Attack on Saudi Aramco Renders Oil Risk Acute for Asian Importers

Solomon Islands switches from Taiwan to China; Thailand-China defense ties

The Big One.

Oil supplies tighten for Asia’s importers.

This Saturday, Sept. 14, 2019, satellite image from Planet Labs Inc. shows thick black smoke rising from Saudi Aramco's Abqaiq oil processing facility in Buqyaq, Saudi Arabia. Yemen's Houthi rebels launched drone attacks on the world's largest oil processing facility in Saudi Arabia and a major oil field Saturday, sparking huge fires and halting about half of the supplies from the world's largest exporter of oil. (Planet Labs Inc via AP)

Early morning on September 14 local time, explosive-toting drones—and possibly cruise missiles—struck Saudi Aramco oil processing facilities in eastern Saudi Arabia. The attack disrupted Saudi Arabia’s total oil output, decreasing it by 5.7m barrels-per-day (bpd) immediately. At Monday’s market open, Brent Crude futures prices spiked 19 percent; the attacks had immediately constrained global oil supply by more than 5 percent. 

This image provided on Sunday, Sept. 15, 2019, by the U.S. government and DigitalGlobe and annotated by the source, shows damage to the infrastructure at Saudi Aramco's Abaqaiq oil processing facility in Buqyaq, Saudi Arabia. The drone attack Saturday on Saudi Arabia's Abqaiq plant and its Khurais oil field led to the interruption of an estimated 5.7 million barrels of the kingdom's crude oil production per day, equivalent to more than 5% of the world's daily supply. (U.S. government/Digital Globe via AP)

As of this writing, the United States and Saudi Arabia have not yet definitely attributed the attack, which was claimed by the Yemen-based Houthis. U.S. officials have pointed at Iran, suggesting that the attacks may have come from Iranian territory, overflying Iraq and Kuwait in the process. The details remain indeterminate, but what is clear is that the incident has marked one of the most serious geopolitical acute shocks to global oil prices since the First Gulf War.

Asia’s major oil importers have reacted to the attacks. A sampling of a few of the major regional reactions:

  • Japan: Japanese Trade Minister Isshu Sugawara said on Monday that Tokyo was monitoring its oil supply and remained prepared to release its reserves if the situation deteriorated. Japan has oil reserves for 230 days of internal consumption.

  • China: China is the world’s largest importer of crude oil and is treating the recent attacks with the seriousness they deserve. In the months leading up to the attack, Chinese reliance on Saudi Arabia as a supplier had grown as Beijing whittled down its imports from Iran amid growing sanctions and from the United States amid intensifying competition. Beijing has also said that it is unwilling to attribute any blame for the attack without additional “facts”—an attempt to push back on what appears to be an eager effort by the Trump administration to point fingers at Iran.

  • India: India’s total fuel import bills are likely to rise, according to Singapore’s DBS Banking Group. For the Narendra Modi government, a prolonged price hike in crude may adversely affect the broader economy and intensify the economic headwinds that New Delhi already faces. One of the filips to Modi’s first term economic performance was the decline in global oil prices at the time.

  • South Korea: Similarly to Japan, South Korea has also said that it will consider the release of domestic strategic oil reserves if the situation continues to worsen. “The government will do its best to stabilize the demand and supply situation and prices, such as considering release of oil reserves if the situation worsens,” the South Korean energy ministry said.

Bottom Line: Energy risk for major Asian oil importers has shot up with the weekend’s attack on Saudi Aramco’s oil processing facilities and the commensurate 5 percent-plus drop in global oil supply.

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East Asia.

The Solomon Islands has formally announced that it will be switching its diplomatic recognition from Taiwan to China, leaving Taipei with just 16 diplomatic allies. As I’d discussed in the most recent edition of this newsletter, the Solomons’ decision was virtually assured. Belize, Guatemala, Haiti, Honduras, Kiribati, Marshall Islands, Nauru, Nicaragua, Palau, Paraguay,

Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, eSwatini, Tuvalu and the Vatican City are the sole remaining countries to diplomatically recognize Taiwan. Their cumulative GDP stands at around $177 billion. (Guatemala is the largest single economy to still maintain official ties.) The Solomons are the sixth country to have severed ties with Taiwan since the Democratic Progressive Party’s Tsai Ing-wen was elected to the Taiwanese presidency in January 2016. For the duration of former Taiwanese President Ma Ying-jeou’s tenure, Taipei and Beijing maintained a so-called “diplomatic truce,” whereby neither would attempt to poach the other’s diplomatic partners.

Taiwanese President Tsai Ing-wen discussed the Solomon Islands move on Monday, September 16, citing China’s attempts to win over Taiwanese diplomatic allies as part of Beijing’s broader interference in the upcoming January 2020 elections in Taiwan. “Over the past few years, China has continually used financial and political pressure to suppress Taiwan’s international space,” Tsai said. She described China’s moves as “a brazen challenge and detriment to the international order.” “I want to emphasize that Taiwan will not engage in dollar diplomacy with China in order to satisfy unreasonable demands,” she continued. Tsai had hosted Solomon Islands foreign minister Jeremiah Manele in Taipei earlier this month in an attempt to salvage the relationship. 

