Everything changed for the oil industry after Saturday's drone attacks in Saudi

TECHNICAL breakthroughs, such as directional drilling and fraccing, have helped create a global petroleum glut but Slugcatcher reckons the drone attacks in Saudi Arabia could be the military side of new technologies, forcing oil production cuts and higher prices.
Everything changed for the oil industry after Saturday's drone attacks in Saudi Everything changed for the oil industry after Saturday's drone attacks in Saudi Everything changed for the oil industry after Saturday's drone attacks in Saudi Everything changed for the oil industry after Saturday's drone attacks in Saudi Everything changed for the oil industry after Saturday's drone attacks in Saudi

The dark side of tech breakthroughs could have wide reaching implications for industry 


It's too early yet to know exactly what happened in the Saudi oilfields, including who was ultimately responsible for the attacks, or where they came from. It could be Houthi rebels in Yemen, it could be Iran.
Important as answers to those questions might be the far more important issue is that the weaponisation of hard-to-detect miniature drones falls into the worst-nightmare category for the oil and gas industry, especially at facilities in contested regions, which is much of the Middle East.
The latest generation of low cost drones have just demonstrated how they can inflict devastating damage on oil installations at minimal cost.
In effect, technology innovation which has worked so well for the oil and gas industry has just felt the first impact of the dark side of technology.
And that's the real issue because once invented, demonstrated and deployed there is no doubt that drone attacks will define how wars are fought in the future and how the oil and gas sector will be a prime target - as it is in every conflict.
What's known so far about the Saudi attacks is that at least 10 drones hit two key oil installations, knocking an estimated 5.7 million barrels of processing equipment offline, a number equivalent to more than 50% of the country's output.
Some of the damage is likely to be repaired quickly while inventories held in at least three locations around the world will ensure that the country's oil champion, Saudi Aramco, will not miss a delivery.
But that mention of Saudi Aramco introduces another aspect of the drone attacks and the damage done because the business itself is at a delicate point in its history with a planned listing on the Saudi stock exchange - an event now likely to be delayed.
The immediate financial implications of the drone attack are likely to first be measured on oil markets as they open today with widespread expectations of a sharp rise in the oil price - and an equally widespread view that the jump will be short-lived.
Looking beyond what happens this week is far more important because it can be argued that the world, especially the world of oil and gas, will never be the same after such a powerful display of drone technology with changes ahead that include:
• Geopolitics. The Middle East shifted a notch closer to a fresh war which this time will pit Saudi Arabia against Iran, formalising a dispute over the different views of the Islamic religion which has manifested itself in proxy wars from Lebanon and Syria to Yemen and North Africa.
• Energy security. A full-blown Saudi/Iran conflict will close the Straits of Hormuz at the eastern end of the Persian Gulf through which much of the world's oil and gas flows.
• The US will side with Saudi Arabia in any conflict but it's not the only global power with an interest in what happens. China has economic reasons to see oil flows maintained whereas Russia does not. China is hurt by higher prices, Russia is a winner.
• Oil and gas from "safe" regions will attract a premium with Australian LNG producers likely to already be fending off fresh inquiries about shipments just in case the Saudi situation spirals out of control.
• Who's next? That really is the $64 trillion question because the drone attacks, apparently carried out over a long distance means that no oil and gas facility anywhere in the world can be considered safe until a reliable and effective drone-killing response is developed.
Helima Croft from RBC Capital Markets told the Financial Times newspaper in London that she doubted whether the oil market appreciated the severity of the risk from the attacks.
"Aramco has really invested in beefing up security but these groups only have to be lucky once," she said.
The New York Times said the Houthi rebels were part of a regional militant network aligned with Iran which is reported to have dispatched technicians to Yemen to train Houthis in drone and missile systems.
The NYT said investigators with the United Nations had written about the Houthis having acquired advanced drones that could have a range of 930 miles (1500km).
The Wall Street Journal said that the drone attacks could prove, in the long run, to be more significant than Iraq's invasion of Kuwait and threats to the Saudi oilfields which saw prices more than double over two months in 1990.
"After the smoke clears and markets calm down, the technological sophistication and audacity of Saturday's attack will linger over the energy market," the WSJ said.