Saudi Arabia has a new, and pricier, workaround to export its oil
Saudi Arabia has quietly re-stitched its oil export map to keep barrels moving to Europe and the Atlantic Basin while the Red Sea remains a contested and costly corridor. The workaround blends pipelines, transshipment, and longer sea routes. It preserves reliability—central to Riyadh’s market reputation—but it does so at a higher delivered cost per barrel.
What changed
– The southern Red Sea and Gulf of Aden became riskier for commercial shipping beginning in late 2023, upending normal flows through the Bab el‑Mandeb strait and the Suez Canal. Even when ships pass, premiums for war risk insurance and security have surged.
– For crude moving from the Persian Gulf to Europe, Suez is the short route. When it’s risky or congested, exporters face a choice: pay up for the Red Sea and Suez, divert around the Cape of Good Hope, or find a land bridge to the Mediterranean.
The new, pricier workaround
– Pipe-to-transship via Egypt: Saudi Aramco is using its East–West “Petroline” to move crude across the kingdom from its Gulf fields to the Red Sea port of Yanbu. From there, barrels can move north inside the Red Sea to Egypt’s Ain Sukhna and cross to the Mediterranean via the SUMED pipeline, then reload at Sidi Kerir onto tankers bound for Europe.
– Split and stitch the voyage: Where useful, Aramco and its partners can use smaller Suezmax/Aframax vessels within the Red Sea and then perform ship‑to‑ship transfers in the Mediterranean onto larger crude carriers. That adds flexibility but also handling costs.
– Go the long way around Africa: For certain destinations—especially in Northwest Europe or the U.S. East Coast—Aramco can sail from Yanbu or the Gulf and route around the Cape of Good Hope. It’s slower but avoids the most dangerous waters and Suez tolls.
– Rebalance outlets: More Saudi barrels that might have gone to Europe can instead be steered to Asia, while Europe pulls more crude from the U.S. Gulf Coast, West Africa, or the North Sea. Aramco then backfills Asian demand with its core Gulf loadings.
Why it costs more
– Distance and time: A Gulf‑to‑Rotterdam voyage via Suez is roughly half the nautical miles of a Cape route. Detouring can add 10–15 days to a VLCC roundtrip, with fuel, charter, and opportunity costs that can run into hundreds of thousands to over a million dollars per voyage depending on bunker prices and freight rates.
– Insurance and security: War risk premiums for the Red Sea have, at times, added several dollars per ton. Even with escorts, owners charge higher freight to cover risk.
– Double handling and tariffs: Using pipelines like SUMED and performing ship‑to‑ship transfers introduce extra fees and operational steps. You lose some economies of scale when you can’t move fully laden VLCCs straight through Suez and have to split cargoes or pay to pump them across Egypt.
– Fleet inefficiencies: Re-routing ties up tonnage for longer, tightening the tanker market and pushing up Worldscale rates for the very ship sizes needed in the Mediterranean.
Who pays
– In the short run, Saudi Arabia can trim official selling prices (OSPs) to defend market share or offer freight equalization to key customers. Over time, much of the higher logistics bill filters through to buyers—European refiners first—and then to end‑users via refined product prices.
– European refiners see squeezed margins on medium‑sour slates like Arab Light and Arab Medium versus alternatives that can arrive more cheaply, such as U.S. grades when transatlantic freight is favorable.
Market ripple effects
– Brent–Dubai dynamics: More Saudi barrels steered to Asia can tighten Middle East sour supply and influence the Brent–Dubai spread, which, in turn, steers arbitrage flows from the Atlantic Basin into Asia.
– Tanker market bifurcation: Higher demand for Suezmax and Aframax capacity in the Mediterranean and Red Sea raises those rates relative to VLCCs on other lanes, distorting normal economics and occasionally making multi‑leg routings surprisingly competitive.
– Product flows: If crude into Europe is costlier, refiners may trim runs, increasing Europe’s pull on imported diesel and gasoline, especially from the U.S. and Middle East refiners with advantaged routes.
The strategic upside for Riyadh
– Redundancy validated: The East–West pipeline exists precisely to reduce dependence on the Strait of Hormuz and to offer options when sea lanes are disrupted. Leaning on it now reinforces Saudi Arabia’s claim to be a reliable supplier in bad times as well as good.
– Regional leverage: Tapping Egypt’s SUMED and expanding storage at Yanbu and Sidi Kerir deepen Saudi‑Egypt energy interdependence and give Riyadh more knobs to turn on timing and destination of shipments.
– Optionality pays: A mix of owned VLCCs, time charters, and flexible sales terms lets Aramco redirect barrels quickly, protect core customers, and arbitrage freight dislocations.
What to watch
– Persistence of Red Sea risk premiums and any further changes to naval protection or insurance terms.
– Throughput and storage utilization at Yanbu, Ain Sukhna, and Sidi Kerir, signaling how much pipe‑to‑transship is being used.
– Saudi OSP adjustments for Europe versus Asia, which reveal how much of the logistics cost Aramco is absorbing.
– Tanker rate spreads between Suezmax/Aframax in the Med and VLCCs on long‑haul lanes, a key driver of routing choices.
Bottom line
Saudi Arabia’s workaround—pipe to the Red Sea, hop across Egypt when it makes sense, or swing wide around Africa when it doesn’t—keeps its oil flowing but at a higher all‑in cost. The kingdom is effectively paying more to buy reliability, and then passing that bill, in varying degrees, to the market. As long as the Red Sea remains volatile, expect Saudi exports to reach their destinations—with more contingencies built in, more intermediaries paid along the way, and a price tag that subtly reshapes global crude and product flows.
