The Scenario

On 14 September 2019, an attack by drones was launched on the Saudi Aramco oil pro-cessing 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 inte-rior 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 – repre-senting about 5 percent 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 in-volved 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 or-dered an investigation in the attack. The US is working with Saudi Arabia to help to inves-tigate 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 investiga-tions.

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 impuri-ties before it is transported to downstream refineries, processing upwards of 7 million barrels of oil per day or about 7 percent 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 at-tempt, tried to bomb the facility. The Khurais oil field, also operated by the Saudi compa-ny 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 at-tacks will continue with the cooperation from the ‘honourable and freedom seeking peo-ple within the kingdom’ -probably Shia population located in the Eastern province of the Kingdom, mainly Qatif and Al-Ahsa parts. Incidentally, the Houthis had earlier displayed some of these long-range drones to the media in July 2019, which gives certain credibil-ity to their claims.

Impact of Damages to the Two Facilities

The damages forced the shutdown of the facilities, resulting in reduction in the produc-tion 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 percent 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 percent during the Sunday trad-ing and the global markets opened on 16 September with Brent Crude oil futures prices surging almost by 20 percent. It was the largest surge in the commodity's price since the 1990 Invasion of Kuwait Iraq. Other markets also saw impact from concerns of the stake holders 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 de-pends 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 percent 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 re-duced substantially.

International Reactions

This attack raised concerns about the political stability in the 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. 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 US led coalition to keep the maritime domain free from destabilisation. North Atlantic Treaty Organisation (NATO) 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 perti-nent to note that sanctions have been imposed by the USA on Iran; on 8 May 2018, Pres-ident of the USA had announced that the US would withdraw from the Iran nuclear deal. Following the US withdrawal, the European Union (EU) 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. 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, USA as well as Saudi Arabia, to exercise caution to avoid destabilisation. They also used this opportunity to offer 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 con-cerned to address the ‘root cause’ of the conflict in Yemen for a lasting peace.

Impact on India

India meets 83 percent of its crude oil requirement by import. In real terms, India con-sumes about 4.5 million barrel of oil per day which works out to be 250 million tons of crude oil per year. 70 percent of import is from Middle East, and Saudi Arabia is second largest supplier of crude oil after Iraq; in 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 stra-tegic reserve of just about 12-16 day, maintained by Indian Strategic Petroleum Reserve Limited (ISPRL). In addition, stocks available with the refineries are just about adequate for 45-60 days. As against this, 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 petro-leum products was experienced on 17 September 2019. Price surge was more in case of Brent North crude, an oil basket that accounts for import to India. In fact, Goldman Sachs mentioned that crude could rise to US $ 75 in six weeks time 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 US $ 2 billion and a 10 percent rise in oil prices widens India’s current account deficit by 0.4-0.5 percent 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 rise in crude prices has an overall impact on the economy. The economy which grew at a modest rate of 5 percent in 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 Sep-tember, but 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, a good news came on 17 September 2019, when Roseneft of Russia stepped in to help India to fill the gap in the supply. However, as Saudi crude output is apparently rising to its normal level, price of crude has started to recover. On 18 September the Brent rate dropped below US $ 65 and things started ap-pearing to be getting normal. However keeping in view that the sabre rattling in the Mid-dle East by the US-led coalition, Iran and Houthi rebels of Yemen not relenting, and Rus-sia and China not showing any intent to follow the line taken by the US, it may be too ear-ly to conclude that the worst is over.

Way Ahead for India

The incident has flagged the vulnerability of India as far as petroleum products are con-cerned. With 83 percent import dependence for crude oil, India needs to review its strat-egy for energy security. Following steps are therefore recommended for consideration:-

1. ISPRL will have to increase the capacity of strategic reserve from the current 5.33 million tons (actually holding is only 55 percent of it) which is just about 12-16 days of the requirement, to minimum 45 days.
2. Keeping in view the volatility of the Middle East Region, it would be prudent that India develops alternate sources. In this connection the recent visit of the Prime Min-ister to the Far East of Russia and the offer of the Roseneft of Russia to make up the shortfall is encouraging and need to be followed up.
3. Keeping in view of limitation of the current availability of crude, India needs to gradually shift to utilisation of natural gas to meet her energy needs in the interim. The recent decision about Vladivostok-Chennai Sea Link with Ennore LNG Terminal becoming functional is a positive step. More sources of natural gas, both indigenous as well as ex-import, need to be developed. Early operationalisation of TAPI and reju-venation of KG basin needs to be done on priority. In addition, survey of indigenous sedimentary basin (26 in number spread across 3.14 million square km) needs to be completed. The newly introduced Open Acreage Licensing Policy (OLAP) Model for granting license for exploration to indigenous as well as foreign vendors is a step in right direction.
4. To preserve the meagre resources 10 percent of petroleum blending with ethanol needs to be made universal.
5. Smooth transformation from petroleum based automobile sector to electrical ve-hicles in a time bound manner needs to be progressed.
6. Research and development needs to be expedited to changeover from petroleum based power generation to generation using renewables, coal gasification, coal based methane, small hydro-systems, waste-to-energy system and bio-mass should be given due emphasis. In this connection, efficiency and storage system and necessary infra-structure should be given due consideration in a comprehensive manner. Similarly, power generation using fast breeder technology to use indigenously available thori-um should also be given due boost. It needs to be noted that for India ideal solution for sustained availability of energy is to use a basket of energy from different origins, rather than a single source based energy.

