Bousso: The quest of ROI-Gulf Exporters to bypass Hormuz is reshaping the region.

Middle East oil producers will have to face the consequences. The Iran War exposed the dangers of relying solely on one chokepoint to export vital oil and natural gas. Gulf governments were left with a clear strategy imperative: diversify at all costs. A blockade of Strait of Hormuz by Iran was long viewed as an "event of doomsday". It would never occur. Experts believed it would take a massive military effort, and Tehran would not be willing to choke off its own exports. These assumptions proved to be wildly wrong. Iran used cheap drones, small vessels, and mines to impose a nearly airtight blockade, but continued to export its oil.

The result was a global energy crisis that affected the entire region.

The countries lost export revenue and had to close down 11 million barrels of oil per day (bpd), along with refineries and LNG installations.

Washington and Tehran agreed to negotiate an agreement for a permanent ceasefire, but the "Hormuz Genie" can't be put back in the bottle. Future closures now pose a persistent and real risk to the region's economy and its people.

The Gulf countries have become economically dependent on developing alternative routes to export energy, chemicals, and fertilisers.

Pipeline Dreams

Saudi Arabia is the best example of how building pipelines to circumvent Hormuz can be beneficial.

The world's largest oil exporter diverted 60% of its shipments before the war to the Red Sea Port of Yanbu using a pipeline that crossed the country from the Gulf Coast. In the 1980s, Saudi Aramco, the state-owned oil company, built the 1,200 kilometre (745 mile) route to protect against such a scenario.

The strategic foresight was rewarded.

In April, the International Monetary Fund stated that it expected Saudi Arabia's economic growth to be 3.1% by 2026. This is just 1.4 percentage point less than its pre-war prediction.

According to the IMF, Qatar's economy, which has no other routes for its oil exports and LNG, could contract by 8.6% in this year after growing by 2.8% by 2025.

Other regional players are taking note.

United Arab Emirates were able to bypass Hormuz in part by using their pipeline?to the Fujairah terminal located outside the Strait. Fujairah was damaged by Iranian fire but the UAE still managed to export 1.8 million barrels per day, or roughly half its pre-war production.

Abu Dhabi, who left OPEC last May to pursue a growth strategy that is ambitious, has now accelerated construction of a new pipeline, doubling export capacity through Fujairah to 2027.

Iraq is still in a very unenviable situation. The majority of the country's production is based in the south, so it is heavily dependent on Hormuz. Companies and authorities in Iraq are therefore looking at ways to improve and expand the northern export routes via Turkey and Syria. Security and political concerns are still major obstacles.

THE QATARI CONUNDRUM

Qatar and Kuwait are faced with a much more complex problem. Both countries, lacking alternative export routes on their own territory, will be forced to rely on neighbours in order to circumvent Hormuz.

Qatar is the world's largest LNG exporter. For Qatar to gain access to beyond the Strait of Gibraltar, it would have to build a pipeline across the Red Sea or through Saudi Arabia, either via Fujairah, Oman or the UAE. Each option has its own geopolitical and economic complications.

Costs would be astronomically higher if such projects required constructing new liquefaction capacities outside of the Gulf.

This would also make Qatar highly dependent on Saudi Arabia and the UAE, countries whose relationship with Doha has?been strained over recent years. This creates the political and strategic risk that Qatar has sought to avoid for years.

Kuwait faces a similar dilemma. To develop alternative export routes, it would be necessary to deepen energy integration with Saudi Arabia. This highlights how geography could reshape future regional alliances.

DIVERSIFICATION OVERSEAS

Diversification of geographic focus beyond the Middle East is another response that has gained traction.

Gulf national oil companies have been expanding overseas operations to create a hedge for future disruptions in the region. QatarEnergy (QE) and Abu Dhabi National Oil Company(ADNOC), which have built international portfolios that include oil, gas, and renewables, are leading the way.

This trend will likely accelerate. Acquiring stakes overseas in upstream assets such as refineries, LNG installations and storage terminals would generate valuable income streams, which are not exposed to Gulf risks. Such investments are a good way to ensure that you can still grow in a world without the certainty of Hormuz.

The race to diversify will shake up government strategies, reshuffle alliances and redirect investments as Middle East producers start the recovery process. It could, in other words reshape this region for many decades.

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(source: Reuters)