![COLUMN | What do the Saudi Arabian drone attacks mean for the offshore industry? [Offshore Accounts]](http://media.assettype.com/bairdmaritime%2Fimport%2Fwp-content%2Fuploads%2F1200px-PersianGulf_vue_satellite_du_golfe_persique.jpg?w=480&auto=format%2Ccompress&fit=max)
Monday opened with the most significant spike in the oil price since Saddam Hussein invaded Kuwait in 1990, with Brent crude shooting up 20 per cent to over US$70 per barrel.
The drone strike on Aramco's Abqaiq crude treatment facility and a simultaneous attack on the onshore Kurais oilfield potentially knocks out five million barrels a day of oil production for an unknown period of time, twice the available spare capacity worldwide, and roughly half of Saudi Arabia's entire oil output.
The Houthi rebels in Yemen claimed responsibility for the attack, as part of their efforts to end the Saudi military intervention in their homeland. As smoke billowed from the ruptured processing facilities, the world suddenly woke up to the risk of an escalation of hostilities in and around the Arabian Peninsula between Saudi Arabia, the UAE and the US, on one side, and Iran, whom Riyadh and Washington blame for being behind the Houthi attack.
The consequences of the attack are severe for the Saudis and for oil markets as a whole. With five per cent of the global oil supply removed with this devastating air strike, and Saudi Aramco giving no indication of when the lost production would be restored, traders and refiners have been panicked, driving Brent prices higher.
Crude tanker rates look set to plunge, especially in the VLCC segment. The US, Israel and Saudi Arabia have stepped up their rhetoric against Iran, which President Donald Trump has explicitly blamed for the attacks. America is "locked and loaded" to respond, the president advised in a tweet over the weekend.
With tensions between the Saudis and the Iranians already high after mysterious attacks on six tankers at the anchorage in Fujairah in the UAE earlier this year, and the seizing of foreign tankers by Iran, as well as the arrest of an Iranian tanker in Gibraltar at American behest, the risk of all out war in the region cannot be ruled out. How did we reach this dangerous moment?
Since 2015 Saudi Arabia and the UAE have been intervening in Yemen's bitter and complicated civil war, which is being fought between the Houthis and the Yemeni government, amongst others.
The Saudis and Emiratis have placed thousands of troops on the ground, and have launched massive airstrikes against both Houthi military and civilian targets. The Houthis have responded by seeking aid from the Iranians, but to see them as simply puppets of Tehran is to misunderstand the havoc wrought in Yemen by the Saudi and UAE intervention.
The Yemen Data Project (https://www.yemendataproject.org/), an NGO dedicated to highlighting the events there, reports over eight thousand civilian casualties in Yemen since the civil war began in 2015, twice the casualties in the September 11 attacks in New York, and more than nine thousand serious civilian injuries from nearly twenty thousand air raids by the Saudis and the UAE.
The conflict has had a terrible human impact in Yemen. In March, the World Food Programme (WFP) was warning of the risk of the largest famine there since the Ethiopian famine of the 1980s. The civil war has wrecked the country's agriculture, disrupted food supplies through critical ports like Hodeida and Aden, and led thousands of Yemenis to flee their homes to escape the fighting and the bombing.
"Twenty million Yemenis – some 70 per cent of the population – are food insecure, marking a 13 per cent increase from last year," WFP Spokesperson Herve Verhoosel told reporters earlier this year at a regular press briefing in Switzerland. "Nearly 10 million of them are one step away from famine".
Meanwhile, Henrietta Fore, Executive Director of the United Nations Children's Fund (UNICEF), said that Yemen's civil war continues to take a "horrific toll" on children. Surprisingly, Dutch owner Vroon has managed to charter at least one OSV to the WFP to support its humanitarian efforts in Yemen.
The Houthis adopted a policy of striking back into the Saudi heartland with both missiles and drones in retaliation. The Yemeni rebels have conducted multiple attacks on Riyadh and Abha airports, the Saudi Ministry of Defence, power stations and Aramco pumping stations previously, including one on the pipeline to Yanbu in May.
The latest attack on Abqaiq marks their most successful to date, but it is not clear whether the Houthis will stop their attacks on Saudi Arabia, even if the US launches heavy strikes at Iranian military targets.
So long as Saudi Arabia maintains its military presence in Yemen it is hard to see why they would. Even if Aramco can quickly repair the Abqaiq facility, what is going to stop the Houthis attacking it again, just as the Taliban keep hitting targets in Kabul, and just as the IRA kept bombing London in the 1980s?
The attacks raise questions about Saudi Arabia's ability to provide a reliable and consistent supply of crude at a time when both Libya and Venezuela have demonstrated that even countries with mature oil infrastructure can see output plummet if there is civil instability or worse.
This successful Houthi attack may serve to encourage further ones, until the Saudis quit the civil war in Yemen. Other plausible targets would be Riyadh airport (again) and Saudi government buildings, as well as increasing the risk of attacks on other Aramco facilities.
Aramco is the cash cow for the House of Saud. Five million barrels a day is two billion US dollars a week of lost revenue to Aramco. If the outage lasts even three months, that is close to $30 billion of lost revenue for the Saudi state oil company, and the state treasury.
The Saudis can pretty much give up their hope of leading Aramco to the public markets in an IPO in these circumstances, let alone one where the company achieves the fabled two-trillion-dollar valuation that the royal family were expecting.
The attacks raise the risk of further political instability in Saudi Arabia itself, where the royal family relies on the cash from Aramco's oil sales to pay for benefits and welfare for Saudi citizens. Half of Saudi Arabia depends on water from desalination plants. The Houthis have targeted these fresh water making facilities in past rocket attacks.
