Digging Deeper podcast | Explained: The Saudi Aramco Drone Attacks

On this episode of Digging Deeper, we’ll take a look at some of the details regarding the attack itself, what it entails for oil prices, in India and elsewhere, as well as what events it could trigger.

Drones over Abqaiq

On September 14, two plants run by state-owned Saudi Aramco in Buqyaq, which are critical to the middle eastern country’s oil industry, were attacked by drones. Buqyaq is around 330 kilometers northeast of the Saudi capital Riyadh.

According to CNBC, the strikes, allegedly involving around 20 drones and several cruise missiles, forced Saudi Arabia to shut down half of its oil production capacity, or 5.7 million barrels per day of crude — approximately 5% of the world’s global daily oil production.

Online videos apparently shot in Buqyaq included the sound of gunfire and showed flames shooting out of the Abqaiq oil processing facility. Smoke rose over the skyline and glowing flames could be seen a distance away. Images obtained by the Associated Press showed at least 19 strikes, 17 of which actually hit targets. Samir Madani of satellite tracking firm TankerTrackers.com told CNBC that the attacks were “extremely surgical”. CNBC also claimed that analysts identified 17 hits that targeted 14 storage tanks and three processing trains. The images showed hits on several “spheroids” used to process crude oil, which, analysts claim, reveal pinpoint accuracy. The photos also show fires from blasts elsewhere in the facility. Blomberg reported “...one photo appeared to show a row of four spherical tanks each with similar puncture marks, indicating a highly accurate strike. Those vessels are important because they are part of a process to remove hydrogen sulfide, a highly corrosive chemical that needs to be taken out of crude before it can be refined. Without that, most refineries would struggle to process Saudi crude.” Further, a close up image of the Khurais oil field near Abqaiq showed damage to a processing plant and scorch marks on the ground from the subsequent fire.

According to Livemint, “A satellite picture from a NASA near real-time imaging system, taken more than 24 hours after the attack, showed the huge smoke plume over Abqaiq had dissipated. But four additional plumes to the south-west, over the Ghawar oilfield, the world’s largest, were still clearly visible. While that field wasn’t attacked, its crude and gas is sent to Abqaiq and the smoke most likely indicated flaring. When a facility stops suddenly, excess oil and natural gas is safely burned in large flaring stacks.”

Saturday’s incident was the biggest attack on Saudi Arabia since the Gulf War period, when Saddam Hussain fired missiles into the country. The Buqyaq plant has a history of terror threats. It was targeted by even Al-Qaida, which allegedly sent suicide bombers in February 2006 who failed to attack the oil complex. Saudi Aramco describes its Abqaiq oil processing facility in Buqyaq as "the largest crude oil stabilization plant in the world." The facility processes sour crude oil into sweet crude, then later transports onto transshipment points on the Persian Gulf and the Red Sea. Estimates suggest it can process up to 7 million barrels of crude oil a day. Therefore, closing the plant will have fairly serious repercussions worldwide.

No group has claimed the attacks but suspicion fell on Yemen's Houthi rebels. A Saudi-led coalition has been battling the rebels for over four years now. The Iran-backed Houthis hold Yemen's capital, Sanaa, and other territory in the Arab world's poorest country. According to organizations like ACLED, or Armed Conflict Location & Event Data Project, which is tracking the conflict, the war between the Houthis and Saudi Arabia became the world's worst humanitarian crisis as violence pushed Yemen to the brink of famine and killed more than 90,000 people since 2015.

As for the drones, since the start of the conflict, Houthi rebels have been using drones in combat. They have flown drones into the radar arrays of Saudi Arabia's Patriot missile batteries, reportedly disabling them and allowing the Houthis to fire ballistic missiles into the kingdom unchallenged. The Houthis launched drone attacks targeting Saudi Arabia's crucial East-West Pipeline in May as tensions heightened between Iran and the US. A report in Mint explained that the first set of drones appeared to be off-the-shelf, hobby-kit-style drones. Later, versions nearly identical to Iranian models made an appearance. Iran denies supplying the Houthis with weapons, although the United Nations, the West and Gulf Arab nations accuse Tehran of doing so deliberately.

