Analysis: Impact of Egypt unrest on oil & gas logistics
By: Lionel Mok
Fear that the violence in Egypt could lead to the closure of its Suez Canal trade routes was followed by a $1.64 spike in U.S. benchmark oil prices to close at $101.24 a barrel, the highest in 14 months. The country’s prime location has made it critical to the international trade of hydrocarbons. The Suez Canal, creates an essential link between the Mediterranean and the Red Sea, shaving off nearly 10,000 km by saving tankers from a 10-to-15 day trip around the Cape of Good Hope, the southern-most tip of Africa.
According to the US Energy Information Administration, in 2011, 17,799 ships transited the Suez Canal from both directions, of which 20 per cent were petroleum tankers and six per cent were LNG tankers.
The majority of crude oil transiting through the Suez Canal heads north, towards markets in the Mediterranean and North America. Northbound Suez Canal flows averaged approximately 535,000 bpd of crude oil in 2011, while the Suez-Mediterranean (SUMED Pipeline) accounted for about 1.7m bpd of crude oil flows from the Red Sea to the Mediterranean over that same period. The 200-mile long SUMED pipeline, serves as an alternative to the Suez Canal for shipments that are too large to transit through the Canal. Due to the size of the Suez Canal, a fully laden Very Large Crude Carrier (VLCC) must unload a portion of its cargo, which is then transported through the SUMED, before navigating the canal itself.
Combined, the two pathways accounted for nearly 2.2m bpd of crude oil flows into the Mediterranean towards European markets.
As the Egyptian army seeks to bring order to the country, it has become clear that the concerns about supply chain disruptions were exaggerated. “Markets tend to advance sharply on uncertainty and will often price in a worst case scenario. This appears to be the case with the unfolding situation in Egypt,” wrote Jim Ritterbusch president of energy consultancy Ritterbusch in a note, according to an article published by the Associated Press.
It is also important to remember that security in the canal remains under the control of the military and is considered to be far-removed from the political tension elsewhere. “If there is one thing that the military has control of in Egypt it is the Suez Canal. We therefore do not see a significant risk for free passage on the waterway,” said Olivier Jakob of Petromatrix, in the same article.
Furthermore, this might be putting a nice spin on some bad news, but the transportation of hydrocarbons through the Suez Canal and the SUMED pipeline has fluctuated dramatically over the last few years.
Total oil flows fell by more than one-third in 2009 to about 1.8m bpd, down from 2008 levels of over 2.4m bpd. Crude oil flows through the SUMED experienced a much steeper drop to 1.2m bbpd from approximately 2.1m bbpd over the same period.
The hypothetical effects of political unrest in the country will always be debateable. But one thing is for sure, the country’s unimpressive economic activity over the last few years and the ensuing political upheaval has revealed how its upstream energy sector is rapidly falling behind.
Despite having rather sizeable proven reserves of oil and gas, Egypt has failed to emerge as a major oil and gas producer, never mind its absence from the export market.
The country holds approximately 4.4 billion barrels of proven oil reserves and an additional 77.2 tcf of natural gas. However, the country only produces 710,000 bpd and natural gas production peaked in 2010 at around 2.2 Tcf for the year, barely enough to meet local needs.
According to an Upstream Insight report on Egypt’s Gas Transformation, published by Wood Mackenzie, the country expects to continue producing approximately six billion cubic feed per day (bcfpd), but falling exploration success and existing contractual commitments to export gas have spelt trouble for the country.
The country’s precarious energy supply left it facing heavy power cuts last month, leading Tarek el-Barkatawy, head of the Egyptian General Petroleum Company, to report that the rate of gas consumption was exceeding normal levels by 20 to 30 per cent. And so Egypt continues to look to expand its supply chain, but this is proving to be an arduous task in itself.
In November 2012, the country issued its first tender to import LNG. It requested that bidders supply floating storage and regasification units (FSRUs), LNG cargoes and construct infrastructure to connect to the gas grid, according to the report by Wood Mackenzie.
But the tender stalled when suppliers were faced with the required $100 million guarantee and contracts between importers and industrial users failed to materialize, as buyers showed their reluctance to pay international prices.
For now, Egypt will continue to face an energy shortage and have to rely on its neighbors for help, as was evidenced by a generous donation in June.
“Qatar will supply five cargos of liquefied natural gas as a gift to the Egyptian people during the summer months, with the first of these shipments beginning at the end of July and continuing until mid-September,” said Qatar’s Minister of Energy and Industry, H E Dr Mohammed bin Saleh Al Sada in a statement.
Each cargo would hold around 3.2 bcf of natural gas, and the total donation will be worth approximately $300 million.
But with a daily gas consumption of 5 bcf, this foreign aid will only go so far.
There is no telling what the country’s next government will do to tackle Egypt’s energy conundrum, but with the country on the precipice of a collapse, it had better act quickly.