-Fujairah Pipeline on 21st June 2012, the European Union imposed an oil embargo on Iran on 1st July 2012, which resulted in an immediate ban on oil imports into 27 European countries from Iran.
This included ending all exemptions for contracts that were signed before 2012, barred international insurance for Iranian oil shipments and heavily restricted the country’s ability to do business with the rest of the world.
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In response, it is reported that the Iranian government has resorted to continuing sale of petroleum to its preferred partners and accepting payments through the following alternate mechanisms:
• India: After initially banning Iranian tankers in its waters to comply with international sanctions on Iran, it is reported that India has agreed to trade for Iranian oil with payments for rice, medicine, engineering supplies and steel to be made in the Indian rupee. A few Iranian financial institutions have subsequently been allowed to open accounts in the local rupee denomination
• China: Iran has been relying on state-backed insurance for its own tankers to supply to China, which is its number one customer. This mechanism, while costly and time-consuming, also adds an element of increased risk by placing faith in the Iranian government for insurance payouts
• Japan: Due to the fallout from the Fukushima nuclear reactor, the Japanese have reduced their reliance on nuclear power and thus have a renewed appetite for petroleum products – the Japanese government has granted maritime sovereign insurance worth US$7.6 bn to continue delivery of Iranian crude oil
Despite securing some of its biggest customers, Iran has suffered nearly US$133 mn a day in lost sales whereas daily shipments have plunged by 1.2 million barrels a day.
After losing its status as the world’s second largest producer in the world, the Persian state is continually struggling to keep its economy afloat. It is feared that existing or increased pressure might force a retaliatory measure, such as closure of the Strait of Hormuz.
With the Habshan-Fujairah pipeline coming online however, the UAE government’s initiative will help reinvigorate confidence in the future of the UAE’s oil supply and reinforce its long-term objectives to protect and develop its domestic oil and gas assets.