A successful attack on the Saudi water supply would be even more catastrophic for the Saudi people than the attack on Aramco's assets. Military incompetence does not reflect well on the ruling family, so further damaging and high-profile assaults would increase the pressure to change within the kingdom.
Similarly, whilst the UAE has reduced its involvement in Yemen over recent months, pulling out many of its troops from Aden and the south, an attack on Abu Dhabi or Dubai would be disastrous for the emirates, especially if aviation or tourist infrastructure were hit.
The sight of jet planes burnt at the terminal in Colombo airport in the Sri Lanka after an assault by the Tamil Tigers late in the civil war there in 2001 provides a stark reminder of the vulnerability of airports to attack by rebels.
If the Houthis can take down half of Saudi Arabia's oil production with a drone single strike on the best protected facility in the country (and probably in the oil industry worldwide), it wouldn't take many drones to disrupt the Gulf's civil aviation infrastructure, damage the UAE's tourism and aviation industry, and interrupt international air travel between the region and the world.
But, what are the consequences for the offshore industry?
Firstly, the world just woke up (again) to the geo-political risks in the Gulf and in the Arabian Peninsula after years of relative calm. This makes developing oil and gas reserves outside the region much more attractive, both because higher prices make new offshore developments, especially in deep water, much more economically viable, and because the risks to Aramco's production from either the Iranians or the Houthis aren't going to go away any time soon, so diversification of supply looks strategically sensible.
An attempt at regime change in Iran by the US would only make a dangerous situation worse. Remember that it took ten years for Iraqi oil production to return to the levels achieved in the year 2000 after the invasion by the US and its allies in 2003.
American sanctions on Iran are only going to get tighter, even if full blown war can be averted. The conflict in Yemen shows no sign of ending without a humiliating withdrawal by the Saudis. If you are Tullow Oil and ExxonMobil looking over the billions of barrels you have just discovered off Guyana, the attack on Abqaiq and the potential for conflict in the Gulf is excellent news.
Fast track those discoveries and benefit from the price spike and the additional risk premium crude is going to carry. For projects in Brazil and West Africa, geopolitical risk in the Middle East centred on Saudi Arabia and Iran will be the gift that just keeps giving in the years to come.
Insurers had already made the twelve-mile territorial waters of Yemen a no-go area due to the civil war there, on top of the previously existing piracy threat in the Gulf of Aden. Then the attacks on tankers near the Straits of Hormuz led to that area being declared as a High Risk Area in August, putting some of the UAE's beach resorts on the same threat level as Nigeria and Djibouti. This potentially entitles some crew to extra war bonuses, or the right to leave vessels that are working in High Risk Areas.
Further attacks on Aramco infrastructure and any further escalation to the threat of war in the Gulf between Iran and Saudi Arabia will likely lead to increased war risk premiums for all vessels trading in Saudi waters, including OSVs. Whether Aramco will reimburse the extra costs owners incur is debatable, as Aramco's contractual terms are notoriously harsh and one sided.
If there is a hot war between Saudi Arabia and Iran, expect the Iranians to target drilling rigs and construction vessels offshore as well as tankers. Why wouldn't they? Saudi Arabia's economic strength depends on its oil production, so by attacking offshore as well as onshore facilities, the Iranians would be inflicting maximum economic harm on their enemies, and on the unfortunate rig owners and OSV owners potentially caught up in the middle.
Unfortunately, the spread-out geography and the marine location of Saudi Arabian offshore production assets makes it much harder to defend than Aramco's land-based facilities.
If there is fighting, expect the Philippines government to embargo travel by Filipino seafarers to vessels working there, as has happened in past Gulf conflicts. This will potentially create a manpower crunch for those OSV owners who do decide to continue their operations in the region.
A decline in drilling and construction activity in the Gulf would be a disaster for the rest of the OSV industry, unless offset by much, much higher oil prices. An interruption to Aramco's drilling and production operations, and an escalation of military conflict between Iran and Saudi Arabia might cause an exodus of OSVs and rigs out of the Gulf.
This would have a serious impact on utilisation and day rates in Egypt, Africa and SE Asia, the most adjacent markets. Industry utilisation is barely above 60 per cent today and a slow-down in activity in the Gulf would be devastating for owners. Hardest hit would be those most dependent on the Saudi market, including Jana Marine, Al Rawabi and Zamil, which have fleets almost entirely dedicated to supporting Aramco's operations.
Of course, a hot conflict could also create all manner of opportunities for those owners willing to put their ships and their crews in the line of fire, if Gulf oil companies were desperate enough to pay top dollar just to hire vessels to continue their operations through any conflict. The Tanker War between Iran and Iraq made the fortune of a certain Norwegian tanker owner.
We can only pray that calm voices prevail, and that seafarers' lives are not once again at risk in the Gulf, as they were in the 1980s. But the events of the last three days suggest we should not be blind to the risks of war in the region extending beyond Yemen, with all the horror and the terrible human cost that entails.
The damage to the OSV industry will be secondary to the lives lost if that happens. Perhaps this attack will be a one off, and Aramco's highly trained engineers will be able to restore the shut-in production quickly, whilst tensions between Riyadh and Tehran are contained.
In which case the consequences may be minimised and readers will roll their eyes at the worst case scenarios presented her. Unfortunately, we just don't know and the history of the region since the Islamic Revolution of 1979 suggests that anything is possible
Full details of the humanitarian crisis in Yemen from the United Nations here:
Full timeline of Houthi attacks in Saudi Arabian territory:
