Hijacking of Saudi Supertanker Likely to Affect Gulf Crude Transport Economics

The Pirates Attack

Saturday's hijack of the Sirius Star, a Saudi-owned 330-metre long, very large crude carrier (VLCC) operated by the Saudi national oil company (NOC) Saudi Aramco's Dubai-based shipping arm Vela International, represents the largest ever ship hijack by pirates and is a clear escalation of the threat to global shipping in the extended region. Sirius Star, with a tonnage of 318,000 deadweight tons (DWT) is very modern—having been launched from its South Korean shipyard in March this year—and carries a crew of 25, from Croatia, Britain, the Philippines, Poland and Saudi Arabia. The ship was carrying 2 million barrels of Saudi crude, having been intercepted en route from the Saudi Arabian Ras Tanura export terminal to the St Eustatius terminal in the Netherlands Antilles in the Caribbean, with its cargo ultimately going to the United States.

Crude oil prices yesterday immediately reacted as the news spread, rising by more then US$1/barrel, to US$58/barrel, although falling back later in the day. This further illustrated the bearishness of the current market, in a stark contrast to the price reactions to supply threats during the first half of the year.

Targeting the Veins of the World Economy

The attack is the most brazen on the international shipping lanes to date, more then doubling the pirate's reach compared with previous attacks, as the ship was boarded around 450 nautical miles south east of the Kenyan port of Mombasa, according to the U.S. 5th Fleet which patrols the area. The most far-reaching attacks against ships sailing along the Somali east coast or through the Gulf of Aden have hitherto still been within a 200-nautical-mile radius. The vast extension of the pirates' reach will extend the area deemed as insecure by international shipping—and more importantly by insurers—which already includes the whole Gulf of Aden, large swathes of the Arabian Sea and the 200-nautical-mile radius along Somalia's drowned-out Indian Ocean coast, as well as parts of Kenya's northern waters. Supertankers like the Sirius Star are too large to navigate through the Suez Canal, making a journey around Africa necessary to reach ports in Europe and North America. The successful targeting of the ship therefore heralds new tangible threats to one of the world economy's lifelines, bringing virtually all crude shipping from the Gulf to the West—whether by smaller tankers having to pass thorough the Gulf of Aden on their way to the Suez Canal, or the crude carried on VLCCs around the Cape of Good Hope—in range of possible attacks. As a result, shipping insurance premiums are likely to rise significantly and immediately, while tankers will be rerouted further from the east African shores, increasing their journey time.

The cost of insurance represents one of the larger fractions in the cost of crude, or LNG, transport by ship, making premium rates immediately filter through to freight rates and, ultimately, to the crude price. The successful pirate attack 450 nautical miles south east of Mombasa might well mean that ships will be forced by insurers to sail so far from the Somali and Kenyan shores that a course eastwards of Madagascar will be plotted, adding significantly to the time and operative cost of the voyage itself, piling even higher transport costs to the crude costs at import terminals and refineries.

The attack on one of the world's most crucial shipping lanes and a vital artery of the world economy is likely to focus attempts to secure the area from piracy and protect vessels passing. Several naval task forces are already operating in the region, with NATO and EU missions playing the largest parts and being assisted by naval presence from Russia and Malaysia. While the United Nations (UN) has given international naval task forces a mandate to protect shipping lanes and cooperate with the embattled Somali government, the international legal situation has been unclear and the taskforces have found it hard to bring captured pirates to justice, as well as conduct raids against their on-shore hideouts. The stepped-up threat against Western energy supplies caused by the pirates is however likely to result in a more concerted effort to clarify the legal scope and allow the naval forces to take more proactive actions.

The Somali Problem

Piracy has been a recurring problem off the Somali coast and the Gulf of Aden in recent years, with the problem seemingly reaching its nadir with the abduction of the Ukrainian freighter—the MV Faina—back in September whilst carrying a consignment of deadly arms, including 33 Soviet-type T-72 tanks, huge quantities of ammunition, and grenade launchers, making international headlines. Whilst the UN-backed effort to internationally police the Somali waters has helped slow down the piracy attacks in the region lately, the abduction of the Sirius Star serves as a reminder that the battle is far from won and may actually get worse before it gets better.

The increase in piracy attacks in the past year has coincided with an upsurge in insurgency activities in Somalia proper, suggesting a link between the two. There are claims that some of the ransom money being paid to the hijackers often ends up in the pockets of politicians on both sides of the current political dispensation, as well as the Islamist militias. As such, the piracy problem which is threatening to disrupt international trade should be seen as a symptom of the current political and security crisis in Somalia and the international community must therefore seek a comprehensive solution to the twin problems, rather than just focusing on problems at sea.

Environmental Risks

Fears have also been aired that the super tanker might be vulnerable to mishandling by the pirates as they direct it towards the north-eastern Somali town of Eyl. While the Sirius Star is most likely being navigated by its crew—under duress—the complexity involved in steering a ship of its size and weight close to the shallow Somali shoreline might not be completely understood by the pirates, potentially aggravating the risk for it to be run aground and causing an oil spill of catastrophic dimensions. As the situation is now a hostage situation, the potential for a rescue raid using force will also be limited, with the existence of heavy arms around the ship in itself posing an additional security risk in the vicinity of such a quantity of crude.

Outlook and Implications

The pirates are now in control of over US$100-million worth of crude and are in a position to start lucrative negotiations. They will be confident of being able to acquire a huge cash ransom in return for the vessel, the crew and of course the crude. It is likely that the pirates will start off setting their price very high but as negotiations take place the price could come down to US$50 million. The retrieval of the vessel and crew is likely to be carried out by a political risk and security firm with considerable experience in responding to these actions. Due to Somalia's status as a failed state and the anarchic nature of politics in the country, the negotiators have no other option but to respond to the pirates; there is no government which can intervene. There is unlikely to be a swift resolution for the Sirius Star as the MV Faina vessel which was hijacked back in September is still to be recovered. Yet due to the size of the vessel and its US$100-million crude treasure this debacle has brought the issue of Somalian piracy to the fore despite the numerous incidents over the past few months. This incident will force all companies with any involvement in shipping and especially crude tankers to re-consider how it operates in this region of the world and it seems certain now that commercial vessels will be forced to have onboard private security firms to protect the vessels and its cargo. The magnitude of the Sirius Star hijacking should also force governments and international organisations to take greater concern in Somalian piracy and its effect not only on international commerce, but also how it continues to betray any hope for a more stable domestic situation in Somalia.