Abu Dhabi will become the oil producing member of the Gulf Cooperation Council that is best insulated from a closure of the Strait of Hormuz, once the Habshan-Fujairah pipeline is fully operational later this year, according to Fitch Ratings.
In January, the UAE’s energy minister said that the pipeline, designed to transport 1.5mbd, should hopefully be operational within six months.
As we have previously said, a prolonged closure of the Strait is a low probability. As well as the practical challenge of physically blocking it, we think Iran would only choose to close an international shipping lane that is the world’s most important oil chokepoint as a last resort, given the potential for international retaliation. Iran also exports oil via the Strait.
However, if the Strait was blocked in the second half of this year, when the Habshan-Fujairah pipeline could be operational, it would potentially give Abu Dhabi the best safety net. It would enable Abu Dhabi, which has the world’s second largest per capita reserves of hydrocarbons, to continue to export up to around two-thirds of its oil output, or around three-quarters of its current net oil exports, by bypassing the Strait and delivering oil to the Gulf of Oman.
Saudi Arabia currently has the advantage that it already enjoys pipeline access to the Red Sea via the East-West pipeline. The country could export more than half its output through this pipeline, which has a maximum capacity of 5mbd and currently transports around 1.8mbd. However, even at maximum capacity, with 2011 output running at 9.3mbd and no decline so far this year due to the tensions over Iran, a higher proportion of Saudi oil output and exports would be stuck inside the country if they could not be shipped out of the Persian Gulf than would be the case for Abu Dhabi once the Habshan-Fujairah pipeline is operational.
All oil exported from Kuwait is transported through the Strait of Hormuz.
Fitch rates Abu Dhabi and Kuwait ‘AA’ and Saudi Arabia ‘AA-‘. The high investment grade ratings in each case are underpinned by strong sovereign and external balance sheets. The high proportion of government revenues generated by oil is a rating weakness for all three countries.