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August 20, 2012

Getting Around Iran: Pipeline Boom by Oil Companies in the Middle East

By Mathew Weinschenk of Wall Street Daily
I was once the economic advisor for the nation of Turkey.

Of course, this was years ago during an international policy class in college. (I was assigned the post though a random drawing for a two-day international relations simulation.)

Turkey has a pretty vibrant economy – some are even calling Istanbul the new Paris. But at the time, the assignment was extremely boring. We spent a lot of time talking to the guys on team Ecuador because no one was paying attention to them, either.

Anyway, when the nerd who was acting as our Prime Minister showed up late for day two, I decided we should close the Bosphorus Strait just to stir things up. Well, all hell broke loose. I haven’t seen college kids that animated on a Sunday morning before – or ever since.

Currently, however, Iran is playing its own game of international relations – threatening to forcibly close the Strait of Hormuz, an important shipping channel.

About 13.4 million barrels of oil pass through the Strait of Hormuz every day. That’s almost one-third of the oil shipped by sea worldwide.

Politically, the probability that Iran actually closes the Strait is low. Militarily, they can’t keep it closed for long. But like any smart business, the countries that export oil through the Strait have begun considering options to get around the blockade. Like adding pipelines to keep the crude oil flowing.

Pipelines already pepper the Middle East, but there isn’t nearly enough capacity to replace all sea-based shipping. Only about 2.8 million to 4.3 million barrels per day could be rerouted, according to the International Energy Association.

That’s why long-shelved plans to build new pipelines have recently been dusted off.

CPECC, a division of PetroChina (NYSE: PTR), recently completed the Abu Dhabi Crude Oil Pipeline. Meanwhile, the United Arab Emirates just awarded a contract to a private German firm to build a 142-mile pipeline from its oilfields to a port that’s much farther down the Strait.

Saudi Arabia constructed two pipelines in 1992 to get around the Strait. But since Saudi Arabia exports most of its oil west to Asia, the pipelines haven’t been used much – and one has been converted to natural gas. Now it looks like that might be converted back.

Now, no single company will build all the pipelines, and significant contracts will go to foreign and private firms. But considering there’s already a huge surge in natural gas pipelines, this new development adds a significant amount of pressure to demand.

And as demand ticks higher, here are two of the best ways to play the trend…

The most likely benefactor of this boom would be Halliburton (NYSE: HAL). The company has been building pipelines in the Middle East for ages. Last year alone, revenue from its Middle East division rose 16%.

If you’re looking for a smaller company (which would get a more dramatic boost from a new pipeline contract), check out Jacobs Engineering Group (NYSE: JEC). While it’s still a sturdy $5 billion company trading around 14 times earnings, Jacobs could see more of an earnings boost from an uptick in Middle Eastern activity. Jacobs is already building the pipelines for the Arabiyah Gas Development Programme in Saudi Arabia, and recent acquisitions have expanded its Middle Eastern footprint.

Bottom line: If Iran closes the Strait, it would wreak havoc in energy markets. But as oil companies protect themselves against such a disaster, it could end up being a profitable opportunity anyway.

Courtesy Mathew Weinschenk at Wall Street Daily (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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