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Saudi Arabia picks up the pieces

Saudi Arabia faces a variety of challenges emanating from the attacks on its oil installations

The kingdom remains in a state of shock. The unprecedented drone and missile attacks on the Abqaiq and Khurais oil facilities in the early hours of 14 September, which halted about half of the country’s oil output, arguably represent a pivotal moment for the country. “Saudi Arabia today is not the place it was before the attacks,” says an economist in Riyadh, who asks not to be named. “Suddenly we feel vulnerable.”

Saudi Arabia has three immediate goals: to replace the damaged oil installations and restore output capacity to its previous level; to beef up its defences to prevent another attack; and to assess the damage to the kingdom’s reputation in the context of the planned Saudi Aramco initial public offering (IPO) and foreign investment required to achieve the goals of the Vision 2030 economic reform programme. These are all tough challenges.

Aramco has put on a brave face on the task of restoring oil production, successfully calming global markets and keeping a post-attack spike in prices brief. A week after the incident the firm said that production at the key Khurais treatment plant resumed with 24 hours of the attack. Abqaiq production resumed to 2mn bl/d soon after and “production of 5.7mn bl/d will be restored by the end of September”. Aramco also says that “not a single shipment to its international customers has been missed or cancelled as a result of the attacks”.

“The 14 September attacks damaged the image of Saudi Arabia as a safe country to invest in” Ulrichsen, Baker Institute

Aramco’s pledge to keep markets supplied may prove an uphill task if stocks are depleted and more time is needed—as most analysts are predicting—for Abqaiq to get back to full operation. Certain repairs could be completed without delay, but replacing sophisticated equipment could take many months. Unconfirmed reports towards the end of September suggested that the Saudis were starting to ‘mix and match’—importing some refined products to free up as much crude oil as possible for exports.

How the drones and missiles were able to pinpoint the jewel in Saudi Arabia’s energy crown without detection remains a mystery. Kristian Coates Ulrichsen, Middle East Fellow at Rice University's Baker Institute says the kingdom “will need to conduct a risk analysis that includes the threat from asymmetrical attacks as well as the more conventional warfare its missile systems have been designed to defend against”. 

Battered image

Repairing Saudi Arabia’s reputation might be the hardest task of all. The 14 September attacks, in Ulrichsen’s view, “damaged the image of Saudi Arabia as a safe country to invest in”. “That image had already taken a hit following the Ritz-Carlton arrests of 2017 and the fallout from the murder of Jamal Khashoggi in 2018. Potential and existing investors may be reassessing the risk premium of investing in Saudi Arabia now that the kingdom has shown itself to be so vulnerable to penetration,” he says.

“There is no sign that the IPO preparations have stopped” Hertog, LSE

The drone/missile barrage targeted Saudi Arabia’s energy infrastructure that is closely intertwined with the Aramco IPO and the intended transformative impact of Vision 2030. Steffen Hertog, politics professor at the London School of Economics and a Saudi Arabia expert, says, that while some analysts are suggesting that the sell-off might be another victim of the attacks, “there is no sign that the IPO preparations have stopped”. “But realistically the listing will not happen until it is clear that production capacity is more or less fully restored,” says Hertog. In the first instance, possibly next year, there could be a Saudi-only listing. An international placement is still planned, but a venue is yet to be found.

In the longer term, investor trepidation and the need for the Saudi leadership to focus on securing the country against further attacks do not augur well for Vision 2030, the targets for which have already been slipping.

Avoiding war

For now, the US-Saudi-Iran crisis continues, without any party apparently wanting war. The international tanker protection force in the Gulf has expanded, with Bahrain, Saudi Arabia and the United Arab Emirates part of the US-led group; and oil continues to be exported through the Gulf of Hormuz. The US is keeping up the pressure on Iran but, as President Donald Trump has said, will not wage a war on Saudi Arabia’s behalf.

Aware of this, the Saudis still refer to the September attacks as a terrorist incident, not an act of war. They want to keep it that way. “We will not enter into a devastating war as happened after the Iranian revolution when Iraq was dragged into a war that lasted eight years,” writes Saudi columnist Abdullah Saadoun in the daily Al-Riyadh.

5.7mn bl/d; Forecast Abqaiq production by end of September

“Open escalation does not seem to be a feasible option,” agrees Hertog, “given the exposure of oil, desalination and power infrastructure to high-impact Iranian operations. The kingdom would very likely support limited US retaliatory strikes, but below a level that would lead to further military retaliation.”

The annual meeting of the UN General Assembly in September could have provided an opportunity for Trump to meet his Iranian counterpart Hassan Rouhani as a first step towards defusing the Gulf crisis. Instead, Trump used the occasion to denounce Iran as “the world’s number-one state sponsor of terrorism” and added that sanctions on Tehran would be tightened. Rouhani said his country would “never negotiate with an enemy that seeks to make Iran suffer with the weapons of poverty and sanctions”.

So, ‘plus ca change, plus c’est la meme chose’. Except for Saudi Arabia, where things are not the way they were before the September attacks.

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