The Strait of Hormuz and the petrochemical world: the survey of a global choke point

The Strait of Hormuz is important to the world economy. Conflict or no, it is one of the arteries through which an enormous portion of energy supply must pass. The region’s countries contain some of the planet’s richest reserves of petroleum and natural gas.

Some 21% of the global petroleum liquids consumed transit the strait. This amounted to a daily average of 21 million barrels of oil per day (bpd) in 2018, about a third of the seaborne traded oil.

The flow and the proximity of energy sources are among the reasons for which the Strait of Hormuz is of great international importance. Its significance transcends the function of fount of energy; it has also been elemental to the development of the contemporary world economy because of petroleum’s relationship to the US dollar via the petrodollar system, coupled with the dollar’s role as the world’s reserve currency supported by established Western financial institutions through which international exchanges are undertaken. This system helps the US maintain global economic dominance.

The petrodollar system was induced by a Saudi-US understanding, later adhered to by all major oil producing countries, to trade oil in dollars. Here, in part, is how the US benefits: Saudi Arabia trades its oil for US dollars. It is left with an excess of dollars to make use of. A good portion of the Saudi dollar denominated profits are ‘recycled’ into the US, via the purchase of bonds, Treasury Bills, and investments.

So, oil’s importance outstrips its practical use as liquid energy: it also fuels the global economic order by backing the dollar as the world’s singular currency. However, oil must continuously be traded in order for this to be effective. The ongoing circulation of oil from source to customers and between consumers is necessary since the petrodollar system is only vital as a transactional process.

Geography

The Strait of Hormuz is narrow yet deep enough to be used by some of the largest of tankers. It is about 39 km (21 nautical miles) wide at its narrowest section. It rests between the territories of Iran to the north, and Oman and the United Arab Emirates (the UAE) to the south. Also, it connects the Persian Gulf to the Gulf of Oman.

Because of the limited confines of the strait, an internationally agreed upon traffic separation scheme (TSS) is used for the navigation of vessels. This is effectively like road regulation, with opposing lanes of traffic and rules for how to turn around in the busy thoroughfare. This routeing system is ruled by the International Maritime Organisation (IMO).

The strait’s TSS has one incoming and one outgoing lane, each 2 miles wide, with a 2 mile buffer zone between them. The waters between each lane and shoreline are designated as inshore zones intended for local traffic and fishing boats. Much of this inshore traffic zone is technically usable by the backbone of tanker fleets, that category of vessels known as very large crude carriers (VLCC), even if they stick to the TSS lanes by default. (see this IMO PDF document, page 3 for Hormuz TSS details)

Producers

Saudi Arabia, Iraq, Iran, the United Arab Emirates, and Kuwait are major sources of retrieved oil. Together they made up a little less than 30% of world oil production in 2018.

Iran’s share dropped in 2019 as a result of US extra-territorial sanctions imposed on Iran and extended to encapsulate third-parties. The US Energy Information Administration (EIA) forecasts that Iran’s market loss will be taken up by increased output from a number of other countries, the US among them (expected to be up by 1.4 bpd in 2019, compared with Iran’s 2018 output of 4.47 bpd).

Here’s a breakdown of major Persian Gulf oil producers in 2018:

1. Saudi Arabia: 12% of world total, with 12.42 million bpd;
2. Iraq: 5% of world total, 4.62 million bpd;
3. Iran: 4% of world total, 4.47 million bpd;
4. United Arab Emirates: 4% of world total, 3.79 million bpd; and
5. Kuwait: 3% of world total, million 2.87 bpd.

Most of the internationally traded oil is shipped via the Strait of Hormuz.

Even though the US produced more oil than Saudi Arabia in 2018, this does not mean that the US has more natural supplies of oil. The US has smaller reserves but it is extracting them at a faster rate. If this sprint is maintained then the US would run out of oil much sooner than the vastly larger reserves held within Saudi Arabia.

The Gulf states’ proven oil reserves are as follows, accounting for 47% share of the global total:

1. Saudi Arabia: 15.7% of world total, with 266.2 billion barrels;
2. Iran: 9.3% of world total, with 157.2 billion barrels;
3. Iraq: 8.8% of world total, with 148.8 billion barrels;
4. Kuwait: 6% of world total, with 101.5 billion barrels;
5. United Arab Emirates: 5.8% of world total, with 97.8 billion barrels; and
6. Qatar: 1.5% of world total, with 25.2 billion barrels.

