IHS World Markets Energy Perspective | |
Significance | Widespread and lengthy public protests in Egypt have raised the possibility of entrenched long-time president, Hosni Mubarak being forced from power, raising political uncertainties throughout the region and investor fears over Egypt's energy industry being hit, while global markets fear that Egypt's oil and gas transit capacity, through the Suez Canal and the Sumed pipeline, might be shut in. |
Implications | While IOCs have evacuated all non-essential staff and dependants from Egypt, as well as closed their offices, upstream and downstream operations continue unabated as the powerful Egyptian army has ramped up security along the Suez Canal and the Sumed pipeline. The only energy project casualties so far seem to be a project finance signing and possibly a delayed drilling, but even disruptions to production and transit should do little to actually impact the global supply and demand balance. |
Outlook | With OPEC having significant spare capacity and global inventories standing quite full, the main risk from Egypt's deterioration would be the delay of shipments, as oil and LNG tankers travelling from the Gulf to the Western Hemisphere would have to be re-routed around Africa, adding to their costs, but not warranting alarmist reactions and fears of supply disruption. |
Urban Evacuation
Oil companies in Egypt have virtually all closed their offices and evacuated their non-essential personnel by now, as well as all dependants, from the North African country. Most decisions to evacuate were taken over the past weekend (28-30 January), when Egyptian police and security forces were withdrawn from the streets and some anti-government protesters, or according to some opposition sources, government provocateurs, resorted to looting and vandalism throughout some of Egypt's main cities. The unrest has since been reined in and police have returned to the streets, however, with the uncertainty about the future of the Egyptian regime being rife, oil companies are unlikely to run anything but skeleton operations at the management and support facilities in Egypt, and will not do so out of their official locations. IHS Energy yesterday reported that Shell, BP, BG Group, LUKoil, and Novatek had evacuated virtually all their office-bound expatriate personnel except their senior executives, and one would assume their security planning details, although all of them maintain that their upstream and downstream operations continue without virtually any disruption (see Egypt: 31 January 2010: Rattled IOCs Evacuate Offices After Political Unrest, But Upstream Operations Continue in Egypt). BG Group was yesterday reported to have halted a drilling in Egypt, however, a statement later insisted that "production continues unaffected, as do operations at ELNG", referring to the Egypt LNG project, where BG is a leading shareholder, although the statement did not go into details. It is likely that on and offshore rig deployments for the moment will be somewhat delayed, as companies are unwilling to fly personnel and equipment into Egypt and they will prudently wait a few days to see what direction the unrest, which now has been running for about a week, takes. At the same time, rig operators Diamond Offshore and Transocean both told Reuters yesterday that having evacuated their non-essential staff and dependants, their rigs would continue operating and sustain themselves for several days.
Adding their names to the list of companies saying that they had undertaken similar evacuations to the large Egyptian players yesterday were Poland’s PGNiG and likely Eni, although the latter stated it would only comment later on its current staffing situation, according to Platts. The U.A.E's Dana Gas was one of a few sizeable companies that did not talk about an evacuation, but their statement also added that 95% of its Egyptian staff were nationals. Its operations were proceeding according to plan, however, with the company believing that the state payment mechanisms would continue working. "Nobody can say how long the demonstrations will go on but the structure of dealing with investors is maintained", Ahmed al-Arbeed, Dana Gas's chief executive told Reuters. Dana's partner in the Kom Ombo concession, Canadian minnow Sea Dragon, however, said that exploration drilling there had been temporarily put on hold, as the remote area was suffering some supply disruption. Its production in the country was uninterrupted though, it clarified to Reuters.
Deal Delay
The only real disruption currently being reported from the Egyptian energy sector is to the hoped-for signing of a financing package for the US$3.6-billion Egyptian Refinery Company (ERC). The project, led by Egypt's Citadel Capital, has been discussed for years and would take Egyptian fuel oil and some light products and crack them into more valuable light products, turning value out of some particular product inefficiencies in the fuel oil produced by the Egypt General Petroleum Company (EGPC)'s Cairo Oil Refinery Company (CORC). South Korea's GS Engineering and Japan's Mitsui have been appointed to build the project, with US$2.35 billion being raised as project finance from European, South Korean, and Japanese institutions. Delays in the equity side of the financing have, however, held up a financial close since a deal was struck in August 2010, according to Reuters, with the waiver previously agreed on settling the deal expiring today. The facility has been seen as a very cost-effective way of improving Egypt's domestic refined products balance, but will now be dogged by further uncertainty, even is a new waiver is agreed.
OPEC Support
Egypt is barely meeting its own domestic demand for crude nowadays, although it does occasionally sell some cargoes depending on demand fluctuations throughout the year. The main international fear about risks in the region arising from the political unrest concerns Egypt's position as a main transit hub for crude, refined products, and LNG through the Suez Canal and the parallel Suez-Mediterranean (Sumed) pipeline. Hitherto, no disruption has been reported and the opposition's calls for a general strike do not seem to have had an impact on transits. Still, in response to the spreading fears about Egypt's unrest halting the flow of crude from the Middle East to Europe, OPEC's chairman, Abdalla Salem el-Badri, yesterday told Dow Jones that OPEC was ready to act on any supply disruption using dome of its large spare production capacity. "I don't think [a sizeable disruption] will happen", he said, however, adding when prompted about how large a disruption would be in order to lead to OPEC output boosting action that "anything above 1 million" barrels of oil being shut out of the market would be seen as a trigger point. He further emphasised that the Sumed pipeline was "very well protected" and that tankers on the Suez Canal are "not an easy target". "I don't think the Egyptians [will] ever dare to touch that", Dow Jones quoted him saying.
Last year, about 1 million b/d of crude moved through the Suez Canal to the Mediterranean Sea and 800,000 b/d moved southward into the Red Sea, U.S. Energy Information Administration statistics showed, while 1.1 million b/d of crude moved through the Sumed pipeline, according to the International Energy Agency (IEA) to the Mediterranean in 2009, down from 2.3 million b/d in 2007. About 17.5 million t/y is also thought to have passed through the Suez Canal during that year, a figure which will have risen substantially during 2010 and early 2011 as Qatar and Yemen increased their LNG export capacity, particularly to Europe. The Egyptian army was, however, today reported to have intensified its protection of the Sumed pipeline and the Suez Canal, in order to stave off any further speculation that the transit facilities were at risk.
Outlook and Implications
While the political implications of Egypt's regime falling would be massive for the Middle East as a whole and the Arab-Israeli conflict in particular, it is important to stress that although President Hosni Mubarak's position seems to have been weakened, the same might not be the case for some of the other key army leaders behind him. On a more direct note for the energy industry, the risk of global crude and refined products supply disruption is not that high, as even the temporary closing of the Sumed pipeline and the Suez Canal would only result in tankers having to go around Africa, thereby taking a longer time and adding to costs, but only delaying rather than disrupting supplies. Inventories in Europe and North America are not low, while the LNG market has been rather over-supplied in the past year or so, making the effect of any potential delays far from catastrophic, especially as the transit facilities for now seem quite secure and their workers intent on maintaining operations. The contagion risk of political protests and unrest spreading to Saudi Arabia and other leading oil producers, the importance of Egypt as an example should not be played down, however, it should also be remembered that the higher the oil price is, the more stable the Gulf monarchies are, as they can afford to uphold their traditional bargain of delivering cradle-to-grave welfare systems to their citizens in exchange for their political quiescence.