The attacks on Saudi Aramco are a reminder of India’s dependence on a very volatile and unstable region of the world. The attack appears to fit a pattern of Iran targeting Saudi Arabia’s oil exports sending a message that if US sanctions on Iran’s exports are not eased, the world should not take Iran’s submission for granted. Iran will up the ante! The US is no longer supporting West Asian monarchies as it was doing about three years ago. John Bolton, the hardliner NSA of the US government, has resigned. In his place, the chief hostage negotiator, Robert O’Brien, is the new incumbent. It is hoped that some negotiations between the US and Iran would now be on the cards to ease sanctions and defuse tensions in the region. In a major step-down for the US President, President Trump has offered to have unconditional talks with his Iranian counterpart, President Hassan Rouhani. Although Iran has refused, it is hoped France can play its cards well to persuade the Iranian President. A game of ‘who blinks first’ is being played between Iran and the US, with Saudi Arabia being forced to play an unwilling intermediary. Between the US and Iran, one has to blink first!
Since 2015, a Saudi-led coalition has been fighting Houthi rebels inside Yemen. It is a war that has killed more than 90,000 people and pushed Yemen to the brink of famine. It is a major human disaster, but the Western nations have not paid much attention to it, since, as per their assumptions, it is Iran that is fighting a proxy war against Saudi Arabia to establish regional superiority and Iran has to be suppressed at all costs! USA and its EU allies have provided military equipment/aid to Saudi Arabia, but have not really joined the conflict with boots on the ground. Notwithstanding the immense firepower that the Houthis are facing, there appears no sign of the rebels backing down. On the contrary, attacks on vital Saudi oil and gas infrastructure have increased dramatically this year, some deep inside Saudi territory, with the latest on September 14, 2019 on two major oil facilities of the Saudi Arabian Oil Company (Saudi Aramco), the Abqaiq oil-processing facility, the world’s largest and the Khurais oil field.
While the Houthi rebels do not possess a credible Air Force, the drone arsenal at their disposal has been a growing threat to Saudi Arabia and UAE. Most of the targets have been in Southwest Saudi Arabia and Yemen, Saudi Aramco tankers and other maritime traffic a few kilometres off the Yemeni coast in the Red Sea. However, strikes in the recent past this year, indicate capabilities to reach Riyadh, Dubai and Abu Dhabi, which is cause for concern in these countries. The growing success of the drone attacks does point a finger not just at the increasing capabilities of the longer-range Houthi drones, but towards also the increased support by the Islamic Revolutionary Guards Corps of Iran (IRGC). The Quds Force of the IRGC handles operations beyond the Iranian border and is known to create ‘mischief’ in the region and beyond for years including the provision of explosives for attacks on US forces in Iraq a decade ago.
Iran’s nuclear programme, meanwhile, continues to test relations with the US and its allies in the West...
Over the past year, Houthis have used several of their longer-range drones, designated as ‘UAV-X’ by the United Nations, with an estimated maximum range of between 1,200 and 1,500 kilometres, putting most of Saudi Arabia and the UAE within striking distance. The success is indicative of the growing expertise of the Houthis in the use of drones at distances over 1,000 kilometres, as previous attempts at launching longer-range missions with the UAV-X had not been as successful. However, it is not clear as to how many of the longer-range UAVs the Houthis have at their disposal. As per some US strategists, the UAV-X does not appear to be a variant of any Iranian-produced drone. Remnants recovered from previous failed missions reveal critical components of German and Chinese manufacture. Many Houthi drones look almost identical to Iranian ones; the weapons used in the latest attack seem to have been developed in Iran since the wreckage found near Abqaiq appeared similar to a cruise missile designed in Iran, called Quds-1.
A Word About Drones
It would be appropriate here to mention a few words about drones. The operational use of drones by the US military started in 1959 when the US Air Force (USAF), concerned about the loss of trained pilots over hostile territory, commenced planning for unmanned flights. The development of drones intensified through the years, primarily for surveillance and intelligence gathering. A change in nomenclature from drones to Unmanned Aerial Vehicles (UAV) followed the increased operational requirements. The intelligence gathering equipment was either totally or partially replaced with armament and these platforms came to be known as Unmanned Combat Aerial Vehicles (UCAVs).
