Implications of the Saudi Aramco Bombing

Saudi Aramco Bombing

On 14 September 2019, an attack by drones was launched on the Saudi Aramco oil processing facilities at Abqaiq and Khurais in Eastern Saudi Arabia. The Houthi movement in Yemen claimed responsibility for the attack. The attack, it was believed, was in response to the Saudi intervention in the ongoing civil war in Yemen.

The attack caused large fires at the refineries which, according to the Saudi Arabian interior ministry, were put out several hours later. Both facilities, however, were shut down until repairs could be made, cutting Saudi Arabia's oil production by about half – representing about 5 per cent of global oil production – causing destabilisation of the world energy market, and by implication affected the financial market of the world. The Houthis of Yemen claimed the responsibility. Their statement issued hours after the attack claimed responsibility for sending ten drones to disable the oil production facilities, and vowing to widen the range of targets in Saudi Arabia in retaliation to the Western-backed, Saudi Arabian led intervention in Yemen.

The USA blamed Iran for the attack. An unnamed senior US official said the attack involved some dozen cruise missiles and more than 20 drones, however, Iran categorically denied the charge. Interestingly, Saudi Arabia did not blame any group/country and ordered an investigation in the attack.

The US is working with Saudi Arabia to help to investigate the attack and ensure that the facilities and energy supplies are secure and stable. As per initial investigations, as confirmed by the Saudi Air Force, weaponry used in drones were of Iranian origin and probably drone was not launched from Yemen. In this connection, another input came from Iraq that the attacks were launched from Southern Iraqi Popular Mobilisation Forces’ bases in retaliation to Saudi-funded Israeli drone strikes on the Iraqi forces in August.

A CBS News report brought out that the damage at the Abqaiq facilities reportedly was on the western-north-western portions, which would have been difficult for the Houthis, located in the south-west, to have hit them with drones. However, Iraq denied that its territory was used to carry out the Saudi Aramco attacks and vowed to act "decisively" against those using Iraqi territory to attack other countries. Anyway, many more secrets are yet to tumble out based on detailed investigations.

The Abqaiq facility is described by the Saudi Aramco as ‘the largest crude oil stabilisation plant in the world’; it converts sour crude into sweet crude by removing sulphur impurities before it is transported to downstream refineries, processing upwards of 7 million barrels of oil per day or about 7 per cent of the daily global oil production. The Abqaiq facility had always been a target of the terrorist attacks.

In 2006, Al- Qaeda, in a failed attempt, tried to bomb the facility. The Khurais oil field, also operated by the Saudi company Aramco, produces about 1.5 million barrels of crude a day and is estimated to hold up to 20 billion barrels of oil. There had been similar drone attacks on these facilities in past also, but without much success. Houthi rebels said that these attacks were in retaliation to the attacks by the Saudi led coalition. Their statement further added that similar attacks will continue with the cooperation from the ‘honourable and freedom-seeking people within the kingdom’ -probably Shia population located in the Eastern province of the Kingdom, mainly Qatif and AlAhsa parts. Incidentally, the Houthis had earlier displayed some of these long-range drones to the media in July 2019, which gives a certain credibility to their claims.

But the potential of drones, also known as unmanned aerial vehicles, is not limited to the oil-rich Gulf. With the rapid proliferation of drone technology and a bumper growth of its global market in recent years, the possibility of a drone attack cannot be ruled out even in the safest cities in the world. In other words, making drones has become child's play today.

Drones are becoming security threats particularly in conflict zones where non-state actors are active and have deep pockets that make such technology easily accessible.

In a 2017 study, the United Nations Institute for Disarmament Research said though drones are not inherently unlawful, there are growing concerns in the international community that they might be misused.

In the last few decades, drone technology has become incredibly popular and its rapid proliferation among combatant groups isn't surprising. The primary reason for this proliferation is that drones are relatively cheaper in comparison to conventional weapons and yet can achieve far more destructive results.

It is this easy-to-procure, easy-to-operate, and proven damage potential that makes it important for any country to equip its forces with anti-drone combat technology.

What Exactly Is a Drone?

A drone is a popular name for unarmed aerial vehicles. As the name suggests, these are machines that can fly without any physical human intervention on board. They are remotely controlled.

Besides combat use, drones are used for a range of purposes like package delivery, in agriculture (spraying pesticides etc), monitoring environmental changes, aerial photography, and during search and relief operations, among others.

Impact of Damages to the Two Facilities

The damages forced the shutdown of the facilities, resulting in a reduction in the production from 9.8 million barrels to about 4.1 million barrels of oil a day, losing 5.7 million barrels of oil a day or about 5 per cent of daily global production. It is expected that the time to restore full production would be weeks, not days.

The day after the attack, the Saudi stock market fell 2.3 per cent during the Sunday trading and the global markets opened on 16 September with Brent Crude oil futures prices surging almost by 20 per cent. It was the largest surge in the commodity's price since the 1990 Invasion of Kuwait Iraq.

