Commodities: Egyptian bloodbath threatens crucial routes for oil and gas supplies

Egypt is a key bottleneck in the global oil industry. Should the current turmoil in the North African country get any worse, a potential oil spike could damage any nascent economic recovery.

Egypt plays a vital role in international energy markets through the operation of the Suez Canal and the Suez-Mediterranean (Sumed) pipeline. These are vital pieces of infrastructure in the global oil market. 

After last week’s bloody crackdown by the Egyptian army, fears of a disruption of oil supplies to the West have boosted the oil price. Brent crude prices were propelled to a four-month high of $111.23 on Thursday. If the turmoil gets worse – or unrest spreads to other countries – the risk premium currently factored into the price of crude is likely to increase further.

Egypt is not a major energy exporter, producing a nominal amount of the world’s oil and gas. The North African country appears at number 54 on the list of the world’s largest oil exporters, producing about 0.9pc of the world’s oil and 1.8pc of global natural gas supply.

However, Egypt plays a vital role in international energy markets through the operation of the Suez Canal and the Suez-Mediterranean (Sumed) pipeline. These are vital pieces of infrastructure in the global oil market.

Last year, about 7pc of all seaborne traded oil and 13pc of liquefied natural gas (LNG) travelled through the Suez Canal, according to data collected by the US Energy Information Administration (EIA).

The Suez Canal, a 101-mile link between the Red Sea and the Mediterranean, and the 200-mile Sumed pipeline are strategic routes for Persian Gulf oil and gas shipments to Europe and North America.

Closure of these two routes would add an estimated 2,700 miles of transit from Saudi Arabia to the United States around the Cape of Good Hope, increasing costs and shipping time.
Hopes are high, however, that both the canal and pipeline will continue to operate as normal. Maritime insurers appear to be relaxed about the situation at the moment, but one, Skuld, has warned ships’ crews not to go ashore.
“Members are advised to ensure that ships and crew calling at Egyptian ports or transiting the Suez Canal remain on alert and take suitable precautions to ensure their safety,” Christian Ott, Skuld’s vice-president, head of claims, said. “Given the announcement of the state of emergency, and the continued situation on the ground, vessels and crew need to exercise particular caution if any crew step ashore – even for short periods of time.”
The rest of the country’s oil industry remains relatively unaffected. Despite the worrying headlines, most oil and gas production takes place offshore and is operating relatively undisturbed.
The largest player is BP, which produces about 15pc of the country’s oil and 30pc of its gas. “Operations and production are unaffected,” a BP spokesman told Reuters after more than 500 people were killed last week in a security crackdown. “We are monitoring the security situation in the areas where we have offices. All our people are safe and accounted for.”
Royal Dutch Shell is also a major producer in the country. “To ensure the safety and security of our staff, Shell offices in Egypt are closed for business today and into the weekend, and business travel into the country has been restricted. We will continue to monitor the situation in Egypt,” a Shell spokesman said on Friday.
However, perhaps the most exposed company to the country is BG Group. Egypt was the energy company’s largest producing country in 2012, delivering 20pc of the company’s total production.
BG’s production is also unaffected so far, but the group withdrew 100 expatriate staff and dependants last month. About half of the gas that Egypt produces is exported, with the rest servicing Egypt’s domestic market. This is one reason why sector watchers are hopeful that disruption will be minimal. Whoever holds political power will not want the lights to go off.
The Egyptian uncertainty will continue to boost the oil price, but the situation in neighbouring Libya is also a concern. Workers at ports in Libya have been on strike for a number of weeks, with the protests resulting in a drop in Libya’s oil exports.
“If the blockade of these oil terminals continues, the state will be obliged to use its power, and all the forces at its disposal, including the army,” the Libyan prime minister, Ali Zeidan, said on Friday.
“The situation in Libya is also threatening to escalate: the government appears to be running out of patience in view of the revenue losses due to strikes,” Commerzbank said last week. “After striking workers at the export terminals had announced that they planned to sell the oil themselves, the government threatened to deploy the army to prevent this from happening.”
Brent crude prices eased on Friday, following five straight days of gains. However, prices are likely to stay at or above $110 (£70) a barrel until there are signs of tensions easing. But if the situation in Egypt and Libya worsens, all bets could be off.