Saudi Arabia is racing to restore oil production after a brazen drone strike on a key Aramco facility slashed its output by half, or about 5% of world supply, an assault that the US has blamed on Iran.
State energy producer Saudi Aramco lost about 5.7 million barrels per day of output after 10 unmanned aerial vehicles struck the world’s biggest crude-processing facility in Abqaiq and the kingdom’s second-biggest oil field in Khurais, the company said.
Aramco would need weeks to restore full production capacity to a normal level, according to people familiar with the matter. The producer however can restore significant volume of oil production within days, they said. Aramco could consider declaring force majeure on some international shipments if the resumption of full capacity at Abqaiq takes weeks, they said.
The attack will likely rattle oil markets and cast a shadow on Aramco’s preparations for what could be world’s biggest stake sale.
If the disruption in production is “protracted it could be a big challenge for the oil markets,” Mele Kyari, chief executive officer of state producer Nigerian National Petroleum Corp., told Bloomberg Television on Sunday.
The attack is the biggest on Saudi Arabia’s oil infrastructure. The kingdom’s benchmark stock index tumbled as much as 3.1% on Sunday in Riyadh.
Iran-backed Houthi rebels in Yemen claimed responsibility for the attacks, but US Secretary of State Michael Pompeo blamed Iran directly without offering evidence for that conclusion. Iran’s Foreign Ministry described Pompeo’s remarks as “blind and fruitless accusations.”
Saudi oil facilities as well as foreign tankers in and around the Gulf have been the target of several attacks over the past year. The escalation coincided with the President Donald Trump’s decision to pull the US out of the 2015 nuclear agreement with Iran and re-imposed crippling economic sanctions against the Islamic Republic.
The Houthis, who are fighting Saudi-backed forces in Yemen, have claimed responsibility for most of the strikes against Aramco installations.
“Work is underway to restore production and a progress update will be provided in around 48 hours,” said Amin Nasser, Aramco’s president and chief executive officer. Aramco is working to compensate clients for some of the shortfall from its reserves.
Aramco may offer customers crude oil grades alternative to Arab Light and Arab Extra Light because of the Abqaiq halt, according to a person familiar with the matter. The company may offer Arab Heavy and Arab Medium as replacement, the person said.
Saudi Aramco, which pumped about 9.8 million barrels a day in August, will be able to keep customers supplied for several weeks by drawing on a global storage network.
The Saudis hold millions of barrels in tanks in the kingdom itself, plus three strategic locations around the world: Rotterdam in the Netherlands, Okinawa in Japan, and Sidi Kerir on the Mediterranean coast of Egypt.
A satellite picture from a Nasa near real-time imaging system published early on Sunday, more than 24 hours after the attack, showed that the huge smoke plume over Abqaiq had dissipated completely. But four additional plumes to the south-west, over the Ghawar oilfield, the world’s largest, were still clearly visible. While that field wasn’t attacked, its crude and gas is sent to Abqaiq and the smoke most likely indicated flaring. When a facility stops suddenly, excess oil and natural gas is safely burned in large flaring stacks.
For the global oil market, the 5.7 million barrels a day outage is the worst single and sudden supply disruption ever, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, and the loss of Iranian oil output in 1979 during the Islamic Revolution, according to data from the US Energy Department.
The US Department of Energy said it’s prepared to dip into the Strategic Petroleum Oil Reserves if necessary to offset any market disruption.
Saudi Arabia, the biggest producer in the Organization of Petroleum Exporting Countries, has been leading the group in production cuts to mop up a surplus of crude in the market. So when half of Saudi Arabia’s production is knocked out, the question is how long the disruption lasts.
“The global economy can ill afford higher oil prices at a time of economic slowdown,” Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen, said in an emailed response to questions. So while a surge in prices driven by lower supply “may temporarily remove the focus on slowing demand, it could, if prolonged, potentially reduce demand growth expectations even more.”