September 16, 2019

Saudi Wealth and Weaponry Still Can’t Guarantee Oil’s Protection
(Bloomberg) -- How could Saudi Arabia, a country with the world’s third-largest military budget and six battalions of U.S.-built Patriot missile-defense systems, fail to defend the beating heart of the oil industry on which the kingdom depends?That question lies at the heart of responses to Saturday’s attack on Abqaiq, which cut Saudi oil production by half, and is critical to any assessment of whether investors will have to permanently factor higher political risk assumptions into the price of oil.As audacious as the strike was, it was only the latest in a series and should have come as no surprise. The effectiveness of the Saudi military machine has long been questioned, despite spending $83 billion on defense last year, compared to $45 billion for Russia and $20 billion for regional rival Iran. The kingdom’s formidably equipped air force has been bombing Iran-backed Houthi rebels in neighboring Yemen since 2015, but has so far failed to tip the civil war in favor of Saudi allies.Yet any firm answers to the question of Saudi vulnerability will have to wait for more clarity on exactly what happened on Saturday, according to air defense specialists. There are conflicting accounts as to what technologies were used -- a swarm of 10 armed unmanned aerial vehicles, cruise missiles or a mix of the two.“If it was a mixed attack, if you have small UAVs plus cruise missiles coordinated, coming in at low level -- that is a wicked problem to deal with, even for a capable Western military,” according to Douglas Barrie, senior fellow for military aerospace at the International Institute for Strategic Studies, a U.K. think tank. “The best place to stop this stuff is before it gets in the air.”Formidable ChallengeDefending against drones -- whether over airports or on the battlefield -- was a hot topic at the U.K.’s biggest annual defense show last week among the companies that manufacture and sell high-end defense systems to governments around the world, said Barrie.The nature of oil installations -- large, stationary and inflammable -- in any case makes their defense a formidable challenge, according to Barrie and others. So too their dispersion across Saudi Arabia’s vast empty spaces and the need to monitor thousands of miles of porous borders with Yemen, Oman, United Arab Emirates, Qatar, Kuwait, Iraq and Jordan.Until U.S.-Iran tensions subside, the risk of further attacks is likely to remain. In recent months, the U.S. has accused Iran of sabotaging tankers carrying oil through the Strait of Hormuz, while Houthi-claimed drones attacked pumping stations for Saudi Arabia’s East-West pipeline in May, and the Shaybah oil field in August. A Saudi military official said Monday that Iranian weapons were used in the latest attacks.“It’s very simple: The Iranians have tried several times to raise the price of oil,” said Ram Yavne, a retired brigadier general and former head of strategic planning in the Israel Defense Forces, who is now with the Jewish Institute for National Security of America, a Washington think tank. “They want to show the world that the price for the U.S. blocking their ability to produce oil is very high.”‘Highly Vulnerable’Iran, the target of crippling U.S. sanctions, has denied responsibility for all of these attacks, including Saturday’s. Some attempted strikes were foiled by Saudi missile defenses, but those successes are likely to be forgotten in the wake of the attack on Abqaiq, which took about 5% of the global oil supply off line.“There is but one rational takeaway from this weekend’s drone attacks on the kingdom’s infrastructure,” according to a note from Citi Research analysis. “That infrastructure is highly vulnerable to attack, and the market has been persistently mispricing oil.”The success of a drone strike against arguably the most important single piece of infrastructure in the global oil industry could also prove an embarrassment for Raytheon Co.’s high-cost Patriots.“What amazes me is, what happened to the American anti-missile systems?” said Fawaz A. Gerges, professor of Middle Eastern politics at the London School of Economics. “This reflects terribly on the U.S. and its defense systems. The Iranians know this now and the lessons learned here will be applied in Syria, Lebanon and others areas in the future.”S-400 CapabilitiesSaudi Arabia has been in talks to acquire the same S-400 advanced air-defense system that Turkey recently bought from Russia. The Russian weapon, though little tested in combat, has technical advantages over U.S. Patriots. It has a range of 400 kilometers (250 miles), versus the Patriot’s 160 kilometers, can destroy targets moving twice as fast and can be mounted for action in five minutes, compared with an hour for a Patriot battery.Buying S-400s would, however, risk a major rift between Washington and Riyadh, as well as U.S. sanctions -- and without necessarily providing the answer to drone attacks. In July, the U.S. said it authorized deployment of 500 troops to Saudi Arabia, as a strengthened “deterrent.”“The issue is that drones/cruise missiles cannot be dealt with with conventional defense like Patriots/Thad or aircraft. That problem nobody has solved not even US,” Ali Shihabi, a Saudi commentator close to the government, said in a tweet Monday. THAAD, for Terminal High Altitude Area Defense, is another large-format U.S. missile defense system.Russia pairs its S-400s with the smaller Pantsir-S1 system, to handle low flying and short range missiles that would slip past the larger ballistic missile defense system. Though Russia has deployed S-400s in northwestern Syria, it has used the Pantsir system to counter drone strikes.“Ideally, the Saudis need layered defenses, including short range point defense systems like the German Skyshield or Russian Pantsir to allow rapid engagements of small threats with cheaper systems than the massively expensive Patriot,” Justin Bronk, research fellow for air power and technology at the U.K.’s Royal United Services Institute, said in an emailed response to questions.For the Saudis, the first priority will likely be to ascertain the launch point of the attack. Depending on their size, drones could even be driven into the kingdom and launched at short range. “It’s true that this is not the most capable military, said Barrie of the U.K.’s IISS think tank. “But the opposition has an awful lot of advantages.”\--With assistance from Henry Meyer, Yaacov Benmeleh, Zainab Fattah and Vivian Nereim.To contact the reporter on this story: Marc Champion in London at mchampion7@bloomberg.netTo contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, ;Rosalind Mathieson at rmathieson3@bloomberg.net, ;Benjamin Harvey at bharvey11@bloomberg.net, Mark WilliamsFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
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