What does Petroline shutdown mean for high sulphur?

The East West pipeline is roughly 5Mbd official + 2Mbd in converted NGL pipelines so about 7Mbd in total capacity. Before the Iran war, Saudi was utilising some 3-3.5Mbd of the capacity, of which roughly 1.5Mbd went to the West Coast refineries, some 500-800kbd for crude burn at the power plants depending on the season and the rest for exports out of mostly Yanbu. Before the Houthis’ attack, if they were running the pipeline at the maximum 7Mbd then realistically the pipeline absorbed an extra 3.5-4Mbd of crude relative to pre-war times.

It’s definitely a very tricky situation for Saudi. Without the pipeline, the only way to transport crude from the East (where most crude is produced) to the West Coast is by shuttling it on tankers which they used to do pre-war but doing that now that will leave those tankers running into both the Iranians and the Houthis.

I have no way of knowing the exact extent of the damage to the pump station and other parts of the pipeline so all the figures below are guesstimates full of (hopefully reasonable) assumptions.

Now, Saudi announced the shutdown of the pipeline but they spent years preparing for these exact scenarios so my gut feel is that there are several contingencies in place to quickly restore some level of flow. A full repair is perhaps weeks away but I’m willing to bet they can restore some 20 to 40% of flow capacity relatively quickly (in a week or two) – experts on this please feel free to roast this naive analyst.

Let’s model out the impact of the 20% vs 40% recovery scenarios on HSFO. Again, some of these numbers can be a bit murky.

Scenario 1: 40% Petroline recovery

(Saudi West Coast refining capacity fuel oil)

At 40% recovery we get roughly 2.8Mbd flowing East to Yanbu. Saudi has 5 refineries on the West Coast with about 1.85Mbd in capacity. Jizan is down since last week’s attacks and we have no idea how extensive the damage is so I’ll assume 25% utilisation for Jizan and about 90% utilisation for the rest which equates to roughly 75% weighted average utilisation or 1375kbd in runs.

Let’s also assume that Q4 West Coast crude burn at the power plants is business as usual which is roughly 400kbd. With 2.8Mbd flowing, both refinery runs and power gen can be satisfied while leaving an extra 1Mbd for exports out of Yanbu.

The implicit assumptions I made here is that they will prioritise satisfying domestic demand first and keeping FO/Crude burn ratio relatively unchanged which are probably reasonable in this particular scenario where they can still maintain some crude exports. Or perhaps you think they are going to burn more FO by importing more Russian HSSR (also tricky at the moment) and export more crude – we will talk about that later.

Scenario 2: 20% Petroline recovery with business-as-usual for runs & power burn

Now things start to get more interesting if you look at 20% recovery which is about 1.4Mbd in East to West flow. I will make another assumption that the 50-70kbd of high sulphur resid that’s been exported out of Yanbu recently gets re-directed back into power gen.

At this level, trying to satisfy both crude runs & crude burn will leave them short around 325kbd. There is probably some 30Mbd in working inventory around Yanbu so if you assume absolutely zero crude exports then this gives us 3 months before tank bottoms.

Scenario 3: 20% Petroline recovery with more FO burn Now assume for scenario 3 a similar 20% recovery on Petroline but with 200kbd from crude burn relieved by a corresponding 200kbd increase in FO burn (I purposely use kbd instead of my usual kt/ktpm this time to avoid the crude vs FO conversions). This will leave the crude side a more comfortable runway.

You can simply arrive at 150kbd extra HS imports required vs baseline by subtracting the additional burn demand by the re-directed FO exports into burn but I deliberately did it in a more roundabout way above to show all the assumptions and their relationships.

Finding that extra 150kbd of HSSR/HSFO will not be an easy task. Anything going through the Hormuz to the West Coast will face two big adversarial chokepoints as I mentioned so that’s probably unlikely. Perhaps more can be re-directed from Iraq to Saudi through either Syria / Jordan exports or directly to Saudi (I have not looked at the logistics for that before).

Pulling more of that from the Russian pool is technically possible but don’t forget that in recent months Russian exports have dipped to just above 550kbd. In any case, in this scenario we will need more molecules into the East-of-Suez pool somehow.

Lastly, if you assume unchanged runs and crude burn, minimise crude exports then run everything backwards, you get to just above 25% of recovery needed on the Petroline for unchange crude inventory – scenario 4 below.

(European HSFO arbs into Singapore)

The truth will lie somewhere in between all these scenarios. I give decent probability to somewhere between 20-40% recovery on the pipeline shortly but I’m clearly no expert in that area.

What is clear is that Atlantic basin high sulphur is still looking a lot weaker than the East even after the moves in the last 2 trading days. European arbs to Singapore are still shut by some $25-30/mt for non-sanctioned molecules but the econs are improving quickly. That in a way also indicates the additional room till a hard ceiling on 380 EW bites.

Happy counting barrels – certainly a fun pastime now that they decide to slow down AGI’s arrival!