While the UCAVs are in the news for their use by the USAF against terrorist targets, human and physical, mainly in West Asia, Afghanistan and Pakistan, as a ‘Bolt from the Blue’, the civil uses of are for police surveillance, monitoring forest fires, inspecting wind turbines, crops, high-rise buildings, power lines and even delivery of pizzas! The possibilities are endless, as the UCAVs are now being used as ‘Kamikaze’ drones or suicide drones, wherein loaded with explosives, the UAV crashes into a target, as was probably done in this particular case.
Saudi Arabia is the main source of spare capacity as a cushion against global supply disruption...
After the Kargil conflict, in the late 1990s, the Indian Army acquired its first UAVs for the traditional roles of surveillance and intelligence gathering. Plans are now afoot with the Indian Air Force and the Indian Navy to acquire attack drones from Israel and USA, while developing indigenous vehicles too. India has a drone inventory of about 100, with plans to add another about 50 attack UAVs to enhance unmanned warfare capability, as these are now considered as an essential part of the segment of force multipliers.
Iran’s Arc of Influence
Iran’s domain in West Asia extends from the Persian Gulf to the Mediterranean Sea. It maintains this arc of influence through its use of militant proxies, political agents and economic relationships, warding off challenges to its power from Sunni rivals in Saudi Arabia and Turkey. Iran’s nuclear programme, meanwhile, continues to test relations with the US and its allies in the West. Notwithstanding the US withdrawal from the nuclear agreement (JCPOA) and the resultant violations by Iran, it is unlikely that a serious confrontation with the USA would ensue. Iran, as it has indicated, will try and leverage its control of the Strait of Hormuz, through which roughly 20 percent of all globally traded crude oil passes, to test US patience.
Iran has always denied a connection with Yemen’s Houthi rebels. However, it is accepted that they receive material, financial and political support from Iran. UN investigators have earlier stated that Iran has supplied the Houthis with advanced weapons, including drones, missiles and even equipment to produce rocket fuel. However, the Houthis, while accepting Iranian support, are really fighting to further their own goals of curbing Saudi and US action in Yemen, where they aspire for a stronger political base. They, thus, cannot really be considered as a proxy for Iran, as the Hezbollah in Lebanon, which takes its directions from Iran. At best, Iran could be considered as using the Houthis as an irritant to needle its adversaries in the region.
Who ‘Dunnit’ and Repercussions
There have been many uncertainties and questions spinning around the connection between the attacks on oil tankers in the Strait of Hormuz and the East-West pipeline attack in May deep inside Saudi Arabia. There are many plausible answers, but none have been confirmed by US ‘super-analysts’. Nevertheless, even if Iran is not responsible directly for the earlier assaults, the incidents did heighten the risk of a military response from the US, which has consistently equated an attack by forces that Iran supports, as an attack by Iran itself.
Al Jazeera has reported that the September 14 attacks have been claimed by the Houthi rebels. The Houthis have further stated that 18 low-cost drones, including cruise missiles, had been launched at the facilities and that they had help from within Saudi Arabia and further attacks in the future are also possible. However, the Saudis and Americans, after having examined the debris at the site of attack, are confident of direct Iranian involvement. Both have called it ‘an act of war’, but do not really want a war with Iran.
A higher oil bill would lead to a budget deficit and also put the rupee under pressure...
Whatever said, the attacks have converted one of Saudi Arabia’s greatest nightmares into a reality. For decades, global oil markets have worried that Saudi Arabia’s Abqaiq processing plant represented a critical bottleneck in Aramco’s supply chain; those fears have now become a reality. Luckily for oil consumers, healthy global storage and production reserves mean that they will, hopefully, be able to ride out the disruption, provided no further attacks take place.
The Abqaiq oil and gas processing complex has been put offline translating into 5.7 million barrels per day (bpd) of crude oil production. Conflicting reports on restoration have been emerging from Saudi Arabia. On September 16, 2019, Saudi energy officials announced the restoration of part-production. Immediately after an initial suggestion that all production would be soon back online, it was announced that the damage could take weeks or even months to repair. On the very next day, the Saudi Energy Minister, Prince Abdulaziz bin Salman (not to be confused with the Crown Prince), and some energy officials, in a media briefing, confirmed the restoration of 50 percent production, with complete restoration by the end of September. Aramco CEO has reportedly claimed that the Abqaiq facility is now processing two million bpd as compared with 4.9 million bpd before the attack.