Other markets also saw the impact from concerns of the stakeholders on the oil supply, including the USA gasoline and heating oil and the gold market. The US President authorised the release of the US Strategic Petroleum Reserves to help stabilise the energy prices in the USA. It may be appreciated that the USA no longer depends on oil from the Middle East, however, the US oil tankers in the region are deployed to help their allies.

Saudi Aramco had been planning its initial public offering (IPO) of about 5 per cent of the company ownership, estimated to be to the tune of US $1.5 to 2 trillion valuation over the next few years. This IPO now is likely to get delayed till such time the production capacity gets fully restored and the threat of terrorist attack is reduced substantially.

International Reactions

This attack raised concerns about the political stability in West Asia and the attended issues of the safety and security of the energy assets located in the region. Every country responded as per their strategic interests. The attacks raised concern over the political stability in the Middle East.

The US appeared to be convinced that the attack had its origin in Iran but wanted Saudi Arabia to confirm before taking any punitive action. UK, Bahrain and Australia have already confirmed their willingness to join the US-led coalition to keep the maritime domain free from destabilisation. North Atlantic Treaty Organisation Secretary-General also condemned the attack and blamed Iran for supporting different terrorist groups and trying to destabilise the entire region.

In this connection, it is pertinent to note that sanctions have been imposed by the USA on Iran; on 8 May 2018, President of the USA had announced that the US would withdraw from the Iran nuclear deal. Following the US withdrawal, the European Union enacted an updated blocking statute on 7 August 2018 to nullify the US sanctions on countries trading with Iran.

The US sanctions came into effect in November 2018 intended to force Iran to dramatically alter its policies in the region, including its support for militant groups in the region and its development of the ballistic missiles. In September 2019, a US official stated that the US will sanction whoever deals with Iran or purchases its oil. The US attempts to coerce others to follow the suit is a warning that if a country wishes to deal with the USA, it will have to impose sanctions against Iran.

Russians were more cautious in their approach and advised both, the USA as well as Saudi Arabia, to exercise caution to avoid destabilisation. They also used this opportunity to offer the S-400 Triumph Missile System to Saudi Arabia. China also decided not to jump to the conclusion drawn by the US and advised all parties to avoid taking actions which could bring about an escalation in the regional tension. Iranian President said that the Yemeni people are exercising their legitimate right of defence; Turkey wanted all concerned to address the ‘root cause’ of the conflict in Yemen for lasting peace.

Impact on India

India meets 83 per cent of its crude oil requirement by import. In real terms, India consumes about 4.5 million barrel of oil per day which works out to be 250 million tons of crude oil per year. 70 per cent of import is from the Middle East, and Saudi Arabia is the second-largest supplier of crude oil after Iraq; in the year 2018-19, it supplied 40.33 million tons. Therefore, any disruption in the crude oil supply will have a very major bearing on the price of petroleum products. It is relevant to note in this connection, that India has a strategic reserve of just about 12-16 day, maintained by Indian Strategic Petroleum Reserve Limited (ISPRL).

Besides, stocks available with the refineries are just about adequate for 45-60 days. As against this, the USA has a strategic reserve of 35 days at a consumption rate of 18.49 million barrels a day. By a broad calculation, they have reserves for almost 150 days. No wonder, based on initial reports about the attack, a steep rise in the petroleum products was experienced on 17 September 2019. The price surge was more in case of Brent North crude, an oil basket that accounts for import to India. Goldman Sachs mentioned that crude could rise to the US $ 75 in six weeks if supply situation does not improve. As far as India is concerned, for every rise of US $ 1, the Brent price will inflate oil import bill by the US $ 2 billion and a 10 per cent rise in oil prices widens India’s current account deficit by 0.4-0.5 per cent of the GDP. If on 17 September petrol and diesel prices rose by 14 paise, on 18 September average hike was 25 paise.

Impact of the rise in crude prices has an overall impact on the economy. The economy which grew at a modest rate of 5 per cent in the first quarter of Financial Year 2019-20, it is likely to suffer if the situation of supply does not improve quickly. Although the market slightly recovered on 18 September, on 17 September there was a drop of 642.22 points in the Sensex and 185 points in the Nifty.

In all this fast-developing gloomy situation, good news came on 17 September 2019, when Rosneft of Russia stepped in to help India to fill the gap in the supply. However, as Saudi crude output is rising to its normal level, the price of crude has started to recover. On 18 September the Brent rate dropped below the US $ 65 and things started appearing to be getting normal. However, keeping in view that the sabre-rattling in the Middle East by the US-led coalition, Iran and Houthi rebels of Yemen not relenting, and Russia and China not showing any intent to follow the line taken by the US, it may be too early to conclude that the worst is over.

While the situation appears to be coming to normal but the incident needs to be taken as a rap on the knuckles and India needs to expedite its efforts to ensure the sustained availability of energy at all times. For that, indigenous as well as resources available worldwide need to be used in research, development and geopolitical equations. For offshore as well as sources within the country, a foolproof safety and security arrangement against all types of threats from land, sea and air, will have to be worked out which will have to be followed in letter and spirit.

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