By contrast, the US has proven oil reserves of 50 billion barrels, equivalent to 2.9% of world total, while it produced 18% of it in 2018.

China, with 1.5% of the world’s total reserves is producing 5% of total output. Its domestic supply of crude oil is extracted at a more conservative rate.

The Gulf region also holds a wealth of natural gas. It is shipped for trade as liquefied natural gas (LNG). Qatar is especially prone to LNG processing. There are unfulfilled plans to export a growing share of natural gas via pipelines, but intense geopolitical tensions have so far prevented the completion of such major routes. Such complications are compounded by regional and global rivalries, most recently illustrated by China’s Belt and Road Initiative as a challenge to the US-led international status quo. For example, see the long-negotiated yet perpetually unfulfilled Iran-Pakistan pipeline with possible links to India and China.

The region’s countries are among the world’s top producers of natural gas, with the following outputs in 2018 ( from BP’s Statistical Review of World Energy 2019, PDF, page 33):

1. Iran: 6.2% share of world production;
2. Qatar: 4.5% share of world production;
3. Saudi Arabia: 2.9% share of world production;
4. United Arab Emirates: 1.7% share of world production;
5. Oman: 0.9% share of world production;
6. Kuwait: 0.5% share of world production;
7. Bahrain: 0.4% share of world production; and
8. Iraq: 0.3% share of world production.

Note that the above numbers are for gas produced, and not for the amount exported. Iran, for example, uses almost all of its natural gas for domestic consumption. Meanwhile Qatar consumes only a small portion of the gas produced, easily making it the world’s top exporter.

According to Bloomberg, West Asia “accounts for 29% of global LNG exports”. Qatar, the UAE, and Oman are core exporters. Qatar and the UAE rely on the Strait of Hormuz for this trade.

The Persian Gulf countries contain nearly 35% of all proven natural gas reserves. Proven reserves for select Persian Gulf countries at the end of 2018 are (from BP’s Statistical Review of World Energy 2019, PDF, page 30):

1. Iran: 16.2% of world share, with 31.9 trillion cubic metres (tcm);
2. Qatar: 12.5% of world share, with 24.7 tcm;
3. United Arab Emirates: 3% of world share, with 5.9;
4. Saudi Arabia: 3% of world share, with 5.9 tcm; and
5. Iraq: 1.8% of world share, with 3.6 tcm.

The US held 6% of the reserves but produced 21.5% of the world’s share of natural gas in 2018. From this we can see that that country is following a common strategy in both oil and gas production, to extract its limited supplies at a very rapid clip as leverage for near-term economic and political benefit.

Consumers

Crude oil, petroleum products, and natural gas are traded widely, reaching consumers in all corners. However, there are geographic agglomerations of consumers, such as the EIA estimate “that 76% of the crude oil and condensate that moved through the Strait of Hormuz went to Asian markets in 2018. China, India, Japan, South Korea, and Singapore were the largest destinations for crude oil moving through the Strait of Hormuz to Asia, accounting for 65% of all Hormuz crude oil and condensate flows in 2018”.

The US is no longer the world’s top importer of petroleum: “In 2018, the United States imported about 1.4 million b/d of crude oil and condensate from Persian Gulf countries through the Strait of Hormuz, accounting for about 18% of total U.S. crude oil and condensate imports and 7% of total U.S. petroleum liquids consumption”.

The large quantities of tankers sailing for East Asia have to transit through another major choke point: the Strait of Malacca. “Nearly one-third of the 61% of total global petroleum and other liquids production that moved on maritime routes in 2015 transited the Strait of Malacca, the second-largest oil trade chokepoint in the world after the Strait of Hormuz” according to the EIA.

