Emirates readies oil export detour to avoid Hormuz

June 8, 2012 - 7:46 AM
Mideast Emirates Pipeline

With an oil tanker in background, fishermen cross the sea waters off Fujairah, United Arab Emirates, Wednesday, May 30, 2012. The United Arab Emirates is nearing completion of a pipeline through the mountainous sheikdom of Fujairah that will allow it to reroute the bulk of its oil exports around the Strait of Hormuz at the mouth of the Gulf, the path for a fifth of the world's oil supply. (AP Photo/Kamran Jebreili)

FUJAIRAH, United Arab Emirates (AP) — By night, the lights of dozens of ships anchored off this eastern Emirati port create the mirage of a far-off city at sea.

The crowded anchorage reflects Fujairah's rise as one of the world's busiest maritime refueling stations. Soon it will also become a vital new exit route for Arabian crude oil destined for world markets.

The United Arab Emirates is nearing completion of a pipeline through the mountainous sheikdom that will allow it to reroute the bulk of its oil exports around the Strait of Hormuz at the mouth of the Gulf, the path for a fifth of the world's oil supply.

Iran has repeatedly threatened to close the strategically sensitive waterway, which is patrolled by Iranian and U.S. warships, in retaliation for ramped-up Western sanctions over Tehran's nuclear ambitions.

That threat has raised worries among Gulf countries that conflicts could block the route to market for their most lucrative resource. But only the UAE and Oman have coastlines on Indian Ocean side of the strait that would enable them to go around the chokepoint by land. Saudi Arabia also can avoid Hormuz by shipping its Gulf fields' oil production out of its Red Sea ports, but it would have to increase the capacity of those ports and of pipelines running across the breadth of the country to handle its total output.

With the Emirates' new pipeline, oil from fields deep in the Abu Dhabi desert would travel 236 miles (380 kilometers) overland and across the barren Hajar mountains to this fast-growing port on edge of the Indian Ocean.

At the moment, Emirati oil exports are loaded in the Gulf and must pass through Hormuz. Once it's running at full volume, the pipeline will let the UAE get two-thirds of its peak oil production to market even if the strait is shut. That's about 10 percent of the total 17 million barrels of oil a day that currently goes through Hormuz.

The director general of Fujairah municipality, Mohammed Saif al-Afkham, told The Associated Press he expects the pipeline to be commissioned this month.

"This will add a lot to the shipment of oil, and it will make it faster and easier instead of going to the Gulf," he said.

Officials have not announced a firm starting date. But al-Afkham's comments and those of other Emirati officials suggest exports could begin soon.

Energy Minister Mohammed bin Dhaen al-Hamli told a Paris conference last month the four-foot-wide pipeline is finished and is being tested.

It is designed to handle 1.5 million barrels of crude a day. Al-Hamli has said that figure could rise to 1.8 million barrels.

Al-Hamli and the state-run International Petroleum Investment Co., which is building the pipeline, did not respond to Associated Press requests for comment about the project. Neither did the China National Petroleum Corp., a subsidiary of which was contracted to construct the pipeline.

The project is immensely important for the UAE, an important American ally. The seven state federation is OPEC's third largest exporter of oil, after neighboring Saudi Arabia and Iran.

"If there are effective bypass routes, it makes it less likely that Iran would try to block it," said Robin Mills, head of consulting at Manaar Energy Consulting & Project Management in Dubai.

The Emirates' Sunni leadership is wary of Tehran's regional influence, especially in Shiite-led countries such as Iraq and Syria and Shiite-majority Bahrain in the Gulf.

A longstanding tussle over three Gulf islands claimed by the Emirates and Iran along the shipping lanes approaching the Strait of Hormuz continues to fester. The dispute flared up again last week when the commander of Iran's powerful Revolutionary Guard traveled to the islands, almost a month after a similar visit by President Mahmoud Ahmadinejad.

Tightening sanctions against Iran are also straining its reliance on Dubai and other long-established Emirati trading ports.

With tensions high, Emirati officials are careful not to link the pipeline directly to threats from their neighbor across the Gulf.

Yet there is little doubt the pipeline is an insurance policy against any threat to the strait.

"It gives a sense of security just in case there are any issues," UAE Minister of Economy Sultan bin Saeed al-Mansouri said this week when asked about the economic benefits of the project. Only later did he add that the pipeline would also offer additional export capacity if oil production increases.

For Fujairah, the pipeline is a way to solidify its standing as an emerging petroleum hub.

About two dozen ships on average already pick up fuel for their own engines in Fujairah every day, according to editor Ada Taib at Bunkerworld, an online site that tracks the industry. Port authority estimates show it is now the world's second busiest maritime refueling spot globally after Singapore, she said.

The waterfront around Fujairah port is dotted with more than 100 towering fuel silos. Eight larger storage tanks, each capable of holding 1 million barrels of crude, mark the terminus for the new oil pipeline.

Even more energy infrastructure is on the horizon.

IPIC, the Abu Dhabi company building the crude pipeline, is planning a $3 billion, 200,000 barrel-a-day refinery at Fujairah. It and another government-backed firm, Mubadala Development Co., in March announced they will develop a terminal at Fujairah to receive liquefied natural gas for domestic use.

"There's a recognition that it's a strategic asset having an outlet on the Indian Ocean," said Mills, who added that the UAE is eager to get the crude oil pipeline running as soon as it can. "Tensions do come and go pretty quickly. You always want to have it ready."