Since the ouster of Morsi much of Egypt has been in a state of fluctuation. In the realm of oil and gas, the past summer has witnessed a few signs of concern. In July a consortium of Indian companies declined to sign a production sharing agreement for previously awarded concession blocks.
Shortly after, gas major BG publicly expressed concern over the loss of future profits as the government is diverting more gas than was agreed to, in order to meet the growing demands of the domestic market. However, Essam Taha, an attorney specializing in oil and gas contract at Zaki Hashem and Partners explained that the government’s actions are permitted under the contract and “such procedures shall not have any negative impact on the future investment in Egypt’s petroleum sector, as these procedures are applied in most of the countries applying a production-sharing model.” Beyond the issues of delayed payments and production sharing, IOC’s are now facing increasing security challenges impacting vital oil and gas transportation routes. Egypt Oil & Gas spoke to regional security analysts on the threat that insurgents pose to the country’s oil and gas sector.
Approximately 1.4 million barrels of petroleum products and 800,000 barrels of crude products transit through the Suez Canal each day. Thus, the canal is of strategic importance not only to Egypt but also to the global oil and gas market. Threats to the canal are nothing new, however, recent attacks on vessels passing through the canal certainly increase concerns.
On August 31st, the Cosco Asia cargo vessel was attacked while passing through the Suez Canal. Following the attack, the military arrested three people for allegedly firing automatic weapons at the vessel. However, in a contradicting statement, Mohab Memish, head of the Canal Authority reported RPGs were used in the attack. Similar uncertainty surrounds the identity of the perpetrators as one military source reported, “the operation was a random operation that is not backed by an organization.i” This information was contradicted a few days later when al Furqan Brigade released a video showing two men firing RPGs at a cargo vessel that appears to have the Cosco label on the side of the ship.
Additionally, al Furqan Brigade issued a statement claiming responsibility for the attack. In the statement the group condemned the ouster of Morsi, as well as the Muslim Brotherhood for participating in elections. It went on to promote the “ammunition box and not the ballot box.” According to the statement the group targeted the Suez Canal as it “has become a safe passageway for the crusader aircraft carriers to strike the Muslims.”
While little is known about al Furqan, the group also claimed that they carried out a similar attack on the Suez Canal in late July. At the time of the alleged July attack local residents reported explosions, however, after investigating the reports the military said that there had been no explosions in the areaii. Similar to their most recent attack, the group posted a video of the alleged assault, which remains unverified. In regards to the most recent video, Gerry Northwood, COO of the maritime security company GoAGT explained, “It is clear that the video is designed to be a propaganda statement of intent and capability to conduct attacks.”
According to Northwood, attacks targeting vessels in the canal are likely to persist, “as this will be a way of getting at the Egyptian government’s financial base, while at the same time making a point to the international community.” Northwood explained the vulnerability of the Suez Canal, “Attacks against vessels at sea are technically difficult to execute successfully. For this reason, attacks in the choke points or the approaches to harbors and terminals are most likely.” However, Northwood pointed out, “we should not underestimate how difficult this kind of action would be for a terrorist group to achieve, and the determination of the Egyptian government to keep canal open.”
Northwood cautioned, “An ongoing campaign of attacks against ships transiting the canal is more likely and may put some owners off using the canal. However, alternative routes are expensive and time consuming. Most will probably continue to use the canal, hardening their vessels as necessary.” Some shipping companies are already considering precautionary security measures, informed Hany Maamoon, a specialist in Egyptian maritime law at Eldib Pandi. Other analysts have pointed out that the expansion of the Panama Canal may provide a new alternative route for US shippers heading to Asian markets in the future.iii However, the expansion is not set to be complete until mid-2015 so that option remains off the table for now.
While the Cosco attack did not affect shipping traffic through the canal, the long-term impact of such attacks on vessels remains unsettling. As Maamoon, explained, if “the navigation in the Suez Canal is significantly interrupted, this will have a big influence on the Egyptian economy…given that the Suez Canal is presently one of the main sources of foreign currency.” The government is aware of the vital need for security of the canal and has increased efforts to protect the passageway. Operations are “being jointly carried out by the Egyptian Navy, the Air Force, as well as the Infantry Forces” in addition to areal surveillance by helicopters, informed Maamoon.
