Iran has repeatedly threatened to close the Strait of Hormuz, and neighboring countries are preparing for a rainy day and looking for another "way out" ​

Recently, the Iran-Israel conflict has affected the international petrochemical market. In particular, after the United States launched an airstrike on Iran's nuclear facilities, the Iranian parliament voted to close the Strait of Hormuz, making the international petrochemical market even more tense. As a key artery carrying nearly 20% of the world's oil supply and a major transportation channel for liquefied natural gas (LNG), the closure of the Strait of Hormuz may pose a direct and far-reaching threat to the world economy. Although the situation has eased, neighboring countries are still preparing for a rainy day and striving to develop alternative routes to minimize the impact of this situation on themselves. However, it seems that these efforts are not enough to offset the impact of the closure of the Strait of Hormuz.

Saudi Arabia expands the East-West oil pipeline

As the leading country of the Organization of Petroleum Exporting Countries (OPEC) and the world's largest oil exporter, Saudi Arabia's key alternative to bypassing the Strait of Hormuz for oil exports is the 5 million barrels/day East-West oil pipeline. The pipeline connects Saudi Arabia's main crude oil production facilities with the port of Yanbu on the Red Sea coast and the port of Ras Tanura in the Persian Gulf.

According to S&P Global Commodity Shipping data, Saudi Arabia's state-owned oil giant Saudi Aramco exports most of its crude oil from Ras Tanura Port. As of June, the port's average daily crude oil exports were 5.3 million barrels, making it the largest crude oil export port in the Persian Gulf region.

Although the East-West Pipeline has the potential to expand its oil capacity to 7 million barrels per day in a short period of time, even if all the crude oil is transported to the western port of Yanbu through the pipeline, it will not be enough to fully make up for the export volume of Ras Tanura Port. Robin Mills, CEO of consulting firm Qamar Energy, said that the pipeline normally transports 1 million barrels per day, and the maximum capacity of 7 million barrels per day has not been tested in practice.

S&P Global Commodity Shipping data shows that in June, Saudi Arabia's Yanbu Port on the Red Sea coast exported an average of only 608,000 barrels per day of crude oil. And since November 2023, Red Sea shipping has been fraught with danger. At that time, Yemen's Houthi rebels began attacking ships in and around the Bab el-Mandeb Strait. Saudi Aramco could also send tankers north through the Red Sea and the Suez Canal to the Mediterranean, but this would significantly increase the cost of exporting to major Asian customers.

"Another problem is that Saudi Aramco can only export Arab Light and Heavy Oil from Yanbu Port based on the existing oil tanks in Yanbu Port. But in an emergency, they may have to mix other grades of crude oil." Previously, Saudi Arabia also used Egypt's 2.5 million barrels per day Suez-Mediterranean Oil Pipeline (SUMED) to avoid the Bab el-Mandeb Strait.

UAE bets on Fujairah Port

In the UAE, the port of Fujairah outside the Strait of Hormuz is the terminus of the 1.5 million barrels per day Habshan oil pipeline, which can be used as an alternative to the Ruwais, Jebel Ali and Zerkho crude oil export terminals in the Persian Gulf to transport Murban crude oil from Abu Dhabi.

But the pipeline's capacity is far less than the UAE's crude exports of 3.5 million barrels per day, according to S&P Commodity Shipping data. Abu Dhabi National Oil Company (ADNOC) produces most of the UAE's crude, including heavier grades such as Upper Zakum, Das and Um Lulu in addition to the sweet Murban crude. "ADNOC can transfer about 1.8 million barrels per day of crude oil to the port of Fujairah, although currently they can only ship onshore crude oil here," Mills said.

The UAE has been preparing for a possible closure of the Strait of Hormuz by developing large caves in the mountains of Fujairah as crude oil storage facilities with a total capacity of 42 million barrels, and plans to expand further. "The UAE has begun to use the port of Fujairah for most of its crude oil exports, so it looks feasible for UAE oil to avoid the Strait of Hormuz," Mills said.

Turkey proposes new oil pipeline

As OPEC's second-largest oil producer, Iraq exports almost all of its crude oil from the port of Basra on the Persian Gulf coast. Its 450,000-bpd Northern Transit Pipeline (ITP) to Turkey has been closed since March 2023 in a dispute with the Kurdish region, but Turkey has proposed building a new pipeline from Basra to Ceyhan.

Shwan Zulal, managing director of Carduchi Consulting, which focuses on the Kurdish region, said: "If the Strait of Hormuz is closed, there is a possibility of pushing for the ITP to open." But legacy issues such as repayment of past debts, Baghdad's withholding of Kurdish regional government salaries and deadlocks on other terms will make it difficult to reach a deal. Zulal said: "The problems between the parties are not easy to resolve in the short term, so opening the ITP is not a quick solution unless the unlikely situation of a long-term closure of the Strait occurs."

Iraqi Oil Minister Hayan Abdulghani said Iraq was looking for alternatives to bypass the Strait of Hormuz, but did not elaborate on its plans

The new pipeline proposed by Turkey would transport oil and gas from Iraq's resource-rich Basra region to Ceyhan, a move that would enable Baghdad to bring more crude to market while advancing Turkey's plans to establish itself as a major regional energy hub. Turkish Energy Minister Alparslan Bayraktar revealed the plans to S&P Global Commodity Insights in April, saying a currently operating pipeline from Silopi in southern Turkey to Ceyhan would need to be connected to the Basra field to reach 1.5 million bpd, largely bypassing the Kurdish region.

For other major producers in the Gulf, including Kuwait, Qatar and Bahrain, alternative export routes through the Strait of Hormuz do not yet exist. Qatar, Kuwait and the Neutral Zone, which is jointly owned by Kuwait and Saudi Arabia, exported a combined 2.4 million bpd of crude in June, according to Commodity Shipping Data. Iran itself exports 1.5 million bpd of crude, mainly from Kharg Island in the Persian Gulf, and its second export facility at Jask in the Sea of Oman is under construction. All of these logistical constraints would lead to an almost immediate supply squeeze in the oil market if the Strait of Hormuz were closed, causing prices to soar.