One of the prominent risks on the horizon for oil companies is the possibility of closure for the Suez Canal due to the political tensions in Egypt. If such an event were to happen, this would significantly increase the supply costs for Eni SpA (NYSE:E) (BIT:ENI) and Total SA (NYSE:TOT), the major oil suppliers in Europe.
The Suez Canal creates an essential link between the east and the west – oil tankers can move between Asia and Europe and avoid going around the cape of Africa. ‘The waterway shortens the oil supply route to Europe and the U.S. by 6,000 miles, or 10 to 15 transit days. About 3,500 oil tankers pass through the Suez Canal each year, carrying about 5 percent of global seaborne oil trade,” says Philipp Chladek Natural Gas Production Team.
Figure 1: Suez Canal via Egypt
In terms of oil production, Egypt’s role is not that significant. Egypt is a net importer of oil and uses most of its local production for its own consumption needs. Natural gas production has outpaced local consumption in Egypt in recent years but oil has remained at or above 100 percent. This illustrates that if civil unrest were to strike the producing fields in Egypt, this would not significantly impact global supply of oil.
Figure 2: Egypt Consumption in % of Domestic Production
Furthermore, Egyptian oil and gas reserves make up only a small chunk of total global reserves. Oil makes up 0.3 percent while natural gas constitutes 1.1 percent of total global reserves. This means that changes in Egyptian supply would not significantly impact the international prices of oil and gas.
Figure 3: Egypt Oil and Gas Reserves in % of Global Oil and Gas Reserves
The majority of the surplus of Egyptian gas is supplied to Asian countries. “A complete interruption of Egyptian LNG exports would most likely drive up prices in Asian markets, where the supply and demand balance is tightest,” says Philipp Chladek.
Of the natural gas that Egypt exports, 70 percent is shipped in liquefied form (LNG). Egyptian LNG exports have been in decline in recent years, primarily because the demand from the main export customers, Spain and the USA, diminished due to a weak economy and the shale gas boom.
Figure 4: Egyptian Export of Gas in 2013
Exploration in Egypt persists at normal levels for the time being. BG Group plc (ADR) (OTCMKTS:BRGYY) (LON:BG) and BP plc (ADR) (NYSE:BP) (LON:BP) are the largest companies carrying exploration activities in Egypt. It is reported that the majority of Egyptian oil and gas fields lie a significant distance from the targets of the country’s civil unrest. “Most of Egypt’s gas is extracted from offshore platforms, while most oil production installations are sited in inhospitable desert land. Unlike neighboring Libya, this makes serious attacks on production facilities unlikely. Most of Egypt’s protests are taking place in the country’s urban centers,” reports Philipp Chladek Natural Gas Production Team.
Figure 5: Map of Egypt’s Remote Oil Fields
Although the Egyptian protests have made the markets fidgety, the combination of small contribution of Egypt in the global oil economy and the remoteness of its oil fields provides some comfort. We can expect the impact of Egyptian issues on the market to phase our soon and for Brent to return to its normal levels of $102-106 in the coming weeks.