The United Arab Emirates will double its capacity to export crude oil bypassing the Strait of Hormuz by next year, as it seeks to reduce reliance on the shipping chokepoint amid the ongoing Middle East conflict.
Abu Dhabi National Oil Co. (Adnoc) is accelerating the construction of a pipeline that runs to the port of Fujairah on the Gulf of Oman, according to a statement from the emirate’s media office. The company already operates a 1.5 million barrel-a-day conduit from its oil fields to the port on its eastern coast, which has proved to be a lifeline during the war.
Strategic Importance of the Pipeline
The existing pipeline has helped the UAE continue to supply markets, offsetting the hit to oil revenue as Iran practically shut the normal route through Hormuz soon after the war began in late February. Adnoc had already been planning the pipeline expansion as the current link can carry less than half of its normal export volumes.
“The project gains new significance in the context of the Hormuz crisis, but the logic behind it predates the war,” said Carole Nakhle, chief executive of consultant Crystol Energy Ltd. “The core strategic objective is clear: reducing dependence on the Strait of Hormuz.”
Impact of Iran’s Closure
Iran’s closure of the strait, through which about a fifth of the world’s daily supply of oil and gas normally flow, has thrown economies into turmoil and upended shipments of products like metals, fertilizer, and plastics. The United States has been imposing its own blockade for the past month aimed at halting shipments to or from Iranian ports.
The UAE and Saudi Arabia are the only major Gulf producers able to get significant quantities of crude to market during the war. State oil companies of both countries have quietly managed to ship some cargoes out of the Gulf in recent weeks, avoiding the Iranian blockade.
UAE’s Exit from OPEC
Accelerating the pipeline’s construction also follows the UAE’s decision to exit the Organization of Petroleum Exporting Countries. Freed of the group’s production limits, the UAE has said it will be able to respond more nimbly to market demands amid the disruption caused by the war. Additional export capacity through Fujairah will give the country more options even after Hormuz reopens to shipping.
“Expanding Fujairah export capacity fits naturally with Adnoc’s production expansion plans,” Nakhle said. “There is little point in expanding upstream production if export infrastructure becomes the bottleneck.”
Production Expansion Plans
With the UAE now out of OPEC, it will be looking to get its money’s worth from major oil-field expansions. Adnoc is set to boost capacity to 5 million barrels a day by next year. When the company first began discussing that target in 2018, it could pump about 3 million barrels a day.
Adnoc ships most of its main grade of crude — Murban, which is produced at its onshore fields — via the pipeline to Fujairah for export. The expanded capacity of the two pipelines will likely exceed the volume of Murban that Adnoc can produce. That means the company could use the new link to export its offshore grades from Fujairah. Crudes like Upper Zakum, produced at fields in the Gulf and exported from offshore terminals, are popular with refiners for their quality and often influence regional price levels.
