One of Saudi Arabia's greatest nightmares became a reality on Sept. 14 after an attack forced the Saudi Arabian Oil Co. (Saudi Aramco), to take its single most important piece of oil and natural gas infrastructure — the Abqaiq oil and gas processing complex — offline along with 5.7 million barrels per day (bpd) of crude oil production. Saudi officials have sought to reassure oil and natural gas markets that they can restore some production, but after an initial suggestion that all production could soon come back online, Riyadh announced on Sept. 16 that the damage could take weeks or even months to repair.
The impact on global oil markets will be significant, but manageable. After an initial spike of nearly 20 percent on Sept. 16, the price of global benchmark Brent crude has settled to around $69 per barrel, up about 14 percent but still far below the $80 mark that oil prices hit just a year ago. Beyond the market impact, the attack raises several critical questions relating to the future of production in the Middle East and Saudi Arabia's oil policy. The events of Sept. 14 provide a clear indicator to the United States that no matter how much domestic production increases, it cannot ignore the impact of the Middle East on energy supplies.
For decades, global oil markets have worried that Saudi Arabia's Abqaiq processing plant represented a critical bottleneck in Saudi Aramco's supply chain, meaning that if it suffered damage, the global oil industry would struggle with the effects. And now those fears have been realized. Luckily for oil consumers, healthy global storage and production reserves mean that the market will be able to ride out the disruption — but only for so long.
Saudi Aramco's Achilles Heel
Abqaiq's importance to Saudi Arabia cannot be overstated. The first step for much of the onshore oil and natural gas production in Saudi Arabia begins with a gas-oil separation plant, which, as the name suggests, removes natural gas from unprocessed oil before sending it through a stabilization process that removes hydrogen sulfide — the last step of the process before the oil moves to export terminals.
While Saudi Arabia possesses several of these complexes, Abqaiq is home to the world's largest crude stabilization plant. Before the attack, Abqaiq's 18 stabilization towers processed most of the crude produced at some of the most important Saudi oil fields, including the supergiant Ghawar and Shaybah fields, which are Saudi Arabia's first- and fourth-largest by installed capacity.
It appears as if the crude stabilization towers at Abqaiq were specifically targeted, along with natural gas storage tanks there. Satellite photos show extensive damage to several towers, which will require extensive repairs or rebuilding — a process that could last months. At Khurais, Saudi Arabia's second-largest oil field and another of the sites that suffered damage in the Sept. 14 attacks, the damage appeared to be limited to two of the complex's five gas-oil separators. Saudi Arabia has claimed that it can bring about 2 million bpd of production back online relatively quickly. At present, it's not clear how much of that figure would come from bringing redundant equipment at the facility online, how much ongoing repairs would add, or how much time everything would take.
Also left unclear is to what extent Saudi Arabia can employ its spare production capacity elsewhere to make up the shortfall. The kingdom has between 2.2 million and 2.7 million bpd in reserve to allow it to make up for any global market shortages, but where that capacity is located is not entirely certain. Earlier this year, reports indicated that more than half of Saudi Arabia's spare capacity was located onshore, primarily at Ghawar and Khurais, suggesting that a significant amount of it could be stuck behind the infrastructure damaged in the recent attacks, meaning it would be unavailable to compensate for the gap in production.
A Muted Short-Term Impact
In the meantime, Saudi Arabia has said it will maintain export levels by drawing already processed oil from inventories. As of the end of June, Saudi Arabia held around 187.9 million barrels in storage, meaning it could maintain export levels for about 71 days, even if the full 5.7 million bpd of production remains offline that long.
Not all crude oil is equal, however. The facilities at Khurais and Abqaiq primarily produce the Arab Extra Light and Arab Light crude grades, which are easier for refineries to handle, but generally more expensive than the country's heavier Arab Medium and Arab Heavy. Saudi Arabia has been asking Asian buyers if they will accept the lower-quality crude at a discount given its expected shortage of lighter grades.
But ultimately, the initial effects of the Saudi production shortfall might be a bit more muted globally than expected. Commercial petroleum inventories sit at 2.931 billion barrels, close to the normal five-year average. In the United States, commercial crude oil inventories stand at 416.1 million barrels, also near the five-year norm. But those five-year averages are higher because of higher oil production between 2014 and 2016 that Saudi Arabia and its allies subsequently trimmed. In addition to commercial stockpiles, most major oil consumers can also draw on large strategic petroleum reserves. The United States, for example, has 645 million barrels in its reserve, and the International Energy Agency could organize a global withdrawal from strategic reserves if the need arises. But there are concerns over the quality and location of global reserved crude. Getting the light sweet crude that makes up the bulk of the U.S. strategic reserve to markets, for instance, would take weeks.
In short, there's sufficient oil available to the global market to offset the drop in Saudi production for a couple of months. However, Riyadh would not be able to continue to make up the difference should the damage at Abqaiq take longer to repair, or if other Saudi processing facilities suffer attacks that push its oil exports to extremely low levels for an extended period.
Perhaps more importantly for Saudi Arabia, if prices continue to rise, it could break the current OPEC+ alliance. Russia, Iraq, Algeria, Angola and several other oil producers would be far less willing to maintain their cuts under the current production-shaving agreement if oil prices rise significantly at Saudi Arabia's expense. And once the alliance is broken, it could be more difficult for Saudi Arabia to piece it together again once its production returns to full capacity. Instead, it may have to shoulder the burden of maintaining prices along with its allies in the Gulf Cooperation Council.
There's sufficient oil available to the global market to offset the drop in Saudi production for a couple of months.
The attacks have already thrown a wrench in Saudi Arabia's plans to launch the initial public offering for Saudi Aramco, which had been penciled in for as early as November. In light of the damage, the kingdom is reportedly considering delaying the offering. There's little chance that Saudi Arabia will move forward with the IPO until all of its infrastructure is repaired. But even after the physical damage is fixed, the harm to the national oil company's reputation will endure. Investors will understandably worry about the possibility of additional attacks. But a lack of transparency over the events of the weekend could also dampen enthusiasm for the stock offering. In the aftermath of the attack, Saudi Arabia was slow to release information; what's more, it has apparently instituted a near-total a domestic media blackout and has not been forthcoming about the extent of the damage its facilities suffered.
Finally, the attacks have exposed the continued power that Middle Eastern crude imports have to affect the U.S. market despite the rise in domestic petroleum production and the decline in imports from the region. There had been some hope in the United States that its increasing production would insulate it from major disruptions in the Middle East, allowing Washington to keep a more hands-off approach. But in the aftermath of the attacks, West Texas Intermediate — the U.S. oil benchmark — followed Brent crude sharply upward. This highlights the reality that its oil markets and economy remain vulnerable to Middle Eastern instability, regardless of whether or not it consumes energy from the region.
Editor's note: An earlier version of this analysis misstated total commercial petroleum inventories.