China first surpassed the US in crude oil imports in 2017. If you lump in petroleum fuels with all other liquid fuels then China became the largest net importer in the latter half of 2013. The increased Chinese imports of oil from all sources was not only because of higher domestic consumption, they also brought on more refineries to process crude for domestic use or resale, and they stocked greater reserves of crude. Notably, China has opened the door to private sector refineries, recent spikes in consumption can also be attributed to the construction industry and infrastructure development. China is importing less refined fuel and exporting more of it than previously, a likely outcome of expanded domestic refining capacity.

China took up 15.5% of global oil imports, the US absorbed 13.9%, India had 7.3%, Japan at 5.5%, and Europe as a whole had a 21.2% share of total imports in 2018. (from BP’s Statistical Review of World Energy 2019, PDF, page 28)

The following oil importers were particularly dependent on Middle Eastern / West Asian oil – of which the Gulf states are overwhelmingly the majority suppliers (my calculations from the BP review sourced above):

• Japan: 86.87% of oil imports from the Middle East
• Singapore: 76.82%
• India: 64.53%
• China: 43.72%
• Australasia: 27.97%
• Other Asia Pacific: 73.08%
• Africa: 57.88%
• Europe: 23.9%
• US: 18.97%

It is notable that the US and Europe have relatively limited oil imports from West Asia.

China’s top suppliers of crude oil from the Persian Gulf region in 2018 were:

1. Saudi Arabia: 12.4% of crude imports;
2. Iraq: 9.4% of crude imports;
3. Oman: 7.2% of crude imports;
4. Iran: 6.3% of crude imports;
5. Kuwait: 5% of crude imports; and
6. United Arab Emirates: 2.8% of crude imports.

The Gulf region’s top LNG exporter, Qatar, has some key customers that source heavily from it.

Share of LNG imports sourced from Qatar in 2018:

• Italy: 78.7%
• Belgium: 72.4%
• Pakistan: 61.9%
• India: 48.3%
• Egypt: 46.2%
• Thailand: 44.9%
• Argentina: 40.6%
• UK: 39.8%
• South Korea: 32.5%
• Taiwan: 29.1%

Shipping

“The Strait of Hormuz is deep enough and wide enough to handle the world’s largest crude oil tankers, with about two-thirds of oil shipments carried by tankers in excess of 150,000 deadweight tons coming through this Strait”, according to the EIA.

Dead-weight tonnage is the sum of all weight that a ship may carry: including cargo, crew, passengers, fuel, provisions, fresh water and ballast water.

Without question oil tankers are the most important vessel type in the strait. Oil tankers predominate, followed by LNG tankers.

Very Large Crude Carriers (VLCC) can navigate through most of the strait, not just the designated traffic separation scheme ‘lanes’. VLCCs carry most of the world’s maritime trade in crude oil, and can carry 1.9 million to 2.2 million barrels of Westli Texas Intermediate (WTI) type crude oil. These ships are also commonly known as ‘supertankers’. They’re built for long-haul journeys, capable of traversing great distances to reach all parts of the globe.

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When it comes to tankers, a multitude of firms, conglomerates and entities come together to handle the range of necessary affairs. They relate to each other by contracts that outline such things as who organises or bears the cost of operations such as with the crew, fuel, insurances, etc. Ships can be owned or leased and they run along regular routes and destinations.

The largest entities in the business of crude oil tanker fleets are: Teekay, Frontline Group, Mitsui-OSK, National Iranian Tanker Company, Nippon Yusen Kaisha Group, Euronav, Sovcomflot, Tsakos Energy Navigation, Nordic American Tanker, Ship Finance International Limited, DHT Holdings, AET, China Ocean Shipping, and China Shipping Development Corp.

Although the privately run businesses among the listed entities may be owned by nationals of counties like Norway, a favourite location to base out of is Bermuda, while each of their vessels may fly a flag of convenience from yet a third country.

“42,544 transits by tankers, bulk carriers, and dry cargo or passenger vessels” were recorded through the strait between 1 July 2017 and 30 June 2018 by IHS Markit Maritime & Trade AISLive. This makes the narrow passage one of the world’s congested maritime thoroughfares.

Alternative routes

Clearly, there is no alternative maritime route to the Strait of Hormuz since the Persian Gulf is a cul de sac for the tankers that frequent it. But, there are land-based alternatives.

