Key facts
- The war between the U.S. and Iran has severely disrupted oil and gas flows from the Persian Gulf.
- Global energy import bills increased by $330 billion between March and August due to these disruptions.
- Saudi Arabia rerouted exports to the Red Sea via its East-West pipeline, later shifting to the Suez Canal.
- The UAE plans to double its pipeline capacity to Fujairah, a port outside the Strait of Hormuz.
- Iraq is pursuing pipeline projects with Syria and Turkey to bypass the Strait of Hormuz.
- Japan has agreed to financially support pipeline network expansion in the region.
The ongoing conflict involving Iran has led to significant disruptions in oil and gas flows through the Strait of Hormuz, causing soaring energy import bills and supply uncertainty for importing nations. In response, Middle Eastern countries are accelerating investments in alternative infrastructure, including pipelines and port expansions, to bypass the vulnerable chokepoint.
According to a report by the Centre for Energy Research and Clean Air, the global energy import bill swelled by $330 billion in the six months between March and August due to these disruptions. Persian Gulf producers have resorted to various methods, such as using tankers with switched-off transponders, to move stored oil out of the region.
Saudi Arabia initially rerouted its exports to the Red Sea via its East-West pipeline, which saw its capacity ramped up to 7 million barrels of crude daily. However, attacks by Yemeni Houthis in the Bab el-Mandeb strait necessitated a further reroute through the Suez Canal, which has more constrained capacity.
Neighboring the UAE is planning to double the export capacity of its pipeline to Fujairah, a port city located just outside the Strait of Hormuz. ADNOC, the state oil and gas major, aims to increase its export capacity from 1.8 million barrels daily to 3.6 million barrels daily with the new West-East 1 Pipeline project, expected to be operational next year.
Major energy companies are participating in these initiatives. TotalEnergies has committed to the ADNOC pipeline expansion and is involved in another project to build a pipeline through Syria to the Mediterranean coast for shipping Iraqi crude. While the U.S. supports this project, its estimated $15 billion cost and four-year construction timeline are too long for Iraq.
Consequently, Iraq is in discussions with the new Syrian government to repair an existing 20-year-old pipeline, a project estimated to take at most three years. Iraq is also in talks with Turkey to expand oil flows via the Kirkuk-Ceyhan pipeline. Kuwait is engaging with the UAE and Saudi Arabia to expand regional pipeline networks, seeking alternative export routes from Fujairah and Saudi Red Sea ports.
Qatar, heavily reliant on the Strait of Hormuz for its LNG exports, faces economic shrinkage, while Kuwait is experiencing an 8% GDP squeeze this year due to the war. Saudi Arabia and the UAE have secured financial support from Japan for their pipeline network expansion, given Japan's significant dependence on Middle Eastern oil imports.
Reuters also reported, citing unnamed sources, that investments in port infrastructure are becoming a critical priority for Gulf states, potentially overshadowing other infrastructure projects. This focus on ports is driven by the need to manage the economic fallout from paralyzed tanker traffic in the Strait of Hormuz.
The ongoing military actions, including U.S. strikes on rocket launchers in the Strait of Hormuz and Iranian retaliation on U.S. bases in Jordan, indicate that the crisis is far from over. The development of alternative routes, while time-consuming, is expected to fundamentally reshape the risk profile of the Middle East's energy export landscape.