Despite higher crude prices being a negative on the surface for net importer Egypt, the Arab world’s most populous country hopes OPEC’s move to cut production will actually breathe life into the moribund traffic in its Suez Canal and provide badly needed foreign currency.
Egypt’s has been a net importer of crude since 2012, and lately has started importing LNG to meet the rising demand for fuel and power.
Typically energy importers prefer lower energy prices, but Cairo might be keen to see oil and gas prices rise as the market slump for both commodities since 2014 has had a disastrous effect on the government’s plans to raise more revenue from shipping through the Suez Canal.
The need for revenue is acute particularly after Egypt fast-tracked an $8.2 billion canal expansion that was inaugurated in August 2015, only a year after the start of construction.
Sailing through the 164-km canal can knock 11 days off a typical intercontinental voyage for which the alternative route would normally be around the Cape of Good Hope. However, tariffs are steep, estimated by shipping line Maersk at around $350,000/vessel.
The fees are still too high compared to the extra cost of bunker fuel needed for longer voyages around the cape as the price of the heavy marine fuel has fallen by about two-thirds since mid-2014.
Moreover, with recovery from the 2007-2008 financial crisis and subsequent global recession still sluggish, carriers of container cargo, crude and petroleum products that make up the bulk of shipping through the Suez Canal are now seldom in much of a hurry.
In late 2015, reports surfaced of as many as 60 cargo vessels/month opting to take the long route around South Africa while running goods from Asia to northern Europe and the US east coast, instead of passing through the Suez Canal. Analysts called the numbers unprecedented.
Suez Canal Authority data later showed that Egypt’s annual revenue from canal transit fees had fallen in 2015 by about 5% to $5.18 billion from $5.47 billion the previous year.
Lofty revenue promises
Authority Chairman Mohab Mameesh pointed out that revenue had actually risen 13% if calculated in Egyptian pounds, despite the slowdown in international trade.
The problem is that canal fees are now Egypt’s main sources of foreign currency, which the country desperately needs to pay international contractors and repay sovereign debt as its own currency, devalued in March 2015, continues falling.
Revenue has a long way to climb before it reaches $13.5 billion by 2023, forecasted by Authority Chairman Mohab Mameesh.
“By 2023 we will have 100 mega-vessels crossing the canal from both directions daily,” Mameesh told delegates at the Seatrade Maritime conference in Dubai last month.
To many, the projection seemed wildly optimistic, with some analysts saying it would require a 10% annual increase in global trade in merchandise from 2015-2023, compared with a 3.4% average in the decade up to 2016, as estimated by the International Monetary Fund.
By allowing two-way simultaneous non-stop transit of the canal, which was not possible under the original design, the completed project would eliminate the average 11 hours of waiting time in bypass pools that a canal crossing previously entailed, Mameesh said.
Other conference speakers outlined ambitious plans to develop intercontinental rail links to the Suez Canal as part of a new silk or spice route linking China and Southeast Asia to the Arabian Peninsula and Europe.
Much was made of the potential boost that such connectivity could provide to oil and gas development in the Red Sea and Arabian Peninsula, as spare parts for offshore operations frequently must be sourced from Stavanger or Aberdeen, or from Antwerp or Venice for onshore projects.
At home, the fast-track completion, on budget, of the country’s first post-revolutionary mega-project has undoubtedly drummed up a fair amount of nationalist pride and fervor from the Egyptian population. That could backfire if the project does not soon start showing signs of fulfilling its potential.
When OPEC announced its plan to cut oil output, oil prices rose, and more importantly bunker fuel prices delivered to the Suez Canal have hit a high not seen in more than a year, Egypt’s Sisi administration and must have breathed a collective sigh of relief.