Crude oil, petroleum product, and natural gas pipelines crisscross segments of the region. These are supplemented by road traffic by truck. These, however, are commonly used to carry products domestically: either raw materials to a local processing plant – such as an oil refinery – or final products to consumers – such as natural gas used for the purpose of heating.

Relatively little internationally traded petroleum or natural gas transits by pipeline or road. Shipping cannot be replaced by existing land-based carriers.

A hybrid solution may be used, with short terrestrial routes to ports outside of the Persian Gulf, with the intention of avoiding the Strait of Hormuz. Examples include current or speculated routes from the Gulf region to ports in Oman (access to the Gulf of Oman and Arabian Sea), to western Saudi Arabia (access to the Red Sea), to Syria (access to the Mediterranean), to Turkey (access to the Mediterranean and Black Sea), or to Pakistan (access to the Indian Ocean). These still suffer from the limited capacity of intervening pipelines.

For example, the combined active international oil pipelines of Saudi Arabia, the UAE, and Oman only have an unused capacity of 3.8 million bpd. However, some 21 million pbd equivalent passes through the strait. Iran and Iraq are even less capable in this regard.

This situation explains the weight given to talk and rumour of any plans for the future expansion of pipelines. These include Saudi and Qatari designs on northern routes to Turkey or Syria, as well as Iranian desires for pipes to Turkey, Syria, or Pakistan.

Major ports

The Strait of Hormuz is in the proximity of several ports of note. This document will limit its regional scope to the Persian Gulf, the Gulf of Oman, and in the Arabian Sea on this topic. Those are adjacent bodies of water.

Side note: Containerised transport plays a large role in the international trade of goods. Container ships are specially built to hold compartmentalised containers. Their use has dramatically transformed sea-borne transportation, and they’ve become a favourite mode of carriage. They’re enormous vessels, and their growing size has forced ports to transform their infrastructure to accommodate both their size and their special form of loading and unloading. Their cargo includes finished products. On-board cargo is measured by Twenty-foot Equivalent Units (TEU). This unit measures the rough volume taken up by the metal boxes, or containers, that are placed within the ships, or moved to trucks and trains.

Iranian ports

Iran is the country with the longest shoreline to the region in question. It also has possession of several islands of significance.

Khorramshahr Port

Bordering the country of Iraq and very close to Kuwait, this port rests within Arvand Free Industrial and Trade Zone. It’s a mere few tens of kilometers away from the major oil producing Iraqi city of Basra. It has 18 berths and a capacity for 3.8 million tons of containerised and general cargo.

Imam Khomeini Port

This large port is one of the country’s most important, and rests at the terminus of rail and road links connecting it to the Caspian Sea and Tehran at the far north of the country. It’s also served by air links. It lies within a special economic zone, and is a trans-modal port through which goods can be repackaged and moved from one mode of transport to another (such as rail to sea). It can handle cotainerised shipping among other general cargo, bulk cargo, and tankers.

Bushehr Port

Iran’s second largest share of container shipping is handled there.

Bandar Abbas

This is arguably Iran’s most important port thanks to its cargo capacity and location. It sits on within the Strait of Hormuz, on the northern shoreline. Its containerised shipping is 3 million TEUs. It is divided between an old and new port. It is within a special economic zone.

Chabahar Port

Though a modest port, it is notable for its growth and political utility. It lies both outside of the Strait of Hormuz and the Persian Gulf, unlike every other Iranian port of significance here listed. Its new development has been jointly funded and managed between Iran and India. It is supposed to offer access into Central Asia and all the way north to Russia. It can be viewed as a twin port to Pakistan’s far more developed Gwadar port. Chabahar’s potential is mainly unfulfilled as it is caught up in international tensions and machinations between Iran, India, Pakistan, Afghanistan, the US, China, and Russia.

Kharg Island Port

This is an oil terminal that can handle supertankers/VLCCs, and its main purpose for the transit of crude oil is underscored by the fact that it is operated by the National Iranian Oil Company (NIOC). It is Iran’s largest oil terminal, having recovered this role after much of it was destroyed during the near decade long Iran-Iraq war. Depending on the condition of sanctions and blockades against the country, this port gains and loses its position as the Persian Gulf’s largest oil terminal. It currently handles up to 90% of Iran’s crude oil exports.

