The vulnerability of the Saudi oil industry

This article represents an Israeli view and so makes assumptions about Iran's aggressive intentions. However this article makes clear the vulnerability of Saudi oil and the western economy.

I don't think the Iranians would make any hostile moves.

However, if Israel attacks Iran all bets are off

How Iran could get carte blanche in the Middle East — without a nuclear weapon

A cyber attack earlier this month highlighted the vulnerability of the Saudi oil industry, on which so much of the world depends. A recent simulation showed that a full-scale terror attack at Abqaiq, where Saudi Arabia processes six million barrels of oil a day, would hugely bolster Iran and bring economic ruin to parts of the world

Times of Israel,

29 August, 2012

Saudi Aramco, a corporation worth hundreds of billions of dollars and the world’s largest producer of oil, came under cyber attack on August 15. A sophisticated malware weapon destroyed 30,000 of the company’s computers.

In a message on an online bulletin board the attackers called themselves the “Cutting Sword of Justice,” a group unknown to cyber security experts, and said that the attack was retribution for “oppressive measures” taken by Saudi Arabia in the Middle East. The group specifically cited Saudi involvement in Syria and Bahrain — two countries where the Saudi government has reportedly aided Sunni factions in their struggle with the Alawite regime and the Shiite majority, respectively.

Officials at Saudi Aramco said this Sunday that “our core businesses of oil and gas exploration, production and distribution from the wellhead to the distribution network were unaffected and are functioning as reliably as ever,” according to Reuters. It said that the attack had come from “external sources” and that the investigation was ongoing.

This wasn’t the first time that the Saudi oil industry was targeted. Six years ago, Saudi Aramco dealt with a more direct attack. On February 24, 2006, at 3 p.m., a car driven by a suicide bomber exploded at the gate of its Abqaiq oil facility. A second car, loaded with 2,000 pounds of ammonium nitrate as well as unknown quantities of high-grade explosives, crashed through the hole made by the first car and hurtled toward the heart of the oil facility, in the desolate, parched, Shiite-majority Eastern Province of Saudi Arabia.

Abutting one of the world’s largest oil fields with proven reserves of 17 billion barrels, Abqaiq processes two thirds of all Saudi Arabian crude oil. More than six million barrels flow daily through the facility. There the gas components of the oil are stabilized and made safe, stripped of sulfur (made “sweet”), and readied for transportation.

Saudi national guardsmen and a squad from the elite Special Emergency Forces stopped the second car a mile inside the facility, according to the Center for Strategic and International Studies in Washington, DC. Several guards were killed in the initial explosion. The damage to the facility was minor; the Saudi Interior Ministry said the sum total of the damage to the site was “a small fire.” Even so, the price of oil, in a market hypersensitive to risk, rose by two dollars a barrel.

Like this month’s cyber attack, the 2006 terror attack, launched by the subgroup called Al-Qaeda in the Arab Peninsula, was largely unsuccessful and caused no long-term damage. But the two strikes hinted at the vulnerability of the Saudi oil industry, on which so much of the world depends.

Earlier this year, a group of international experts at the Herzliya Conference imagined a very different scenario — a far more drastic one — in which a sophisticated attack on Abqaiq was directed by Iran and carried out from within. In the simulation, a series of explosions, along with a cyber-weapon, crippled the facility.

An illustration of Saudi Arabia’s oil facilities and shipping routes (Photo credit: Courtesy: Institute for Policy and Strategy and the Interdisciplinary Center Herzliya)

The results of this simulated attack, detailed here in full for the first time, were profoundly disturbing. The price of oil skyrocketed to over $200 per barrel. The House of Saud, and the territorial integrity of the kingdom, were existentially threatened. Saudi Arabia’s neighbors — Jordan, Iraq, the UAE, Bahrain, Qatar, Kuwait and Oman — were destabilized. Developing countries that use oil for electricity were propelled into war, both civil and external.

And Iran, the world’s third-largest producer of oil, authoritatively recognized as the perpetrator of the attack, reaped the rewards, its influence growing throughout the Middle East as the demand for oil outpaced the supply, and the Shiite populations in the Gulf — increasingly unrestful throughout the Arab Spring revolutions — rose up in arms.

“The simulation showed that global over-reliance on Saudi oil and our over-reliance on Saudi stability, would give Iran, in the case of such an attack, carte blanche in the Middle East — and that’s without a nuclear weapon,” said Tommy Steiner, the author of the report and a senior research fellow at the Institute for Policy and Strategy at the Interdisciplinary Center Herzliya. “Even small-scale meddling” — Sinai-style vandalism along the 11,092 miles of pipeline that crisscross the desert kingdom — “would be enough to significantly increase Iran’s standing.”

The simulation

The simulation started one week after the “attack”:

A senior executive of the Saudi oil company Aramco briefs journalists in Dhahran. He acknowledges that the blasts forced the closure of the facility for 14 more days and that the power station’s main transformers were ruined. Moreover, at least three of Abqaiq’s 10 “hydrosulphurization cylindrical towers (silos for separating sulfur and producing “sweeter” crude oil – the Arabian Extra Light and Arabian Light crude oil)” were destroyed, creating a long-term environmental disaster and necessitating an emergency evacuation of some 2,000 workers and their families from the area.

The executive refuses to comment on rumors of a cyber-attack but does acknowledge that the sabotage had been “sophisticated” and that the plant’s monitoring, data collection and supervisory control systems had been debilitated.

