Energy Sector Braces for Iran Tensions Amid Rising Resilience Costs

Energy companies operating in the Middle East are making preparations for a potential escalation of tensions involving Iran, with industry leaders highlighting the increasing financial burden of maintaining operations during conflict. Executives speaking at Adipec in Abu Dhabi indicated that while companies are now better equipped to handle disrupted supply chains after months of adaptation, the cost of this resilience is mounting.

These adaptations include stockpiling critical supplies, rerouting transportation, and optimizing workforces to withstand further disruptions. Several executives noted that this enhanced preparedness comes at a significant financial cost. These remarks followed a US strike on Iran's Qeshm Island, targeting a missile launcher after an American drone was downed near the Strait of Hormuz. This incident reignited concerns about renewed regional conflict, coinciding with the US midterm elections, which could shape future US policy in the region.

For energy firms, the critical question has shifted from whether another escalation will occur to how long they can sustain operations if it does. Sharif Foda, CEO of NESR, stated that his company has continued operations by relying on domestic employees and maintaining adequate supplies to endure prolonged logistical challenges. "We will be able to continue to operate as long as our clients are operating," he affirmed. "We are not going to evacuate. We are staying." NESR has implemented a 30, 60, and 90-day contingency plan, stockpiling spare parts, chemicals, and essential materials within the countries of operation, enabling them to maintain operations even when international supply routes are unreliable. Mr. Foda emphasized the importance of a local workforce, calling localization a necessity rather than a preference.

While some businesses have managed to maintain operations, others have faced difficult financial decisions. Youssou Jules Diop, executive director of Helix SEN, revealed that the conflict had necessitated a 30% reduction in his company's management team. Helix SEN maintains its treasury, board, and key decision-making functions in the UAE, which Mr. Diop identified as a crucial hub for African businesses, underscoring that "The ABC of business is trust and confidence."

The financial strain is widespread across the energy sector, particularly for companies reliant on maritime transport through the Strait of Hormuz. Bruno Placha noted that initial disruptions severely impacted operations as vessels ceased entering the region. "If we don't have vessels, we don't have work," he stated. The threat to shipping remains acute, with the International Maritime Organisation reporting at least 125 vessels attacked in and around the Strait of Hormuz since the conflict began, including a record 34 attacks in October. Companies have responded by utilizing alternative ports and increasing reliance on road transport over sea. These adjustments have also involved workforce reductions and a greater focus on longer-term projects to lessen dependence on regular shipping schedules.

George Alexopoulos, deputy CEO of HELLENiQ Energy Holdings, highlighted the essential, albeit expensive, nature of maintaining alternative supply arrangements. Following disruptions to crude shipments from Basra, Iraq, the company sourced replacements from the North Sea, the US, and West Africa. "Optionality has a cost and especially at times of crisis," Mr. Alexopoulos remarked, citing tanker charter rates on Gulf routes to China reaching $1 million per day as an example of extraordinary expenses. "What is the alternative? Shut down your operations, so you have to go on." His sentiments were echoed at Adipec by Dr. Sultan Al Jaber, Minister of Industry and Advanced Technology and Adnoc group CEO, who called for enhanced energy infrastructure and diversified supply routes amidst surging shipping costs.

Despite industry adjustments, executives caution that a prolonged escalation could expose vulnerabilities that cannot be quickly remedied. Robin Mills, CEO of Qamar Energy, acknowledged progress in rerouting logistics, expanding port capacity, and utilizing road and rail networks, but stressed that these measures are insufficient for long-term resilience. "There's a limit to what can be done in the space of eight months," he observed. Major infrastructure projects require years to complete, leaving energy facilities and shipping routes susceptible to further attacks. Nonetheless, energy companies remain active, with increasing demand for maintenance, repairs, security, and infrastructure development.

This resilience is being built as the UAE continues to advocate for conflict avoidance while preparing for potential escalations. For Mr. Alexopoulos, even an immediate cessation of hostilities would not result in a swift return to normal business conditions. He warned that damaged infrastructure, refinery disruptions, and shipping shortages could take weeks to normalize, with full recovery potentially spanning years. His primary advice for companies navigating the increasingly unpredictable energy market is to "Keep options. Develop and maintain options. Options have a cost, but in this environment you have to pay the 'option premium' in order to be able to handle this and the next and the next crisis."