Lavan Island Port

Near to offshore oil fields, this island and corresponding port houses petrochemical storage, processing, and transport facilities. This terminal is second to Kharg.

Sirri Island Port

This oil terminal is third behind Kharg and Lavan. Together with other mostly dormant terminals, Iran can process and export a much larger quantity of crude oil than it has done so in the past years, due to restrictions placed upon it by US imposed sanctions.

Iraqis ports

Iraq has only a sliver of land access to the Persian Gulf, sandwiched between Kuwait and Iran.

Umm Qasr

This is Iraq’s only deep water port. It lies just across the river from Kuwait and is also very near to Iran. It is actually made up of three ports, each with its own management encapsulated under a common financial supervisory body. The nearest major city is Basra, and it is close to the country’s most important oil fields.

Kuwaiti ports

The export of oil is very important to Kuwait, since “Oil comprises nearly half of Kuwait’s GDP, around 95% of exports, and approximately 90% of government revenue”.

Shuwaikh

This is Kuwait’s primary commercial port. It is in an urban area, by Kuwait city.

Shuaiba

Apart from its container terminal, the port also sports the capacity for handling petrochemical products. This is the country’s second most important commercial port.

Saudi Arabian ports

The export of petroleum is of core importance to the country’s national budget. Therefore, its ports are critical since the vast majority of such goods are transported by sea. The country’s main oil deposits are in the east. The Persian Gulf in the east and the Red Sea in the west are Saudi Arabia’s only maritime access points. As mentioned before, the Red Sea accessible oil pipelines have limited capacity. The Persian Gulf and the Strait of Hormuz are therefore the country’s main avenue to oil exports.

King Abdulaziz Port

Located in the city of Dammam, this is the country’s primary Gulf port. It is important for the import of goods and the export of petroleum.

King Fahd Industrial Port in Jubail

Located in Jubail city, the port is used to export petrochemicals and processed petroleum products, while importing industrial materials needed for the ongoing related industrial activity.

Jubail Commercial Port

It Is also in Jubail city. It has 16 berths and is notable for its significant handling of bulk grain trades.

Bahraini ports

Bahrain is a very small island country linked to the Saudi Arabian mainland via a bridge.

Khalifa bin Salman Port

A newly constructed port, it has replaced Mina Salman Port as the country’s top maritime trade facility. It provides for larger ocean-going vessels than the older port permitted.

Mina Salman Port

This was once the country’s main port, built into a natural harbour. However it was overcrowded and had difficulty letting through the world’s larger ocean-going vessels.

Qatari ports

This peninsula shares a land border with Saudi Arabia. Its seagoing exports of liquefied natural gas are especially important to the country’s economy.

Doha Port

This port’s commercial activity has been supplanted by Hamad Port. It was previously Qatar’s main commercial goods port.

Hamad Port

It is a new facility that is still under construction. It is officially intended to have 7.5 million TEU per year of containerised cargo capacity. If that is achieved it would make it one of the Middle East’s top ports. However, Qatar’s political and economic isolation by its erstwhile allies of Saudi Arabia and the UAE may limit this goal. Qatar’s intent is to use this capacity to turn the peninsula into a regional import-export hub, reducing the country’s dependence on natural gas and oil exports. According to the Qatar port authority (Mwani Qatar), the port can currently optimally handle 2 million TEU per year. Hamad Port began operations in 2016.

Al-Ruwais Port

It has become Qatar’s second most important commercial port, notable for its specialisation in the transport of fresh and frozen foodstuffs. It is a newly constructed port and is under continuing development.

Ras Laffan

This is a major industrial complex that is tied to the North Field offshore natural gas reserves under the Persian Gulf. Together with Iran’s section of the field (which they call South Pars), this field is so rich that it places Qatar as one of the world’s top ranking natural gas reserve holders. Qatar is the top global exporter of LNG. The owner of Ras Laffan, Qatar Petroleum, states that the complex “is developed and operated specifically for natural gas-based industries that produce gas products and their derivatives from natural gas produced in the North Field”. The associated port is a massive export hub for processed hydrocarbon products, LNG included.

