Canal to bypass Strait of Hormuz??

This story has popped up a few times today.

Arab policy makers in the Persian Gulf are turning to eccentric plans in their quest for an alternative shipping route for about a fifth of the world’s oil transported through the Strait of Hormuz.

Dubai, home of the Middle East’s largest-container port within the Gulf, is the latest Arab sheikdom to study projects to bypass the Hormuz shipping lane that’s vulnerable to Iranian attack.

According to a senior Dubai government official, planners have proposed building a giant canal across the desert that could handle the huge oil tankers and freight ships that currently sail through Hormuz.

If built, the channel would rival the existing Suez and Panama canals as a major conduit for world sea-trade and crude oil shipment. But the costs of such a project, estimated by industry experts familiar with the plans to be in excess of $200 billion, could be prohibitive.

“Many studies on this have been presented but nothing is solid,” said the senior Dubai-government official, who declined to be identified.

But the fact that such a grand plan exists demonstrates how concerned Gulf Arab leaders have become by the Iranian threat to their main trade route. The Islamic republic’s repeated assertions to close Hormuz if its nuclear research plants are attacked by Israel, or the U.S., have been a major factor in driving oil prices higher over the past year.

Crude oil is down about 25% since its $147.27 peak on July 11 when tension between Iran and the U.S. peaked.

One of the world’s most important oil choke points, the 50-kilometer-wide Hormuz channel, conveys about 17 million barrels a day of Gulf crude, or roughly two-fifths of all oil shipped by sea.

“It would definitely ease market concerns and would lower the insurance premium currently paid by tankers passing through Hormuz,” said Manoucheher Takin, senior analyst at the Center for Global Energy Studies in London.

The premium for vessels carrying 300,000 metric-tons of crude at a value of $32 million from Kuwait through the Persian Gulf to Europe is equivalent to $24,000 for the entire voyage, according to Lloyds Underwriters.

Iranian Threat

Tensions are rising between Iran and Arab states in the Gulf amid a smoldering territorial dispute between Tehran and the United Arab Emirates over the ownership of islands in the Persian Gulf.

This builds on an already tense situation as Iran faces off with the U.S. and its allies over the Islamic republic’s quest to enrich uranium and develop nuclear power plants.

“Iran has clearly stipulated its intention to close the Strait of Hormuz in case of a military conflict in the region,” said Mustafa Al Ani, a senior advisor at Dubai-based think tank Gulf Research Center.

Defending the strait is currently a major preoccupation of the U.S. Fifth Fleet in the Gulf, where the largest U.S. naval force in the region has an armada of vessels including nuclear aircraft carriers ready to counter Iran.

Iran’s military, the largest in the Gulf, presents a formidable adversary, however.

Shipping in the Gulf is vulnerable to attack because of Iran’s long coastal waters, a fact painfully demonstrated in 1987 when the Islamic republic targeted commercial vessels with ease in what became known as the “tanker war”.

Other Routes

Dubai isn’t alone in looking into building a canal to link the Persian Gulf with the open sea.

Neighboring emirate Ras Al Khaimah, one of seven semiautonomous sheikdoms in the U.A.E., considered a plan to build a shorter canal across the Hajar mountain-range to the country’s east coast but was put-off by its vast cost, according to a Dubai-based engineering consultant familiar with the proposal.

Meanwhile, plans that emerged last year to build a storage center for liquefied natural gas outside the Gulf and the Hormuz channel remain on the drawing board.

People close to the proposed Dubai plans told Dow Jones that the canal would follow a route of about 180 kilometers from the emirate’s northern Gulf coast to the East coast port of Fujairah.

The scale and cost of the canal venture is unlikely to deter Dubai’s rulers who have an appetite for vast infrastructure projects. These include the world’s tallest skyscraper; the construction of three Palm-shaped Islands in the Gulf that are visible from space and the world’s largest airport currently under construction.

To be sure, the economics of such a canal are largely untested and the vast cost of building the link could make the project unfeasible, or as Global Energy’s Takin says “it’s not certain if the benefits would justify the costs.”

Pipelines could provide a more cost-effective alternative to Hormuz.

Dubai’s richer cousin Abu Dhabi, holder of the world’s fifth-largest oil reserves, is building a pipeline linking its oil fields with Fujairah, conveniently bypassing Hormuz. The link will have the capacity to carry about 1.5 million barrels a day of crude oil and feed an export refinery.

But this pipeline would only carry U.A.E. oil, leaving producers such as Qatar, Kuwait, Saudi Arabia and Iraq still without an alternative shipping route to Hormuz.