Now, when we think drones, we think of the funny spider-like drone cameras we see in Indian weddings. Surely a bunch of raggedy Yemeni rebels cannot get their hands on the scary drones the US uses, you know...the kind that turns rogue in Hollywood movies and tries to bomb innocent people. Well, UN investigators claimed the Houthis' new UAV-X drone, found in recent months during the Saudi-led coalition's war in Yemen, likely has a range of up to 1,500 kilometers. That’s half the length of India vertically! Some serious mileage there. That also means both Saudi Arabia and the United Arab Emirates are well within the drones’ range.

Interestingly, the US govt is pinning the blame on Iran. USA’s Secretary of State Mike Pompeo said on Sunday there was no evidence the raids were carried out from Yemen. He added, “Amid all the calls for de-escalation, Iran has now launched an unprecedented attack on the world’s energy supply.” US secretary of energy Rick Perry also blamed Iran. He said, “The US wholeheartedly condemns Iran’s attack on the kingdom of Saudi Arabia. We call on other nations to do the same. This behaviour is unacceptable. They must be held responsible."

American President Donald Trump tweeted, “Saudi Arabia oil supply was attacked. There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!” 

According to Reuters, Iranian Foreign Ministry spokesman Abbas Mousavi dismissed allegations that his country was responsible was, calling them “pointless”. A senior Revolutionary Guards commander also warned the Islamic Republic was ready for “full-fledged” war. Tensions between Washington and Tehran were already running high because of a long-running dispute between the two nations over Iran’s nuclear program that led the United States to impose sweeping sanctions.

But the Houthis are daring the Saudis after the drone attack. Houthi spokesman Yahya Saree said in a statement, “We assure the Saudi regime that our long hand can reach wherever we want, and whenever we want...We warn companies and foreigners not to be present in the facilities that were hit in the strikes because they are still within range and may be targeted at any moment."

The Saudis have not placed blame on anyone yet. That said, Riyadh has accused Iran of being behind previous attacks on oil-pumping stations and the Shaybah oil field, charges that Tehran denies. Riyadh also claimed Tehran armed the Houthis, a charge both deny.

And the US may also face a difficult situation. Aaron David Miller, senior fellow at the Carnegie Endowment for International Peace, explained, “There’s no great response here...The question becomes how does the US navigate between not allowing this precedent to stand on one hand, and avoiding a punitive escalation or one designed to deter future attacks without an escalation. And the answer is there is no answer."

Emily Hawthorne, Middle East and North Africa analyst at Texas-based advisory firm Stratfor Enterprises, observed, “If the Houthis were actually responsible, this puts pressure on the Saudis to better target Houthi drone and missile capabilities…(That) might require a larger military commitment from Saudi Arabia at a time when it wants the opposite.”

Whatever the subsequent action may be, there is a definite shift in perception. According to Helima Croft, global head of commodity strategy at RBC Capital Markets, “Abqaiq is the nerve center of the Saudi energy system. Even if exports resume in the next 24 to 48 hours, the image of invulnerability has been altered.”

UN Secretary-General Antonio Guterres condemned Saturday’s attacks and called on all parties to exercise restraint and prevent any escalation. The European Union warned the strikes posed a real threat to regional security, and several nations urged restraint.

How does this affect Oil?

Saudi Aramco pumped about 9.8 million barrels a day in August, and will be able to keep customers supplied for several weeks by drawing on a global storage network - 188 million barrels in June, according to official data. Saudi Arabia holds millions of barrels in tanks in the kingdom itself. It also maintains storage in three strategic locations: Rotterdam in the Netherlands, Okinawa in Japan, and Sidi Kerir on the Mediterranean coast of Egypt.

That said, the company lost a massive 5.7 million barrels per day of output after the attack. Saudi Arabia is racing to restore oil production which has been slashed by half, or about 5% of world supply. The Saudi oil industry supplies 10% of the world’s crude oil.