Halul Island

Is operated by Qatar Petroleum and serves as an export hub for crude oil.

Emirati Ports

The United Arab Emirates holds the region’s top container ports, solidly establishing it as an import-export hub. The Emirates are notable for having shorelines in both the Persian Gulf and in the Gulf of Oman.

Jebel Ali Port

It was ranked as the world’s 9^th largest container port in 2016, transiting 15.73 million TEU of goods, and is clearly the busiest of its kind in the Middle East. It boasts 67 berths and is undergoing regular upgrades and expansion. Construction began in 1976, with the intention of supplementing Port Rashid since the latter faced congestion due to growing cargo traffic.

Port Rashid

A small port that once played a larger part for Dubai as cargo port. Its function for commercial transport is winding to a close, for the most part replaced by Jebel Ali Port.

Khorfakkan Port

This is one of the world’s major ports, ranked 37 largest container port in 2016, handling 4.33 million TEU that year. Notably, it lies outside of the Persian Gulf, in the Gulf of Oman. It is a transshipment hub of commercial goods.

Khalifa Port

This is a commercial cargo port that officially opened in December 2012. According to its owning entity, the Abu Dhabi Ports, it has an annual capacity of 2.5 TEUs and 12 million tons of general cargo (uncontainerised). The technical capacity and the actual usage are likely to be different from each other, however. The port is notable for its use of automated (remotely controlled) cranes and carriers (see example video here).

Fujairah Port

This has a potential for greater significance over time, with the possible completion of oil refinery and large-scale crude oil storage facility. It is located outside of the Persian Gulf, a little south of Khorfakkan Port. However, any oil refined or stored there would first likely need to pass the Strait of Hormuz since existing and planned pipelines have limited capacity, as earlier explained. It currently has two oil terminals.

Jebel Dhanna Ruwais Petroleum Port

This is major petrochemical products facility suited for the export of crude, refined or processed oil.

Das Zirku & Mubarraz Port

These are petroleum ports tied to the Das, Zirku and Mubarraz oil terminals located on tiny islands of the same name that are associated with offshore oil fields. They are used for the export of crude and processed products, including derivative LNG.

Omani ports

Almost all of Oman’s shoreline lies along the Arabian Sea and the Gulf of Oman, cradling the western portion of the Indian Ocean. Its Musadam peninsula defines the southern border of the Strait of Hormuz. This Omani territory is separated from the main body of that country by the United Arab Emirates.

Salalah Port

This is a container and cargo terminal, ranking as the world’s 46^th largest container port in 2016. The 3.32 million TEU of container throughput makes it one of the region’s most important. The current claim from its operator is that the port has an annual capacity of 5 million TEU. It is especially focused on African and Indian markets via the Indian Ocean.

Ras Markaz Storage Terminal

This is a planned terminal whose final outcome is yet uncertain. It is grandly advertised as a place for the safe storage of Persian Gulf oil in case the Strait of Hormuz ever becomes a problem to navigate. Of course, the storage facility will need to be supplied by the same sources that currently pass via the Strait of Hormuz, so it will either have to be filled up as reserve during peace time or major new pipelines would have to provide significant new potential. It is here mentioned as the example of incomplete yet interesting plans. It is advertised as optimally holding 200 million barrels of oil. About 21 million barrels of crude oil pass the Strait of Hormuz on a daily average.

Pakistani ports

Pakistan has partnered with China to develop a new port of great significance to the Strait of Hormuz. Although the country has other facilities of note, for the purpose of this article, only the one port will be examined.

Gwadar Port

This new port is still in the final stages of construction and has entered ‘test pilot’ stage. It is part of a the China-Pakistan Economic Corridor (CPEC) linking the two countries via port, rail, road, and pipelines, and it is a subset of the Chinese state’s international political economic Belt and Road Initiative strategy. It has the potential to provide China with some access to energy located in the Persian Gulf via a port that is strategically outside of the Gulf. Furthermore, it helps China to bypass the congested and militarily vulnerable Malacca Strait (see my article on the South China Sea for more on this). This port will supplement Pakistan’s existing deep sea ports of Karachi and Qasim. The Gwadar Port Authority claims that this “is Pakistan’s largest infrastructural project since independence”.