Global security contractors and advisers say that such an elaborate attack was surely the product of two years of careful surveillance and that it was likely perpetrated from within, by Shiite Aramco employees — part of a disenfranchised 15 percent minority in Saudi Arabia long feared to harbor allegiances to Iran, the home country of Shiite Islam.

Several dozen workers are detained for questioning. Saudi national guardsmen are deployed to the Shiite Qatif region. State television in Iran claims that the workers are innocent cleaners and janitors employed by Aramco. The Committee for the Defense of Human Rights in the Arabian Peninsula, a pro-Shiite group with ties to Iran, issues a statement condemning the police deployment and calling on the Shiite communities to protest the “brutality of police forces.”

The Saudi General Security Service reportedly detains clerics affiliated with Hizbullah al-Hijaz, the Iranian-sponsored group behind the deadly Khobar Tower bombings that claimed the lives of 19 US servicemen. Saudi officials anonymously blame Iran, which denies the accusations but does indicate that it will “consider its options” if Saudi security forces continue to forcefully put down the civilian Shiite demonstrations.

Not farfetched

Seated around a table at the Israel Economic Forum in Herzliya last week, Steiner, Yossie Hollander, a member of the simulation’s control group and the Chairman of the Israeli Institute for Economic Planning, and Maj. Gen. (res) Danny Rothschild, the director of the Institute for Policy and Planning and the Chairman of the Herzliya Conference Series, agreed that while the simulation “constituted one of the worst possible scenarios,” it was not “farfetched or entirely hypothetical.”

On the contrary, they said, with international focus currently centered on Iran’s nuclear ambition, the Abqaiq simulation was a crucial means of understanding the strategic implications of global oil dependency in an age of Sunni-Shiite tension in the Middle East.

One week after the attack, the price of oil rises from $100 a barrel to $180. At the pump, gas prices go up by 30-50 percent. And the United States indicates that it will allow “a divergence of crude oil” to China, which, along with South Korea and Japan, are the primary importers of Saudi oil.

“At this stage of the game most of the participants were focused on calming the market,” said Hollander, especially by releasing the International Energy Agency’s strategic petroleum reserves.

The IEA was established in 1974 as a response to an oil crisis sparked by an Organization of Arab Petroleum Exporting Countries‘ decision to punish the United States for its resupply of Israel during the Yom Kippur War. The 28 developed-nation members, which represented three-quarters of all oil consumers in the world at the time and today represent a mere half, created the Strategic Petroleum Reserve, in which each country keeps 75-90 days’ worth of oil in reserve and commits to aiding the other countries in need.

“The 1973 crisis solution, though, is no longer sufficient,” said Hollander, noting that the enormous populations and emerging oil-consuming economies of China and India, for instance, were not included in the IEA pact.

Other countries heavily reliant on oil for electricity and not party to the pact include Malta, Eritrea, Cyprus, Jamaica, Cambodia, Lebanon, Senegal, Cuba, Haiti, Nicaragua and Sri Lanka.

“China and India would buy all of the spare oil on the market, everything that’s on the tankers,” said Steiner. The result would be acute shortages in certain countries and a swift decline in law and order in many developing nations.

Three months later the situation is graver. Abqaiq is stuck at 30 percent of its normal capacity, oil prices reach $200 a barrel, an “unprecedented” economic depression takes shape due in part to a tremendous increase in shipping and production costs, and, though Iran’s responsibility for the attack is proven “irrefutably,” the price of oil, coupled with the unfeasibility of removing an additional 2.5 million barrels of oil from the market, means that Iran is effectively shielded from any US or NATO operations.

The international actors agree that Iran, so long as it stopped short of an outright invasion of Saudi Arabia or blatant military action in the Strait of Hormuz, has gained “immunity from international pressure and bolstered its regional influence.”

Six months after the attack, the IEA releases 900 million barrels out of a total store of 1.6 million. The international community fails to establish a mechanism to control and allocate the global oil needs. Rich countries are engaged in “zero-sum competitions” leading to “fierce competition over oil supplies on the high seas and in international markets.” The soaring prices of commodities and the aggressive behavior of state actors triggers intra-state and inter-state wars in sub-Saharan Africa and in the Horn of Africa, resulting in famine and chaos. And Saudi Arabia, “lying across the maritime lifeline of Europe,” according to Steiner, teeters under the stress of soaring unemployment, sectarian strife and a newfound difficulty to run electricity and desalinate water — crucial tasks in a desert society whose energy production is dependent on oil.

Reducing the danger

The recommendations it has compiled, the Herzliya Game report makes clear, are imperative but not altogether novel.

The report found a need for car-industry reform, allowing vehicles to operate on all-alcohol fuels such as ethanol and methanol. (Methanol can be made from natural gas or refuse and, as Yossie Hollander noted in a TEDx lecture, the United States is “the Saudi Arabia of garbage.”)

Oil subsidies, particularly in developing countries, must be phased out. The result would be a drastic reduction in consumption and would prevent soaring debt and domestic instability in the event of a global oil shortage.

The concentration of oil, with 78 percent of all proven reserves in the hands of OPEC nations, “is unsustainable.” Consumers must “diversify import sources,” and the IEA, which will represent only 30 percent of consumers by 2030, must expand its “mandate and membership and invite China, India and other major developing countries to pool resources and collectively manage strategic reserves” — without which it will plainly not be able to carry out its primary mission of mitigating the global effects of an oil crisis.

Steiner stressed that these reforms were urgent.

“A loss in Syria will not lead to Iranian capitulation,” he said. “Iran is going to raise the price of oil. Their counteraction will come and it will” — even if on a far smaller scale than in the Herzliya Game — “be either in Iraq or in Saudi Arabia.”