Key Takeaways
Saudi Arabia is considering expanding the capacity of its East-West oil pipeline by up to 2 million barrels per day, bringing it to nearly 9 million barrels per day.
The existing system is capable of up to 7 million barrels per day, with about 2 million barrels per day for domestic refinery use and about 5 million barrels per day for export.
The Saudis have been discussing possible linkage on the expansion with other producers, including Kuwait and Bahrain.
The United Arab Emirates has its own alternative pipeline that it is working to expand.
These and other possible market workarounds become more likely considering Iran’s continued deviation from the terms of the ceasefire agreement with the United States and its recent attacks on ships transiting the Strait of Hormuz.
The Iran conflict continues to confront Middle Eastern energy producers with challenges to getting their products to market, and they continue to respond with new ideas to overcome the impasse. Saudi Arabia is considering expanding the capacity of its East-West oil pipeline by up to 2 million barrels per day, allowing more exports to bypass the Strait of Hormuz. The existing East-West pipeline was built in the early 1980s and can now ship up to 7 million barrels per day from the country’s eastern oil fields to the Red Sea export terminal at Yanbu. About 2 million barrels per day are for domestic refinery use, and about 5 million barrels per day are for export. It is unclear whether the proposed capacity increase would involve upgrades to existing infrastructure, construction of a new pipeline, or a combination of both. One source indicated that the increase would include a smaller second pipe for oil products. The expansion, in whatever form would take years, cost billions of dollars, and require changes to Saudi oil’s pricing mechanism. Given that the United States and Iran have resumed strikes due to Iran targeting three commercial ships crewed by civilians in the Strait of Hormuz on July 7, the Saudi pipeline expansion may become a priority.
According to Reuters, Saudi Arabia has held preliminary discussions with neighboring producers, including Kuwait and Bahrain, about expanding the system. Kuwait and Bahrain have no alternative export route to the Strait of Hormuz, while Iraq’s pipeline to Turkey remains fraught with outages and political disputes. Iraqi oil output dropped from 4.3 million barrels per day to less than 1.5 million barrels per day in May during the conflict and due to the effective closure of the strait, so an alternative outlet would be beneficial. Kuwait had to declare force majeure in March, and Bahrain’s Sitra refinery was struck by Iranian missiles several times. Qatar is studying whether its LNG exports could also benefit from alternative routes through Saudi Arabia and several other potential alternatives.
Like Saudi Arabia, the United Arab Emirates (UAE) can avoid the strait by using its oil pipeline to Fujairah, which carries up to 1.8 million barrels per day. The country has completed half of a new West-East pipeline that will double its crude oil capacity when it becomes operational next year.
Even during the ceasefire and the supposed opening of free transit through the strait due to the U.S.-Iran interim framework agreement in June, commercial shipping remained below pre-war levels. Independent tanker operators continued to face elevated war-risk insurance costs, while Iran has repeatedly insisted it intends to regulate vessel movements and has threatened to charge ships for services in the waterway once negotiations and the ceasefire conclude. That may now be the case as President Trump, speaking at a NATO summit in Turkey, said the interim deal reached with Iran last month was ‘over,’ despite negotiations expected to continue after Khamenei’s funeral on July 9. Many Gulf Arab states say they will not agree to Iran charging for passage through the strait.
President Trump suggested that peace talks were not dead, but he called his counterparts in Tehran “sick people.” The U.S. Treasury Department revoked Iran’s waiver that allowed it to sell oil on the global market during the ceasefire under the interim agreement between the United States and Iran, which both sides signed last month. Brent crude oil, the international benchmark, rose to $78 a barrel — up more than 8% since July 6.
Iran has maintained a chokehold of sorts on the Strait of Hormuz since the war began, disrupting global energy markets. According to AP, the three commercial ships it attacked on July 7 appeared to be using a route close to Oman’s shore, rather than one ordered by Iran. Iran has declared that only its approved route through the strait is safe and is suspected of attacking other ships that have used the Oman route. One tanker was traveling off the coast of Oman when it was hit and caught fire after Iranian media indicated that the liquefied natural gas tanker had ignored warnings. The other two ships sustained some damage, but no one was injured, and both continued through the Strait of Hormuz. As part of the interim deal, Iran and the United States agreed to allow ships to pass without paying charges for 60 days.
Conclusion
Saudi Arabia is considering expanding the capacity of its East-West oil pipeline by up to 2 million barrels per day. The project becomes more likely as the ceasefire between the United States and Iran, which opened the Strait of Hormuz to free passage for 60 days, may be over, according to President Trump. The United States revoked the waiver that allows Iran to sell its oil on the global market due to the increased hostilities. Hostilities resumed after Iran struck three commercial ships in the Strait of Hormuz, followed by U.S. attacks on over 80 targets in Iran, with Iran responding by targeting 85 U.S. military sites in Bahrain and Kuwait. Energy-producing nations in the region are intent on selling their products to consumers worldwide and are working to ensure they can do so.
