Hormuz bypass pipelines may not remove Iran risk for oil exports

Middle East oil producers are trying to move more crude around the Strait of Hormuz, a choke point now facing near-daily tanker attacks tied to Iran. For retail investors watching energy prices, the key issue is supply risk: even new pipeline routes may not fully protect barrels that feed the global oil market.

The U.S. is backing Iraq’s effort to restore a crude pipeline from Kirkuk in northern Iraq through Syria to the Mediterranean Sea, a State Department official told CNBC on Thursday. The official said U.S. companies are expected to be involved in building the line.

Iraq has been hit hard by the disruption because most of its exports leave through Basra in the south and the country has few alternatives, according to CNBC. Iraq, OPEC’s second-largest producer, pumped 1.9 million barrels per day in June, down more than 50% from 4.2 million barrels per day in February before the U.S. and Israel launched the war against Iran. Barrels per day, or bpd, is the standard way oil markets measure production and transport capacity.

Other producers are also looking for ways around Hormuz. The United Arab Emirates plans to double export capacity outside the strait by completing a second pipeline to Fujairah on the Gulf of Oman, CNBC reported. Saudi Arabia is considering adding 2 million bpd of capacity to its pipeline to the Red Sea, Reuters reported last week, citing people close to the matter.

Goldman Sachs analysts said in a Sunday note that seven pipeline projects in the Middle East are either being built or planned. The bank said regional pipeline capacity could exceed 14 million bpd by the end of 2028, equal to more than 60% of the seven Gulf states’ pre-war export volume of 23 million bpd.

Analysts cautioned that pipelines reduce reliance on Hormuz without removing the threat. Jennifer Li, a geopolitical analyst at energy consulting firm Rystad, told CNBC the projects are a geopolitical hedge against disruption in the strait rather than a full substitute for it.

The existing UAE route to the Gulf of Oman and Saudi Arabia’s East-West pipeline to the Red Sea have helped during the Iran war, according to CNBC. Abu Dhabi and Riyadh have diverted millions of barrels per day through those systems away from Hormuz.

Those routes also create new targets. Li told CNBC that pipelines remain vulnerable, and CNBC reported that an Iranian strike on a Saudi pumping station in April cut throughput on the Red Sea route by 700,000 bpd. Asymmetric attacks are lower-cost strikes that exploit weak points in larger systems, including ships, terminals, pumping stations and storage tanks.

“The problem isn’t the waterway,” Bob McNally, founder of Rapidan Energy, told CNBC’s “Power Lunch” on Monday. “It’s that Iran can use weapons to attack loading facilities, pumping stations, the end stations, these terminals, and the storage units of these pipelines.”

Risk is also spreading toward the Red Sea. Mohammed al-Farah, a senior political official with Yemen’s Houthi movement, said the group is ready to close the Bab el-Mandeb Strait in coordination with Iran, according to Iranian state media. Reuters reported Thursday, citing sources, that Tehran has asked the Houthis to close the strait if the U.S. bombs Iran’s power infrastructure.

The Bab el-Mandeb links the Red Sea with the Gulf of Aden and global shipping routes. A closure would trap millions of barrels per day that Saudi Arabia has moved by pipeline to its Red Sea export terminal at Yanbu, according to CNBC.

Michelle Wiese Bockmann, senior maritime intelligence analyst at Windward, told CNBC that Yanbu’s role for Saudi Arabia and the global oil market is difficult to overstate.

This story draws on original reporting from CNBC.