Western powers ready contingency plan if Iran blocks Hormuz strait

Britain sends large destroyer to Gulf

Kuwait asserts natural wealth in al-Dorra field is the right of Kuwait and Saudi Arabia

Western powers this week readied a contingency plan to tap a record volume from emergency stockpiles to replace nearly all the Gulf oil that would be lost if Iran blocks the Strait of Hormuz, industry sources and diplomats told Reuters.

They said senior executives of the International Energy Agency (IEA), which advises 28 oil consuming countries, discussed on Thursday an existing plan to release up to 14 million barrels per day (bpd) of government-owned oil stored in the United States, Europe, Japan and other importers.

Action on this scale would be more than five times the size of the biggest release in the agency's history -- made in response to Iraq's 1990 invasion of Kuwait.

The maximum release, some 10 million bpd of crude and about 4 million bpd of refined products, could be sustained during the first month of any coordinated action, the plan says.

"This would form a necessary and sensible response to a closure of the strait," a European diplomat told Reuters. "It wouldn't take long to put in place if it was required ... and would be unlikely to prove controversial amongst the (IEA) membership."

A spokesman for the IEA confirmed that the Paris-based agency has an existing contingency plan that outlines a maximum stock release capability of 14 million bpd for a month. "We're watching the situation carefully," he said of Iran.

Tehran announced plans on Friday for new military exercises in the world's most important oil shipping lane, through which some 16 million barrels of crude pass each day.

Iranian officials have threatened to block the strait if new sanctions, aimed to discourage Iran's nuclear program, harm Tehran's oil exports.

Many oil experts believe the threats are rhetoric aimed at pushing up oil prices in a bid to avert sanctions.

"The IEA is monitoring the situation very closely, and is fairly concerned about it," the diplomat said, confirming that senior management discussed Iran at the meeting on Thursday.

Western governments are targeting Iranian oil supplies and the European Union is readying a ban on the country's crude oil exports of about 500,000 bpd with the goal of a final decision by month's end, while Washington has already imposed financial measures to discourage business with Tehran.

Industry sources said the IEA is unlikely to release stocks in the event of an EU embargo on Iran. While Europe will import less Iranian oil, Tehran will seek to sell larger volumes to its biggest customers in Asia.

However, Bob McNally, a former White House energy advisor and now head of consultancy Rapidan Group, says even a more modest disruption -- if Iran were to shut in some of its own production due to sanctions pressure, for instance -- may require action.

"Given low OPEC spare capacity, IEA stock releases may need to be considered if prolonged supply disruptions even smaller than the flow through Hormuz were to take place," he said.

U.S. congressman Edward Markey, the top Democrat on the House of Representatives' Natural Resources Committee, said he would support U.S. releasing its reserves, although he views the emergency stockpiles as only a short term solution to the nation's energy problems.

"America should always be willing to use our strategic oil reserves as a weapon against OPEC dictators, Wall Street speculators and any manipulators of the oil markets, and the recent saber rattling from Iran is no different," Markey told Reuters in a statement.

Also watching closely are oil giants Saudi Arabia, Kuwait and Iraq who depend on the strait to move most of their crude.

If the Gulf channel gets blocked, Saudi Arabia, the world's top exporter, can route more crude through the country's East-West pipeline system to the port of Yanbu on the Red Sea.

Altogether that network has effective capacity of some 4.5 million bpd and after supplying Saudi domestic refineries in Jeddah, Riyadh, Rabigh and Yanbu - there is about 3 million bpd of export capacity available, said an industry source.

The neighboring United Arab Emirates also has export flexibility. It is nearing completion of the Abu Dhabi crude oil pipeline, which will bypass the strait to ship as much as 1.5 million bpd to the Indian Ocean.

Industry sources said the pipeline has been tested and the first flow of oil has already been pumped.

"It's now only a matter of switching on a button," one industry source said.

The IEA tapped emergency stocks in June to help supply refiners caught short by supply lost to Libya's civil war. It was a move that angered the Organization of the Petroleum Exporting Countries which felt the consumer group had overstepped its bounds.

Founded in 1974 in the wake of the Arab oil embargo, the IEA has only drawn down reserves on three occasions. Apart from last summer, member countries released oil in 2005 after Hurricane Katrina damaged offshore oil facilities in the Gulf of Mexico and made available 2.5 million bpd in January 1991 after Iraq's invasion of Kuwait disrupted about 4.3 million bpd.

The Royal Navy's newest and most advanced ship was sent to the Gulf for her first mission amid heightened tensions with Iran over threats by Tehran to block a busy shipping lane. The Type 45 destroyer HMS Daring, which has a 'stealth' futuristic design to help avoid detection, is to join the British presence in the region, the Ministry of Defense confirmed.

The dispatch of the ship comes days after Defense Secretary Philip Hammond warned the regime that any attempt to block the Strait of Hormuz would be 'illegal and unsuccessful' and would be countered militarily if necessary.

Leaving Portsmouth on Wednesday, the £1 billion destroyer also carried the world's most sophisticated naval radar, capable of tracking multiple incoming threats from missiles to fighter jets.

