Saudi Arabia now relies on a ship-to-ship transfer operation to move crude oil past the Strait of Hormuz, making it the kingdom's most critical backup plan after militants knocked out what is arguably the world's most important oil pipeline. This shuttle service, coupled with Saudi Arabia's proven ability to rapidly repair damaged infrastructure, has become the best hope for calming oil markets.
The kingdom's East-West pipeline was recently shut down following a drone attack by Iraqi-based, Iran-aligned militia groups. Since the start of regional hostilities, this pipeline has served as a vital safety valve for oil markets. According to analysis from the International Energy Agency, various methods of bypassing the Strait of Hormuz made up for nearly one-fifth of the supply losses caused by the waterway's closure during July and August. Most of the diverted crude was moved through the East-West pipeline, which has done more to keep global prices in check than the release of emergency reserves or other countermeasures.
Before the attack, Saudi Arabia had already reduced the pipeline's throughput after Houthi rebels began striking Red Sea shipping. IEA data shows that daily exports of crude and refined products from the western port of Yanbu reached 2.9 million barrels in August, down from an average of 5 million barrels per day between March and July. With that route constrained, the shuttle transfer system through the Strait of Hormuz is now the kingdom's second-best option.
The UAE's state-owned Abu Dhabi National Oil Company (ADNOC) is already using its own vessels and chartered tankers to traverse this shipping chokepoint. Tankers typically sail out of the strait at night in convoys protected by US military forces, before conducting ship-to-ship transfers in the Gulf of Oman to other waiting vessels. Estimates of the actual volumes moving through this system vary widely, as participating ships often switch off their transponders, making their movements difficult to track. Commodity traders estimate that roughly 9 million barrels of crude and refined products move this way each day.
However, this shuttle system carries a hefty price tag. Producers pay between $16 and $20 per barrel to compensate crews and shipowners for the risks of transiting the strait. Insurance costs can reach as high as 10% of the combined value of the vessel and its cargo, and the availability of equipment for offshore transfers is becoming increasingly tight.
One factor working in Saudi Arabia's favor is the Saudi Aramco's track record of quickly fixing damaged infrastructure. Rebecca Schultz, a senior oil analyst at the IEA, notes that Saudi Aramco possesses the most complete supply chain in the region and is second to none in its ability to repair assets like pipelines. Around 70% of the company's operational needs, including chemical feedstocks, wellhead equipment, and piping, can be sourced domestically. By comparison, Iraq and Kuwait are heavily dependent on imported equipment and overseas oilfield services.
The rising frequency of attacks on Saudi Arabia has exposed the vulnerability of its energy infrastructure. Jim Burkhard, vice president at S&P Global Energy, commented: "Saudi Arabia is the cornerstone of the global oil system, and any event there sends ripples around the world." Brent crude spot prices have surged to $132 per barrel this week, up from just $90 at the end of August. But with oil accounting for 55% of Saudi state revenues, the kingdom has a powerful incentive to restore exports as quickly as possible. In the second quarter alone, Saudi Aramco handed over roughly $50 billion to Riyadh in royalties, dividends, and corporate taxes.
The militants have destroyed Saudi Arabia's preferred Plan B. Now the best viable path to keep oil flowing appears to be reopening the Strait of Hormuz corridor.