Conclusion

While 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 sustained availabil-ity of energy at all times. For that, indigenous as well as resources available world-wide need to be used in research, development and geopolitical equations. For off shore as well as sources within the country, a fool proof 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.

References:-

1. An Aljazeera Report, “Houthi drone attacks on 2 Saudi Aramco oil facilities spark fires”, dated 14 Sep 2019 .
2. “Major Saudi Arabia oil facilities hit by Houthi rebels drone strikes”, published by The Guardian, Asso-ciated Press dated 14 Sep 2019.
3. Gambrell, Jon, “ Yemen’s Houthi rebels launch drones on 2 big Saudi oil sites”, published by Associated Press, dated14 September 2019 and uploaded on https://apnews.com
4. Ben Hubbard, Paulo Karasz and Stanley Reed, “Two Major Saudi Oil Installations Hit by Drone Strike, and U.S. Blames Iran” , published in The New York Times dated 14 Sep 2019.
5. Welle Deutsche, “Houthis claim responsibility for the attacks on Saudi Aramco”, uploaded on https://www.dw.com dated 14 September 2019.
6. An AP report, “ Saudi Arabia: Drone attacks knocked out half its oil supply”, published by The Economic Times dated 15 September 2019.
7. Martha Raddatz, “Iran fired cruise missiles in attack on Saudi oil facility: Senior US official”, ABC News Report dated 15 September 2019 uploaded on https://abcnews.go.com
8. Stephen Kalin, “Evidence indicates Iranian arms used in Saudi attack, say Saudi attack”, published by Reuters dated 16 September 2019.
9. David Hearst, “Iranian drones launched from Iraq carried out attacks on Saudi oil plants”, published in Middle East Eye dated 15 September 2019, uploaded on https://www.middleeasteye.net
10. Roxana Saberi, “Iran slams American lies after US accuses it of unprecedented attack on Saudi
    oil”, A CBS News report published by Associated Press dated 15 September 2019.
11. A Gulf News Report, “Iraq Prime Minister: Iraq territory not used in Saudi attacks”, published in Gulf News dated 15 Sep 2019.
12. Laila Kearney, “Oil Prices Surge 15% after Attack on Saudi Facilities Hits Global Supply”, a Reuters re-port, dated 15 September 2019, uploaded on https://www.reuters.com
13. Roberta Rampton and Arshad Mohammed,“Trump says US locked and loaded for potential response to Saudi…” , a Reuters’ report, dated 16 September 2019.
14. A France 24 Report, “NATO chief extremely concerned after attacks on Saudi” dated 16 September 2019.
15. An Al-Jazeera Report, “Putin proposes Russian missile defence for Saudi after oil attack” dated 16 Sep-tember 2019.
16. Maria Tsvetkova, “ Kremlin warns against hasty conclusions over attack in Saudi Arabia, a Reuters re-port date 16 September 2019.
17. Will Kennedy and Javier Bas, “Aramco Less Optimistic on Pace of Oil Output Recovery”, dated 16 Sep-tember 2019 uploaded on https://www.bloomberg.com.
18. A Reuters report, “Oil prices drop sharply as Saudi output seen returning to normal soon”, published in Times of India dated 17 September 2019.
19. Utpal Bhaskar, “Roseneft steps in to help India fill gap in oil supply”, published in Live Mint dated 18 September 2019.
20. A TOI Report, “ Attack on Saudi facilities sets oil on fire in India”, published in Times of India dated 18 September 2019.
21. Krishnanand Tripathi, “Saudi Aramco Refinery attack: will India’s oil supply dry out”, published in Fi-nancial Express dated 17 September 2019.
22. Kaustav Das, “Saudi oil facility attack: Surging oil prices could worsen India’s growth hurdle”, pub-lished in India Today dated 18 September 2019.

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