The Suez Canal, which serves as a conduit for liquefied natural gas (LNG) shipments out of the Gulf of Suez into the Atlantic Basin, does not appear to be under immediate threat from political unrest in Egypt, and the nation's gas production, liquefaction facilities, and pipeline operations have not been compromised so far, according to analysts at Barclays Capital Research and IHS CERA.
While the industrial city of Suez has experienced some of the worst violence in the past week, there have been no reported attempts to target ships. "Even if Western companies were to become a major target of protesters, we believe that shipping traffic through the Canal is unlikely to be seriously imperiled, through some individual ships docked in port might be at risk of attack if the situation deteriorates further," Barclays said in a note this week, adding that protestors do not yet appear to be poised to carry out organized attacks on tankers as in the case of the USS Cole in 2000.
Though unlikely, the canal's closure would impact an estimated 4.2 billion cubic meters and 5.0 Bcf/d of LNG trade flows; however, the canal's closure would not mean any significant loss of production volumes. Middle Eastern cargoes would have to take longer routes to reach the Atlantic Basin, resulting in fewer cargoes per ship-month and likely, higher costs.
In 2009, Egypt produced 6.1 Bcf/d of gas, of which 2.0 Bcf/d was exported and the rest consumed domestically. The majority of Egypt's gas exports leave the country as LNG, with about 1.3 Bcf/d of LNG exported in 2009 and 1 Bcf/d in 2010, or 3.2 percent of global LNG supply for the year, Barclays said. Spain, the U.S. and South Korea are the three main markets for LNG exports from Egypt. However, Spain's LNG needs have dropped significantly over the past two years due to the global economic slowdown, and a drop in Egyptian LNG receipts could be partially offset by higher purchases from other existing suppliers before Spain would need to buy cargoes on the spot market.
The global LNG market is well supplied with output growth being paced by demand increases in 2010. This trend is expected to continue into 2011, with ample production capacity available to meet any potential Egyptian LNG shortfall. Additionally, Egypt represents a small portion of supply for both the U.S. and South Korea.
Although the 14 percent of the global LNG trade that passes through the canal each day is of notable significance to the LNG markets, the canal's importance may even be greater for Egyptian revenues. Receipts from the canal amounted to just under $5 billion. "Given that any government that emerges from the crisis will likely need to maintain or even increase costly subsidies to preserve social order, it would probably be reluctant to part with such a vital source of revenue," Barclays noted.
IHS CERA also noted this week that deterioration in Egypt's security situation could have a negative impact on gas exports and international shipping, which includes significant volumes of oil and LNG that pass through the Suez Canal. Crude oil flows through the Suez-Mediterranean (Sumed) pipeline from the Red Sea to the Mediterranean could also be at risk.
However, IHS CERA Senior Director Bhushan Bahree notes that world gas supplies are plentiful, though regional or local distribution issues may arise from any interruption in Egyptian supplies. "Similarly, there is no shortage of oil in the marketplace, and OPEC's spared capacity of some 5 million b/d is considerable. Saudi Arabia alone has spare oil production capacity of about 4 million b/d, which is more than recent flows of oil through the Suez Canal and the Sumed pipeline combined."
Concern remains among importers, notably Israel which relies entirely on Egypt for the gas that it imports, at even the remote possibility of a disruption. Israel's fast-growing market already relies on Egyptian gas to meet about half its needs, Bahree said; in 2010, Israel received an estimated 2 billion cubic meters in pipeline gas in 2010, up from 1.7 billion cubic meters a year earlier. Barclays' analysts believe that, if gas exports from Egypt to Israel were halted, that Israel's existing gas fields would be more than capable of making up for the losses.
Most Egyptian drilling activity has been halted as a result of political instability, and several international exploration and production companies, including Houston-based Apache Corp, have evacuated workers. Apache said it has redeployed non-essential expatriate personnel and expatriate dependents from Egypt due to civil unrest.
Atwood Oceanics reported on Tuesday it received a force majeure notice from RWE Dea Nile GmbH, which has the Atwood Aurora drilling rig under contract in the Mediterranean Sea offshore Egypt. RWE said the political turmoil in Egypt was impacting drilling operations.
Barclays noted that a change in gas export policy for political reasons does not appear to be on the immediate horizon. "In our view, an interim military government would likely honor existing agreements, while a national unity government led by someone like Noble Prize winner Mohamed El Baradei would also probably preserve the status quo."
The Egyptian government has been a critical U.S. ally, and the 30-year peace agreement with Israel, along with a similar pact between Jordan and Israel, is a critical factor underpinning stable relations between the three in this volatile region, Bahree said. As in Tunisia, Egypt's protestors could inspire similar movements across North Africa and the Middle East. "Disturbances there could profoundly affect neighbors and reverberate across the wide Middle East, including the Persian Gulf where many Egyptians live and work," Bahree noted.
It is still too early to tell who will prevail as protestors unite under El Baradei to form a transitional government that could guide Egypt to the polls, though restrictions on political development mean it will be difficult for the transition of any leader not backed by Mubarak and the military, Bahree said.
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