Upstream production in the Middle East will remain constrained for several weeks as shipping logistics continue to face challenges in the Strait of Hormuz.
The recovery of the 11 million barrels per day of shut-in oil production will initially be hampered for several weeks by shipping logistics issues in the Strait of Hormuz, with upstream operational challenges emerging only after this period, Wood Mackenzie said in a report.
“A ‘workable system’ of transit and shipowner confidence in the security of the transiting vessels is essential,” Alan Gelder, SVP Refining, Chemicals and Oil Markets at Wood Mackenzie, said in the report.
Assurances remain key
Sustained transit through the Strait of Hormuz is essential for the global oil market. This includes ensuring insurance for vessels, facilitating trade financing, and enabling a continuous flow of crude “on water” to refiners and inbound ballasting vessels to Gulf load ports, according to Gelder.
Confidence in viable transit must extend beyond the current two-week ceasefire.
While vessels carrying cargo are motivated to pass through the Strait of Hormuz as quickly as security protocols and insurance coverage permit, the maximum safe transit rate remains uncertain.
Ballasting vessels are unlikely to enter via the Strait of Hormuz any sooner than a 'just in time' logistics basis, at risk of becoming trapped if hostilities resume.
The transfer of onshore inventories to ballasting vessels is limited because the onshore storage drawdown is restricted by the load rates available over the jetty, according to Gelder.
Secondary stages of oil recovery
As export volumes increase, the resulting available storage space (ullage) will permit upstream production and refining operations to restart, according to Wood Mackenzie.
The capacity of current storage is approximately one month for countries like Saudi Arabia and the UAE, but less than two weeks for Iraq and Kuwait, estimates from the research company showed.
Fraser McKay, head of upstream analysis at Wood Mackenzie, stated that initial recovery from major fields will exceed the needs of rising export volumes. Shipping logistics will restrict upstream recovery for several weeks.
“Thereafter, as those constraints begin to ease, the constraints on supply will shift to the upstream production, and this will expose the different challenges each country faces,” McKay said.
“More than half of most fields’ previous supply levels could be restored before shipping constraints ease. Thereafter, different recovery profiles will emerge.”
McKay noted that even if unconstrained, countries like Iraq will take six to nine months to return to prior production levels due to reservoir and resource complexities.
In other countries, while upstream infrastructure is mostly undamaged, the repair of local refining capacity means exports will increase, but previous production highs will take much longer to reach.
Operators likely had pre-war contingency plans, adapting them as the conflict progressed. Once export uncertainty is resolved, these plans can be quickly initiated, ultimately restoring most production to previous levels, the company said.
Gas recovery
The two-week ceasefire in the Middle East is bearish for global gas prices. However, there has been no significant fundamental change regarding the supply of liquefied natural gas (LNG).
According to Tom Marzec-Manser of Europe Gas and LNG Wood Mackenzie, the ceasefire is likely to allow the 14 loaded LNG cargoes currently held up in the Gulf to pass through the Strait of Hormuz. This could offer some relief to the global gas market.
“But for there to be a real structural change in supply, the Ras Laffan site in Qatar would need to restart its 12 operable trains. It is unclear if QatarEnergy would consider doing this during a ceasefire, however,” Marzec-Manser said.
If ballast LNG vessels could enter the Gulf, more than 10 vessels could load immediately, even before Ras Laffan’s LNG production restarts, Marzec-Manser noted. Loadings for delivery to Kuwait have continued during the conflict.
Wood Mackenzie projects that a full restart of all 12 trains at QatarEnergy’s Ras Laffan site, if initiated in early May, would not reach full service until the end of August.
Specifically, while restarting only the 41 million tonnes per annum (mtpa) North site would take just over a month, the more extensive restart of the South site is anticipated to be the part that extends through the end of the summer.
The South site, which originally had a capacity of 36 mtpa, sustained damage. As a result, two additional trains will be out of service for several years, reducing the site’s capacity to 24 mtpa.
Wood Mackenzie projected that ADNOC’s 5 mtpa Das Island LNG plant in the UAE will likely resume operations in a relatively short timeframe.
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