Tensions between the US and Iran are once again on the rise. More strikes in the coming months on Saudi oil and gas infrastructure, including Abqaiq, cannot be ruled out, which would further add to the growing tension. The strikes have exposed Saudi Arabia’s Achilles’ heel. Meanwhile, Saudi hesitance to blame Iran despite claiming that Iranian weapons were involved, suggests that the country does not want escalation in the volatile situation out of fear that any counter-strike on Iran could generate more attacks on the Saudi oil sector. In such a scenario, Abqaiq would be even more vulnerable given that the September 14 attack has already greatly reduced its redundancy.
Effect on India
India imports 83 percent of its oil needs. Saudi Arabia is India’s second largest supplier after Iraq, selling 40.33 million tonnes of crude in the fiscal 2018-2019 to India, out of a total Indian import of 207.3 million tonnes. The drone strike on Abqaiq and Khurais facilities has reduced the output by about five mpd, which corresponds to about 50 percent of Saudi sales. Notwithstanding the assurances by Saudi Aramco of meeting India’s requirements, India is concerned as its reserves are the least amongst the importing nations.
Saudi Arabia is the main source of spare capacity as a cushion against global supply disruption. In case the cushion is not available, in the event of any disruption in global supplies, the already nervous market could see a huge outage. The disruption could mainly be caused by US military action or an Iranian retaliation, when tensions are already sky high.
As it is, the Indian economy is showing a downward trend. Costly oil will slow it down further. Higher oil prices would have a cascading effect on the prices of all other goods and would have a greater impact on the retail fuel prices leading to political repercussions. A higher oil bill would lead to a budget deficit and also put the rupee under pressure. However, there are some comfort factors. As the smoke clears from the targeted facilities and a damage assessment done by Aramco, the situation does not appear as grim as it first appeared – provided there are no further attacks. India has enough oil for its needs for two months or thereabouts. With good relations with all oil suppliers, India has commenced talks with Russia, the UAE and USA for additional supplies, should the need arise. The US has also given a global assurance that it would tap into its strategic reserves in the event of a serious disruption. Simultaneously, India is aggressively pursuing a policy of diversifying its supply sources and deepening its energy ties with other suppliers, especially Russia. It should now fast-forward the long-pending reforms in oil marketing so as to cater for such contingencies when oil supplies or global prices tend to go awry.
Concluding Thoughts
The attacks on Saudi Aramco are a reminder of India’s dependence on a very volatile and unstable region of the world. The attack appears to fit a pattern of Iran targeting Saudi Arabia’s oil exports sending a message that if US sanctions on Iran’s exports are not eased, the world should not take Iran’s submission for granted. Iran will up the ante! The US is no longer supporting West Asian monarchies as it was doing about three years ago. John Bolton, the hardliner NSA of the US government, has resigned. In his place, the chief hostage negotiator, Robert O’Brien, is the new incumbent. It is hoped that some negotiations between the US and Iran would now be on the cards to ease sanctions and defuse tensions in the region. In a major step-down for the US President, President Trump has offered to have unconditional talks with his Iranian counterpart, President Hassan Rouhani. Although Iran has refused, it is hoped France can play its cards well to persuade the Iranian President. A game of ‘who blinks first’ is being played between Iran and the US, with Saudi Arabia being forced to play an unwilling intermediary. Between the US and Iran, one has to blink first!
Fortunately, for importers such as India, there is a global surplus of oil. Nevertheless, Prime Minister Narendra Modi should try and use his bonhomie with President Donald Trump and convince him to allow a sanction waiver to import oil from Iran. This has many advantages. Firstly, India can pay in rupees in a window of 60 days rather than in dollars over 30 days, if imported from other sources. Secondly, tensions in the region would ease and the two nations can then proceed for talks on other contentious issues, namely the JCPOA. Thirdly, imports from Iran would have significant macro-economic consequences on the Indian economy by saving on foreign exchange, which can then be used for other imports. How effective President Trump’s visit would be to the ‘Howdy Modi’ gathering in Houston! One can only wait for the results!