Bottom Line: China appears determined to continue to shrink Taiwan’s international space for maneuver; beyond plucking away Taiwanese diplomatic allies, Beijing has taken steps to prevent Taiwan’s participation in international organizations as well.

Don’t Miss It: The U.S. Treasury Department announced sanctions against the North Korean hacker collective known as the Lazarus Group and two of its named subsidiaries last week. A Treasury release also noted that “the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) and U.S. Cyber Command (USCYBERCOM) have in recent months worked in tandem to disclose malware samples to the private cybersecurity industry.”

South Asia.

China, which concluded a deal with Bangladesh in 2016 to provide submarines, will help construct a submarine base for the country, the Radio Free Asia-affiliated BenarNews reported earlier this month. The anticipated submarine base will provide facilities for the Bangladeshi Navy to berth its two Chinese Type 035B diesel-electric submarines. “We are going to construct a submarine base in Cox’s Bazar with Chinese assistance. We have procured two submarines from China, so we need a submarine base. Unless we build a base, where will the submarines be stationed,” retired Col. Faruk Khan told Benar News. “The Chinese will help us build the base and impart training to our personnel to operate the submarines and base. The Chinese submarines will not come here. The base is for our submarines,” he added. The project will be China’s first involvement in a naval facility project in Bangladesh.

The move will no doubt be viewed through geopolitical lens in India, where strategists have long been concerned by China’s network of dual-use facilities along the Indian Ocean littoral. A new China-involved naval facility at Cox’s Bazar will not be reassuring for New Delhi—or for Washington, Canberra, and Tokyo, all of whom see the Indian Ocean as an important area to maintain dominance. The Chinese People’s Liberation Army Navy has expanded its operations into the Indian Ocean for some years now and Beijing’s first overseas naval base is in Djibouti. Concerns continue to persist that China could expand its basing options by converting the Pakistani port of Gwadar for military use, or by pursuing other sites in the area—including potentially Cox’s Bazar.

Given India’s close diplomatic relationship with Bangladesh, New Delhi will no doubt communicate its red lines to Dhaka. Prime Minister Sheikh Hasina of Bangladesh has communicated Dhaka’s position on the matter: namely that Bangladesh would remain friendly to India. The Bangladeshi military and Ministry of Defense apparently did not respond to any queries from BenarNews on the question of the naval base.

Bottom Line: China’s involvement in a Bangladeshi naval base’s construction will raise eyebrows in New Delhi.

From the Ground: Reporting from Indian-administered Kashmir in August, The Diplomat’s Tapasya writes on the Indian government’s ongoing crackdown there: 

Tear gas was shot indiscriminately. As shells landed, the whole street from the mosque to the barricade was covered in clouds of thick smoke. The few journalists who were covering the event, apart from the protesting masses, were affected by the tear gas and had to take cover for a while. The locals were giving salt to apply on the face and water to drink. If it was not for their generosity, I would have been left in the middle of nowhere with burning eyes, coughing and suffocating.

Asia Defense.

Earlier this month, China and Thailand signed an agreement for the construction of a new landing platform dock (LPD) vessel. The deal would see the China Shipbuilding Industry Corporation (CSIC) help the Royal Thai Navy get an export version of the Type 071E LPD built. As my colleague Prashanth Parameswaran noted in his discussion of the agreement, few other details are available. As he wrote:

Few additional details were provided on the deal itself, including the exact cost and contractual terms and timelines. But Chinamil unsurprisingly played up the significance of the move, noting that this was the first time that China had exported the export version of the Type 071E LPD – a product of its advanced technology; maturity of use; and cost competitive – and that it marked “a major achievement” for China and Thailand within their comprehensive strategic partnership that was signed in 2015.

The Type 071E would be the largest warship to date to be exported by China. The Thai deal underscores Beijing’s growing competence as an arms exporter. The Type 071E, like the People’s Liberation Army Navy’s Type 071s, should be able to accommodate several hundred personnel for modest amphibious landing missions. For the Royal Thai Navy, the vessel may have applications in humanitarian assistance/disaster relief missions.

Bottom Line: A new China-Thailand deal underscores their growing defense ties.

In Case You Missed It: U.S. freedom of navigation operations, or FONOPs, in the South China Sea aren’t as newsworthy as they once were, but they’re still worth tracking. On September 13, U.S. Navy Arleigh Burke-class destroyer USS Wayne E. Meyer sailed near unspecified Chinese-held islands in the Paracel Islands in the South China Sea.

Extras.

Don’t miss the latest episode of the Asia Geopolitics podcast, where Prashanth Parameswaran and I discuss both the Solomon Islands’ decision to switch diplomatic ties from Taipei to Beijing and the energy implications of the Saudi attacks. You can also subscribe to The Diplomat’s Asia Geopolitics podcast on iTunes here; if you use Windows or Android, you can subscribe on Google Play here, or on Spotify here.

This newsletter is written by Ankit Panda, senior editor for The Diplomat, and director of research at Diplomat Risk Intelligence. Please do feel free to reach out with comments, tips, and feedback at ankit@thediplomat.com and follow me on Twitter at @nktpnd and The Diplomat at @Diplomat_APAC.