The significance of vessels being unable to transit through the Suez Canal remains debated but some analysts suggest the impact maybe overstated. As David Unger of the Christian Science Monitor points out, “The shifting of the global energy landscape has helped minimize the spikes of unrest in Egypt.”iv The time and costs of alternative routes are often cited as key factors that would impact markets if the canal was disrupted. However, Drewry maritime research group asserts that vessels could safely increase their speeds to 22k in order to avoid additional transit time while passing around the Cape of Good Hope.v The report does point out that the longer route would incur higher costs. Thus, any disruption to the Suez Canal would impact the international markets but these impacts would not be catastrophic to international markets. Egypt would suffer the greatest losses from any disruption due to the loss of foreign revenue.
Similar to the Suez Canal, Egypt’s Sinai Peninsula is strategic to the transport of oil and gas. Additionally, the region is host to a handful of onshore and offshore fields. Following the ouster of Morsi, Islamist militants in the Sinai have launched an insurgency in the region. While the almost daily attacks generally focus on the police and military, oil and gas infrastructure in the region has been targeted as well.
On July 7th militants bombed the Arab Gas Pipeline near the town of EL Arish in North Sinai. Approximately 12 kilometers of the pipeline, which carries 100 million cubic feet of gas per day to Jordan, was damaged.vi Another attack on the pipeline was reported by a local official on July 23rd.vii However, Taher Abdel Reheem, chairman of EGAS, denied the second attackviii. Reheem informed Dow Jones that they were “still waiting for the army to secure the area.” At the time of writing, the pipeline had yet to resume operations. El Fagr news reported that the Egyptian government informed Jordan that the pipeline operations would remain suspended so long as insecurity persists in the Sinai.
The increased insurgency in the Sinai has also spurred tentions between the Egyptian government and Gaza’s Hamas, who have been accused of supporting militants in the Sinai. Jordan has suffered serious consequences due to the attack and subsequent suspension of fuel supplies. Lucy Jones, an analyst specializing in the region at Control Risks explained, “The implications for Jordan are also significant, from an economic perspective as well as the security angle. Egyptian gas imports would normally represent 80 percent of the fuel the kingdom uses for electricity generation; pipeline attacks in North Sinai have caused frequent interruptions to imports, forcing the kingdom to purchase alternative fuel at higher costs. Jordan is in dire straits financially, and substituting Egyptian gas with other fuels places additional stain on the budget.”
According to Jones, “Militant activity in Sinai will not in itself prevent IOCs from entering the Egyptian market, particularly as the majority of oil and gas fields are located outside the Sinai. Nevertheless, the growing threat posed by militancy adds to the already complex operating environment and will translate into increased security costs for foreign investors.” Similarly, energy expert Robin Mills explained, that companies in Egypt are unlikely “to declare force majeure unless there are major strikes, protests, or violence that affects oil infrastructure or workers,” noting, “the obvious exception of the Sinai gas pipeline.” If attacks on oil and gas infrastructure remain sporadic and centralized in the Sinai then the impact on the sector will be limited, but if they increase and spread into other regions IOCs may begin to implement precautionary measures or reconsider their investments.
Tackling the Issues, Ensuring the Future
The Egyptian government continues to launch military campaigns against insurgents in both Suez and Sinai. In addition, they are providing security to companies with existing operations in the Sinai. However, it is extremely difficult to secure everything when you are talking about hundreds of miles of pipelines and canal banks. Many IOCs are used to working in unstable environments and know the necessary precautions, but additional security measures come with additional costs. As the sector is already marred with debt and delayed payments, insecurity may deter some future investment. However some IOCs are likely to continue to invest in the sector, as Mills explained, “if they can get specific assurances from the government…but of course major new investments will be deterred.” Ultimately, the military’s ability to prevent future attacks on oil and gas operations and transportation routes will determine the long-term impact of insecurity on future investments and operations in Egypt.
By Maya Moseley