Last week’s failed attack on a Saudi oil tanker in the Red Sea may be the start of a dangerous new chapter in Saudi Arabia’s war in Yemen. Houthi militants struck a VLCC in the Bab-el-Mandeb strait, a critical maritime passageway through which five percent of the world’s daily oil supplies transit. The supertanker was traveling to an offloading point for the SUMED pipeline which terminates in the Mediterranean Sea, where the bulk of Europe’s oil imports from the Middle East originate.
With the uptick in global terrorist incidents overall, this decade has been the most violent in oil market history.
The oil tanker attack was one of many instances when militants targeted Saudi oil production and export capabilities. This week, Houthi fighters launched a drone attack on a large refinery that is under construction in Saudi Arabia’s southwestern Jizan region. And last May, militants attacked a Marshall Islands-flagged tanker with rocket-propelled grenades as it entered the Red Sea. Similar attacks on U.S. transport vessels in 2016 prompted the U.S. Navy to dispatch a guided missile destroyer and carrier ship to protect U.S. commercial interests. The Houthis have stepped up attacks on the Kingdom in recent weeks in what they claim are retaliation to Saudi air raids. Already this week, global oil prices reached $72 per barrel for the first time in more than three years amid renewed violence in Syria, reduced inventory levels, OPEC’s commitment to continued cuts, and increasing global demand.
“We continue to see Yemen as the most dangerous confrontation in the oil market as it is the one that could be the tripwire for direct confrontation between Saudi Arabia and Iran,” Head of Commodity Strategy at RBC Capital Markets Helima Croft told S&P Platts. “I think the oil market is being way too complacent about the risks posed by the Yemen conflict,” she said.
The most violent decade
Acts of violence and terrorism against oil processing and distribution facilities are not new, but they have taken on renewed significance as key oil-producing regions have increasingly become destabilized by conflict and civil unrest. With the uptick in global terrorist incidents overall, this decade has been the most violent in oil market history—and it is not even close.
There were 1,480 terrorism incidents against oil and gas facilities worldwide between 2011 and 2016, a 387 percent increase from twenty years ago.
A SAFE analysis of data from the National Consortium for the Study of Terrorism and Responses to Terrorism (START) shows that there were 1,480 terrorism incidents against oil and gas facilities worldwide between 2011 and 2016, a 387 percent increase from twenty years ago. START, a project of the University of Maryland, has recorded over 170,000 episodes since 1970. Incidents include any intentional action by a sub-national entity outside the context of legitimate warfare activities. Through 2016 (the last year data was available), a mere 1.7 percent of overall attacks targeted oil tankers, refineries, utilities, or pipelines. However, that proportion has fluctuated over the years, and the high number of attacks against the oil and gas industry adds another layer of geopolitical instability and fear in the global oil markets.
In the early-to-mid 1990s (period “A” in the above chart), a sustained bombing campaign by Colombian guerrilla groups sabotaged oil infrastructure, especially the extensive Caño Limón–Coveñas pipeline which caused an increase in violence during that period. Following the 2003 U.S. invasion of Iraq (period “B” above), a host of non-state actors—from Nigeria’s Boko Haram and eastward to the Bangsamoro Islamic Freedom Fighters in the Philippines—used a variety of methods to disrupt a wider assortment of oil-related targets. Since then, oil-and-gas related violence has, for the most part, picked up significantly.
This shifting global terrorism terrain has had profound implications for the oil market. Twenty years ago, oil terrorism was largely confined to pipeline attacks or other oil utility disruptions. Due to a host of reasons, however, that dynamic started to change after September 11, 2001, when the types of oil-related targets became more varied, and the number of attacks increased. Between 1991 and 1995, 71 percent of oil and gas attacks were on oil utilities, including pipelines. That proportion fell to approximately 30 percent between 2011 and 2016. Nevertheless, pipelines and other utilities remain popular targets in some regions of the world, most notably in South America and West Africa where they are often bombed or otherwise interrupted by guerrilla groups. Despite the proportionate decline in pipeline attacks, there are still a large number of them today—certainly more than there were twenty years ago.
Attacks on oil and gas businesses have increased as a proportion of overall oil-related incidents, accounting for 44 percent of attacks since 2011.
Attacks on oil and gas businesses, meanwhile, have increased as a proportion of overall oil-related incidents, accounting for 44 percent of attacks since 2011. One reason for the increase was the sudden rise of the Islamic State (IS). As IS moved across Iraq and Syria in 2014, the group either committed, or were implicated in roughly 18 percent of the global attacks on refueling stations, transport hubs, and oil refineries. Still, the number of IS attacks on oil sector targets has been relatively small (less than 10 percent of all attacks were against oil or gas facilities were attributed to IS). The greatest proportion of disruptions were caused by unknown assailants (50 percent of global oil terrorism incidents). That figure is roughly on par with the number of incidents by unknown groups overall, making the oil sector episodes no different, statistically speaking, than any other terrorism event.
The START database also reveals several of the most prominent oil terrorism hotspots. Aside from Colombia, which, since 2000, has led the world in pipeline and other oil utility attacks, some of the other most troublesome areas include Nigeria, Iraq, Yemen, and Pakistan. Of the 1,480 oil- and gas-related incidents since 2000, roughly two-thirds were concentrated in these five countries. Given these countries’ incidences of terrorism, that number may not appear too surprising, but the proportion decreases to 44 percent when accounting for all violent events over the same period.
High levels of instability make these countries more susceptible to sabotage, which is why it is important to understand the oil industry’s geography of risk. For example, Yemen, Pakistan, Nigeria, and countries across South Asia have seen a large number of oil tanker attacks since 1970. And while Pakistan is a major source of violence generally, the country also experiences an unusually high proportion of the world’s gas utility attacks. One-in-five acts of violence or terrorism in the oil and gas industry have occurred in Pakistan since 2000, in part because of the country’s political instability.
Possibility for escalation
With the global economy heavily reliant on oil and so much of the world’s crude production and export facilities concentrated in the Middle East, any disruption can cause a sharp increase in prices. Saudi Arabia, the de facto leader of OPEC and the world’s swing crude oil producer, is located in a hostile and volatile region where any single incident can have many negative global repercussions. In 2006, for example, oil prices jumped six percent in a single day after a suicide bombing attempt at the large Abqaiq refinery.
With the Houthis stepping up their campaign against Saudi oil facilities, the possibilities for miscalculation and escalation are growing.
With the Houthis stepping up their campaign against Saudi oil facilities, the possibilities for miscalculation and escalation are growing. In recent months, Saudi officials have disrupted plots to blow up Aramco fuel terminals, and last week, the Kingdom’s air defenses intercepted a ballistic missile aimed at Aramco storage tanks. If Yemen is a “tripwire” for a broader regional conflict with Iran, more than 20 percent of the world’s crude oil flows coming from OPEC could be choked off if the Strait of Hormuz were closed. It’s clear that geopolitical and infrastructure risks are rising in the global oil market—and won’t likely go away anytime soon.