Reports claim Aramco would need weeks to restore full production capacity to a normal level. However, some say it can restore å significant volume of oil production within days. Aramco could also consider declaring force majeure on some international shipments if the resumption of full capacity at Abqaiq takes weeks.

A couple of days ago, Amin Nasser, Aramco’s president and CEO, said, “Work is underway to restore production and a progress update will be provided in around 48 hour.” Aramco is also working to compensate clients for some of the shortfall from its reserves.

That’s the official word.

Mele Kyari, chief executive officer of state producer Nigerian National Petroleum Corp., told Bloomberg the disruption is “quite significant. If it’s protracted it could be a big challenge for the oil markets." Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen, said, “The global economy can ill afford higher oil prices at a time of economic slowdown...so while a surge in prices driven by lower supply may temporarily remove the focus on slowing demand, it could, if prolonged, potentially reduce demand growth expectations even more.”

How are major oil buyers responding to this crisis?

The US Department of Energy said it’s prepared to dip into the Strategic Petroleum Oil Reserves if necessary to offset any market disruption. Or as Trump tweeted, “PLENTY OF OIL.”

How will India deal with this crisis? 

As far as India goes, the govt slammed the attacks and reiterated the country’s “rejection of terrorism in all its forms and manifestations.” Given the growing closeness between India and Saudi Arabia in the last few years, Saudi Aramco reportedly told one Indian refinery there will be no immediate impact on oil supplies. It will deliver crude from other sources and claimed it had adequate inventory.

That is important because India consumes 4.5 million barrels of oil a day, or 250 million tonnes of crude oil a year. Our country is heavily dependent on imports and more than 80% of crude oil requirement is imported. Nearly 70% of the country’s crude oil imports come from the middle east.

Things could get worse before they get better. The drone attack on Aramco has shaken the global oil market. Crude oil prices have went up nearly 15% within two days of the attack. The price surge is more in case of Brent North Crude, an oil basked that accounts for the bulk of India’s imports unlike West Texas Instrument (WTI) that is relevant for the US market. If the disruption continues for more than 10-15 days, it will have an impact on the retail price of petrol and diesel. According to Financial Express, if it drags on for months then it will mark the end of the era of moderate crude prices.

Sushil Chandra Tripathi, former petroleum secretary, said, “The Saudis have to give a clear assessment...how much time it will take to restore the production. If it’s a matter of a week, 10 days or even a month then the reserves available with the Saudis, the US and India’s own reserves can help the country to manage the situation.”

While India does maintain reserves, Saurabh Chandra, former oil secretary, said, “India’s strategic oil reserves are enough for 12-15 days.” These include a total installed capacity to store over 5 million tonnes of oil at three underground locations in Visakhapatnam in Andhra Pradesh, and in Mangalore and Padur (near Udupi) in Karnataka. Chandra added, “In addition to these three underground caverns to store oil, refineries of the country also maintain a large stock of commercial storage that should be sufficient for 45-60 days.”

But if the situation takes longer to resolve - say six months or a year -  supply lines will be severely restricted and  force the country to look for alternative sources but this option has its own limitations. Former oil secretary SC Tripathi told Financial Express, “In case of existing oil fields, the scope for increasing the production other than Saudi Arabia is not much. Saudi Arabia can increase production but these fields that have been attacked were its major fields.”

Virendra Chauhan, a Singapore-based analyst at industry consultant Energy Aspects, told Mint, “The vulnerability of Saudi infrastructure to attacks, historically seen as a stable source of crude to the market, is a new paradigm the market will need to deal with...At present, it is not known how long crude will be offline. “

Citigroup Inc.’s Ed Morse wrote in a research note, rather ominously, “...there is but one rational takeaway from this weekend’s drone attacks on the Kingdom’s infrastructure -- that infrastructure is highly vulnerable to attack, and the market has been persistently mis-pricing oil.”

For consumers like you and me, that’s not good news. We could well see costs rise for products ranging from petrol and diesel to ticket prices. As the cost of transportation rises, shipments of other goods, such as groceries, could also see an increase in prices in the coming months.