As Red Sea blockade threat grows, Korea weighs Suez Canal as crude import route of last resort

Korea is weighing the Suez Canal as a fallback route for crude oil imports should a worst-case scenario materialize — namely, a full blockade of the Red Sea by Yemen's Houthi rebels as the U.S.-Iran conflict intensifies.

However, experts warn this route is the least economical option and ultimately unsustainable.

Rounding Africa's Cape of Good Hope via Suez takes roughly three times as long as transiting the Strait of Hormuz, which dramatically drives up charter costs, while vessels can carry only about half their usual cargo in a single passage.

"Should the Red Sea itself become blockaded, we are considering routes through the Suez Canal, among other options," said Yang Ki-wook, director-general of the Office of Industry, Trade and Resource Security at the Ministry of Trade, Industry and Resources. 

"We are also pursuing measures such as releasing strategic reserves and resuming refiners' oil-swap programs."

The contingency planning comes after Yemen's Iran-aligned Houthi rebels on Monday declared a maritime blockade of Saudi Arabia through the Bab-el-Mandeb Strait in the Red Sea, calling it retaliation for Saudi airstrikes on Houthi-controlled Sana’a International Airport. 

The Bab-el-Mandeb Strait in the Red Sea has been the major alternative to the blocked Strait of Hormuz, with Saudi Arabia rerouting crude through existing pipelines and through its Red Sea port of Yanbu.

Up to 7 million barrels of crude and refined products can pass through the strait daily, accounting for roughly 7 percent of global oil shipments. Saudi Arabia has said it plans to expand that capacity to around 9 million barrels.

The Strait of Hormuz had long overshadowed the route as the primary artery, but since the outbreak of the Iran war, energy exports through the Bab-el-Mandeb have averaged 4 million barrels a day over the past month, roughly four times the volume from a year earlier. 

Crucially, roughly 80 percent of the Saudi volume moving through the Bab-el-Mandeb Strait is bound for Asian markets like Korea, China and Japan. If the Red Sea route is closed, it would sever Asia's principal artery for crude imports.

One remaining option is the Suez Canal route, rounding Africa's Cape of Good Hope en route to Asia — a journey of roughly 60 days. That’s about three times as long as transiting the Strait of Hormuz, adding 40 days' worth of fuel and charter costs along the way.

"The Suez Canal is too narrow for conventional Very Large Crude Carriers (VLCCs), which can carry up to 2 million barrels, to pass through, so vessels can only carry about half the crude they would normally bring in a single voyage," said Chang Tae-hun, a researcher specializing crude oil at the Korea Energy Economics Institute.

"The Suez Canal charges tolls, and if everyone tries to route through there, those tolls could keep climbing," Chang said. "Routing through the Suez Canal simply isn't economical under these circumstances, so it can't really serve as a viable alternative," Chang added.

Ships carrying 1 million barrels of crude currently pay roughly $500,000 in tolls to transit the Suez Canal, while the latest LNG carriers pay between $300,000 and $500,000, according to the Suez Canal Authority.

However, Korean refiners say Middle Eastern crude remains indispensable, given the highly sophisticated refining equipment they've built up over the years. 

To reduce its reliance on the Middle East's heavier crude, Korean refiners have invested billions of dollars in upgrading their refineries to process lighter grades sourced from countries like the United States. 

"We have enough supply secured through September, but beyond that, we'd been operating on the assumption that the Strait of Hormuz would reopen, and discussing long-term contracts on that basis," said a spokesperson for HD Hyundai Oilbank.

 "We're bringing in crude from the United States and South America, but it still needs to be blended with heavier Middle Eastern crude — so no matter the cost, we have to embrace the Middle Eastern supply."

Korea's Industry Ministry said the country has already secured more than 110 percent of its average crude needs for July and August, compared to the same period last year, and more than 90 percent of what it needs for September. The supply beyond that has yet to be locked in.

BY SARAH CHEA   [[email protected]]