Shippers Concerned Over Possible Suez Canal Disruptions

Shippers Concerned Over Possible Suez Canal Disruptions

February 3, 2011

The New York Times - As violence has broken out in Egypt, concern has turned to the risk of the blocking of the Suez Canal or nearby pipelines, which could pose a threat to world energy supplies.

So far, oil and gas flows through Egypt have not been interrupted, and the army has stepped up security around the canal and pipelines. But rising tensions in the port of Suez have led several shipping companies to order their ships not to change crews in Egypt.

Meanwhile, disruptions in government port services have slowed the discharge of some crude oil cargo at the Red Sea port of Ain Sukhna, at the southern entrance to the Suez Canal.

“Potentially, we see attacks on employees of shipping companies and attempted attacks on vessels docked in ports if you see more violent demonstrations around the ports,” said Helima L. Croft, a director and geopolitical strategist at Barclays Capital.

“It could be very problematic.”

Egypt is not a major oil producer, and Western oil and gas companies have halted most drilling in the country. But it is a crucial link for oil and gas headed to Europe, Asia and the United States.

More than two million barrels of oil and petroleum products traverse the Suez Canal daily, speeding the transit of crude and gas supplies that shippers would otherwise have to send around the Horn of Africa, prolonging delivery times and expenses.

About 4.5 percent of global oil supplies flow through the canal and the Sumed pipeline, which connects the Red Sea with the Mediterranean. About 14 percent of the global liquefied natural gas trade is shipped through the canal as well, providing critical supplies to Spain, and to a lesser extent, South Korea and the United States.

Egypt also produces about 3 percent of the world’s liquefied natural gas supplies at two export terminals, which were reported to be operating normally.

Gen. James Mattis, head of the United States Central Command responsible for military operations in the region, said on Tuesday that it was inconceivable that anyone would want to disrupt the canal.

“Were it to happen, obviously, we would have to deal with it diplomatically, economically, militarily, whatever, but that to me is a hypothetical,” Reuters quoted him as saying to a policy group in London.

There are already signs of slowing cargo operations at the Alexandria and Damietta Ports, which handle container and bulk shipments of grains and other goods. Canal traffic has not yet been affected, although employees must leave their posts early to comply with the government curfew that begins in the late afternoon.

Egypt has historically taken strong measures to assure oil and gas traffic, and interruptions have been rare. The army is trained to operate the canal in case of any strikes. The canal was closed for several months during the 1956 Suez crisis, and it was blockaded by the military for eight years after the 1967 war with Israel.

In recent years, it has been considered a safe passageway.

But analysts say that the defense of Egypt’s pipeline network would be particularly problematic in the event of terrorism. They also say that several large refineries are located around Suez, where there have been outbreaks of violence.

Over the last half-century, shippers have built a large fleet of supertankers that can haul oil in case of an interruption of Egyptian operations.

Taking cargo around Africa would add about 16 days’ time to delivering oil and gas to global markets, and it would add insurance and other costs.

But it would probably not cause a dire shortage or bottleneck, energy experts said.

James Burkhard, an oil analyst at IHS Cera, an energy consulting company, noted that OPEC had five million barrels of spare production capacity to bolster world supplies if needed.

“That’s a substantial volume, more than we see transiting Egypt,” he added.

Nevertheless, the turmoil in Egypt--and concerns that political contagion could spread to larger oil producers around the Middle East--has caused a price spike of nearly 10 percent in some oil benchmarks over the last week.

Brent crude oil has broken the $100-a-barrel mark for the first time since 2008. Since natural gas prices in most world markets are tied to oil, they are expected to increase as well.

The unrest in Egypt comes at a time when global oil supplies are tightening mainly because of Chinese demand increasing by 10 percent last year, or by 810,000 barrels a day. Energy analysts expect Chinese demand to increase by an additional 400,000 barrels a day this year. But the United States appears less vulnerable than it did only three years ago to a Middle East crisis.

Demand for oil in the United States remains about 5 percent lower than it was before the recession, and increased domestic production and imports from Canada have moderated the rise in oil and gasoline prices in some regions in recent days.

Spain would be most vulnerable to an interruption of Egyptian transit operations because an estimated 10 to 15 percent of its liquefied natural gas imports come from Egypt. Egypt also exports gas through pipelines to Israel, Syria, Lebanon and Jordan.

Statoil, the Norwegian oil company, and BG Group, an energy company based in Britain, have halted drilling in Egypt. Other companies, including the Italian company Eni and two based in Houston, Schlumberger and Diamond Offshore Drilling, have moved workers and family members out of Egypt, although oil production in fields far from population centers has continued.