Iran Shuts Hormuz, Igniting Saudi-UAE 'Pipeline War'

Saudi Arabia has moved to expand alternative routes after Iran blocked the Strait of Hormuz. The kingdom is weighing a plan to sharply increase the capacity of a crude oil pipeline running to the western coast along the Red Sea. With oil supplies choked by the US-Iran war and Iran declaring it would impose transit tolls, Saudi Arabia is seeking to reduce its dependence on the strait.

According to Reuters on Monday, Saudi Arabia is holding preliminary negotiations with some neighboring countries over a plan to increase pipeline capacity by up to 2 million barrels a day. It is unclear whether Aramco's expansion involves upgrading existing facilities or building new ones. One source said the expansion would include a smaller second pipeline for petroleum products.

The "East-West Pipeline" emerged as a key route after the outbreak of the Iran war in February and the blockade of Hormuz. The pipeline can transport up to 7 million barrels a day to the Red Sea port of Yanbu. Of this, about 2 million barrels go to western refineries, while about 5 million barrels are used for exports.

Kuwait, Bahrain and Qatar have no route to bypass Hormuz. Iraq's pipeline to Turkey operates well below capacity due to conflict and repeated shutdowns. Sheikh Nawaf al-Sabah, CEO of Kuwait Petroleum Corporation (KPC), said at the Atlantic Council's Global Energy Forum last month, "We are discussing with our Saudi and Emirati brothers ways to expand pipelines to accommodate Kuwaiti crude."

The expansion could range from 1 million to 2 million barrels a day, and petroleum products are also under consideration, two sources said. Another source said it would take years, cost billions of dollars, and require changes to how Saudi crude prices are calculated.

Iran blockaded the strait immediately after the war began, and Gulf oil-producing states cut output by up to 12 million barrels a day, sending oil prices surging. Volumes have partially recovered since a preliminary US-Iran agreement last month, but they remain below prewar levels.

Qatar, which mainly exports liquefied natural gas (LNG), faces greater technical barriers and is reviewing several alternatives, including routing through Saudi Arabia, three sources said. The United Arab Emirates (UAE), which has the capacity to bypass Hormuz, has completed half of a new west-east pipeline. When it begins operating next year, it will double crude transport capacity to Fujairah. The existing Abu Dhabi pipeline transports up to 1.8 million barrels a day.

"The next phase of Saudi-UAE competition after the war could be a contest over oil output, which could eventually lead to a race to lower prices," one industry source said.