How quickly can Gulf oil exports recover?

The now twice extended ceasefire between the US and Iran and ongoing talks towards peace give hope that the war ends soon. If a sustainable agreement is finally reached – and as we write it’s still a big if – it could lead swiftly to the reopening of the Strait of Hormuz, kick-starting the process of returning shut in oil supply to the global market which peaked in May at around 12 million b/d.

Our May Horizons scenarios mapped out the implications of the timing of the reopening on energy markets, oil and LNG prices and the global economy. Here our experts, Alan Gelder, Fraser McKay, Alexandre Araman, Dalia Salem, Ali Nabizadeh and Dougie Thyne assess what challenges lie ahead to get oil exports back to pre-war levels.

What’s the trajectory for oil production?

If the Strait reopens in the next few weeks, we believe much of the shut-in supply could be restored fairly quickly. Wood Mackenzie data indicates that Saudi Arabia and Iraq have been pre-emptively increasing supply in the last few days. In most instances, the main bottleneck will be the logistics of resuming export flows and safely managing field start-ups rather than subsurface deliverability.

Assuming operators choose a measured and controlled ramp-up, our analysis suggests the fields affected by the Strait’s closure could get back to 70% of prior production within three months and to 90% within six months. The last 1 million b/d or so will take considerably longer.

What factors drive the upstream recovery path?

There are a lot of subsurface variables. These include the age, maturity and size of the field, the proportion of production shut in, how long it’s been shut in and whether the shut-in process (in some cases done at speed and under duress), was well managed or not. The nature, quality and bubble point of the reservoirs, recovery mechanisms and technology being utilised, and water salinity are all critical factors.

Add to these, the above-ground challenges. Gas handling and water reinjection must be simultaneously restarted to avoid reservoir damage. The proportion of water in the produced fluids will be higher temporarily in many fields. Restarting and re-optimising these systems is a key risk.

Then there’s the coordination with the supply chain. Multiple factors could inhibit the pace or the quality of the restart such as deploying staff in the right places; mechanical or other issues with artificial lift; restarting remote power generation; and pipeline flow assurance and integrity issues. Some of the oldest, or trickiest wells, will likely never recover.

These issues will vary country-by-country and field-by-field. Focusing on the Big Four Gulf exporters, Saudi Arabia and UAE both have high quality reservoirs and, because they have export pipeline capacity circumventing the Strait, have the smallest proportion of total supply shut in. We expect production recovery in both countries will be at the faster end of the recovery range.

The ramp up for Kuwait and Iraq is likely to be slower. Neither has had alternative export options resulting in the forced shut-in of all production above volumes meeting local demand. Iraq will the slowest of the Big Four to return to pre-war levels, due to reservoir maturity, technical and operational complexity.

Could delay in reopening the Strait of Hormuz affect the recovery?

It’s highly likely that an extended closure will reduce the bouncebackability of production for some fields. The exact impact is hard to predict, but many of the issues outlined above are exacerbated by duration. More wells in more fields would need intervention to get back to full production, adding cost and slowing the recovery path.

What other obstacles could slow the return of oil to the market?

With the best will in the world fully restoring Gulf liquids exports to February levels is going to take months. Given the many hurdles, we’d identify four key stages.

• First, assurance of safe passage for marine traffic with no restrictions through the Strait in both directions – mariners, insurers and vessel owners will insist on nothing less.
• Second, getting vessels currently stuck in the Gulf on their way to market. We assume that by now all are fully loaded with crude or product and good to go.
• Third, restoring tanker loading protocol and logistics. Empty vessels sitting outside the Gulf will gain entry for loading from storage in ports, creating ullage to allow oil production to restart. Breaking the logjam requires rebooting tanker traffic flows – empty vessels need to be loaded and sent on their way. It will be many weeks before they return ready to refill, so in the meantime, other vessels need to relocate to enable sustained recovery in transit traffic and export flows.
• Fourth, cranking back up to capacity the pre-war value chains in each country – producing wells, pipeline infrastructure, refineries, petrochemical facilities, storage tanks and loading facilities.

Are there levers to pull if the production recovery stutters?

Restoring supply on this scale is wholly unprecedented and there will be pleasant surprises and but also setbacks. Saudi Arabia and UAE have some flexibility. They can use their spare production capacity and storage to smooth the ramp up of exports should there be hiccups in the recovery of production from individual fields.

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