Russian-Israeli Cooperation: A Threat to Saudi Oil?

Possible Prophetic "Hook In The Jaw"?
Jul 16, 2003

Stratfor Intelligence

Summary

Israel has completed modifications to its primary transit pipeline, known as the Tipline, which will allow Russian crude to reach Asia. The line not only will enhance Israeli energy security and Russia's economic prospects, but it also will bite deeply into Saudi Arabia's bottom line.

Analysis

Effie Milutin, commercial director at the Eilat-Ashkelon Pipeline Co. said July 16 that modifications to the Tipline, Israel's primary oil transit line, are complete and the line can now transport crude oil in either direction. The development is a coup not only for Eilat-Ashkelon, but for Asia as well.

Though Israeli-Russian relations during the Cold War can only be described as hostile, the two states now see themselves as partners in many respects. About 1 million Russian Jews have immigrated to Israel since the Cold War ended, shoring up cultural and economic links between the two states. The war in Chechnya also has given Russian authorities an appreciation for Israel's security concerns, and the two harbor the same fears about Islamist militants.

In the post-Sept. 11 environment, Russia and Israel also have discovered that they share a new rival: Saudi Arabia. Various Saudi factions support both the Palestinians in Israeli-occupied territories and the Chechens in southern Russia. The Kremlin suspects a Saudi hand in the recent suicide bombings in Moscow as well. Both Israel and Russia consider al Qaeda a scourge to be uprooted and eradicated, and -- like the United States -- have not been surprised to discover that al Qaeda's financial paper trail leads back to Saudi Arabia.

There is an economic dimension to the rivalry as well. Saudi Arabia is the key player in OPEC and endeavors to keep oil prices robust. That grinds on the nerves of energy-poor Israel, which imports 99 percent of its oil needs. Riyadh cooperated with U.S. authorities in the past to tank oil prices in an effort to bankrupt the Soviet Union. Though now under new management, Moscow has been about as forgetful of this as an elephant.

This makes the modifications to the Tipline all the sweeter for Russia and Israel. The line, built in 1968, originally allowed Iranian crude to bypass the Suez Canal. When Islamists came to power in Tehran in 1979, however, the Tipline largely was shut down; it has been used since only for the odd shipment from Egypt's Red Sea production areas. But when the last intifada began in September 2000, even Egyptian transit all but dried up.

With the new modifications, however, Russian crude now can flow in the opposite direction. This represents far more than just a few transit fees for cash-crunched Israel. The bulk of Russia's waterborne exports come from the Black Sea ports of Tuapse, Odessa and Novorossiysk. However, Turkish transit restrictions on the traffic-choked Bosporus and Dardanelles keep Russia from using supertankers for its Black Sea exports, dramatically limiting the distance Russian crude can travel economically.

Israel, with a daily crude demand for 278,000 barrels, not only falls within the range that small Russian tankers can service at reasonable costs, but the Tipline option allows Russian crude to be shipped further still, since both Ashkelon and Eilat and can handle supertankers. Small Russian tankers can now dock at Ashkelon and load their crude into the Tipline, which will ship the crude south to supertankers waiting at Eilat. The crude then can proceed to any place in South or East Asia. The line is currently operates at 400,000 bpd, but easily could be expanded to its design capacity of 1.2 million bpd.

The details of the deal that have emerged so far are sweet enough to please officials in both Israel and Russia, but this very bright cloud has one very special silver lining. For the past 20 years, the Persian Gulf states -- especially Saudi Arabia -- have held a de facto monopoly over crude supplies to East Asia, allowing them to charge an "Asian premium" that at times has ranged as high as $3 a barrel. In 2002, some 40 percent of Saudi Arabia's 7.0 million bpd in exports went to Asian consumers. That surcharge alone netted Riyadh a tidy $1 billion to $2 billion in supplemental profit.

Saudi Arabia hopefully spent the income wisely, because Riyadh won't be seeing that cash again. With the onset of Tipline operations, Russian crude can compete directly with Saudi supplies anywhere in Asia. The Tipline's existing capacity will quadruple Russia's presence in Asian markets, assuming no additional upgrades -- which are almost a foregone conclusion. Courtesy of Russian crude and an Israeli pipeline, the Saudi windfall -- and crude prices throughout Asia -- are about to lose their edge.