The vessel has been fitted with new technology that will give it the ability to shoot down any missile in Iran's armory, according to The Telegraph.

An MoD spokesman said: 'The Royal Navy has had a continuous presence East of Suez for many years, including the Armilla patrol and its successors since 1980.

'While the newly-operational Type 45 destroyer HMS Daring is more capable than earlier ships, her deployment East of Suez has been long planned, is entirely routine and replaces a Frigate on station.'

The second Type 45, HMS Dauntless, will also be available to sail at short notice.

HMS Daring completed four years of sea trials and training late last year and is the first of six new destroyers which will replace the Type 42 vessels which started service in the 1970s.

The vessel, with a crew of 180, is the first to be built with a futuristic design that makes it difficult to detect using radar.

It also has a large flight deck which can accommodate helicopters the size of a Chinook as well as take on board 700 people in the case of a civilian evacuation.

The 8,000 ton destroyer will carry 48 high-tech Sea Viper anti-air missiles that can also be used to shoot down fighters as well as sea skimming missiles.

It will also carry a Lynx helicopter capable of carrying Sea Skua anti-ship missiles and is capable of carrying 60 special forces troops.

Lord West, the former First Sea Lord, described Daring as a 'world beater' in The Telegraph.

'This warship has an unbelievably capable ability to track targets, spot the most dangerous and identify them for its missiles to take out. It's highly, highly capable. I would like to see the Type 45s show their potential in the region' he added.

Tension in the oil shipping lanes of the Gulf looks set to increase amid signs that Iran, Israel and the US will hold military exercises designed to test weaponry and tactics.

And the US and European Union are still planning to press ahead with oil sanctions on Iran.

On Friday, Tehran’s defense minister announced that the Iranian Revolutionary Guard Corps will hold large-scale exercises in the Strait of Hormuz and the Gulf in February.

Called 'the Great Prophet', the exercises are expected to be more extensive than Iranian naval maneuvers in the Sea of Oman that ended this week.

The Iranian announcement came as it emerged that the US and Israel are gearing up for a major missile defense exercise in the next few weeks.

The drills, called Austere Challenge 12, are designed to improve defense systems and co-operation between the forces and would be the largest ever held by the two countries.

Israel has deployed the Arrow system, jointly developed and funded with the U.S., which is designed to intercept Iranian missiles in the stratosphere, far from the country.

A statement from the Israeli military said: ‘U.S. European Command routinely works with partner nations to ensure their capacity to provide for their own security and, in the case of Israel, their qualitative military edge.’

This week Philip Hammond, the UK's Defense Secretary, warned the regime in Tehran that Britain will not tolerate the ‘very significant consequences’ if it fulfils a threat to block the Strait of Hormuz.

He signaled that such action would be blocked by force of arms.

Hammond used a speech in Washington to warn Iran that any move to close the key Gulf trade route would be opposed by the Royal Navy.

‘Any attempt by Iran to do this would be illegal and unsuccessful,’ he said in a speech at the Atlantic Council.

Then in a television interview, Hammond said he wanted to send a ‘very clear message to Iran’ that the UK would not allow the Strait of Hormuz to be closed.

The Royal Navy operates mine clearance vessels in the Gulf as part of a joint taskforce based in Bahrain.

He said: ‘We are an integrated part of the naval taskforce in the Gulf and one of the missions of that taskforce is to ensure that those shipping lanes remain open.

'Any attempt to close the Strait of Hormuz would be illegal and we need to send a very clear message to Iran that we are determined that the Strait should remain open.’

More than 15million barrels of oil pass through the narrow stretch of water between Iran and the United Arab Emirates every day.

Iran has threatened to block the 34-mile wide strait in retaliation for a planned EU trade embargo on Iranian oil.

The planned embargo is an attempt to persuade Iran to abandon plans to develop a nuclear weapon.

Meanwhile, Kuwait protested on Tuesday against Iran's intention to unilaterally develop a disputed offshore gas field in the Gulf unless an agreement is reached, Kuwait's state news agency KUNA reported.

Iran said on Sunday it would launch full-scale unilateral development of the field if Kuwait does not respond to its offer of joint development.

Kuwait's Foreign Ministry summoned Iran's charge d'affaires and handed him a letter saying that negotiations were still ongoing between the two countries and development could not take place before an agreement is reached, KUNA said.

The comments came following Iran fresh threat on Tuesday to take action if the U.S. Navy moves an aircraft carrier into the Gulf, Tehran's most aggressive statement after weeks of saber-rattling as new U.S. and EU financial sanctions take a toll on its economy.

The Arash gas field is located on Iran-Kuwait's water border and it is called Dorra in the Kuwait part of the field. The field's gas reserve is estimated at one trillion cubic feet along with some 310 million barrels of oil.

Kuwait and its neighbor Saudi Arabia have protested to non-Arab Iran on its drilling for gas in the disputed field when the three states have not reached an accord on demarcating their sea borders in the northern Gulf.

Iran has the world's second largest gas reserves but has struggled for years to develop them due to tightening international sanctions that have kept away foreign energy firms with the capital and technology it needs.