"Red Sea Shipping Attacks Having Monumental Impact on Suez Canal Traffic!"

Cem Saral , CEO, Cockett Group

About 26,000 ships transited the Suez Canal in 2023, which represents roughly 12% of total global shipping activity. About 40% of all oil and gas imports into Europe transit through the Canal, showing its importance for European energy security and supply. The last estimate we have is that about 85% of all container companies have stopped transiting through Suez. Tanker and bulk activity have also started to reduce. In normal traffic conditions, containers form about 42% of the Canal traffic, followed by tankers at 23% and bulk at 19%. Transit times have significantly increased for containers via South Africa into Europe. A typical distance from Singapore to Rotterdam is about 8500 miles through the Canal, whereas around the Cape, it adds about 42%, or 3500 miles and an average 12 days of additional voyage time. That means higher marine fuel consumption, and higher emissions, and obviously adds a significant load on to the existing traffic. If the current status quo continues for the entire year, we estimate around 3-7% additional demand on marine fuel and matching emissions. The most drastic hikes in freight costs are for the container segment, specifically to the Far East and North Asia. Rates have almost tripled from their December values. We are not seeing a direct impact on the cost of marine fuel globally, with the market quite balanced, and demand simply shifting from one location to another, but the higher freight rates are being felt by shippers and consumers.?

Is there excess refining capacity coming online in Asia and the Middle East?

In China, we’re seeing an additional million barrels a day capacity coming online to the existing capacity of 18.3mn b/d in the next 2 to 3 years, and that follows a 50% increase in 2023 year-on-year. But reforms in the Chinese refining system anticipate that the capacity will be capped at 20mn b/d. Also, refineries with a capacity of under or around 40,000 b/d, will be decommissioned, so there is a rebalancing act going on that is in line with the country’s target of peak emissions by 2030. In the Middle East, refining capacity was just under 11 million b/d as of the beginning of 2023, a 700,000 b/d increase on 2022. The most important change this year comes with the 615,000 b/d Al Zour refinery in Kuwait. We also have an additional 260,000 b/d capacity coming on in Q1 of 2025, mostly from Bahrain and Iraq. So, net-net, there will be a surplus of fuel in the region, making the market a bit more heavily reliant on exports than local consumption.

How committed are shipping and marine fuel industries to curbing emissions?

We had 102mn b/d of global oil consumption in 2023, with projections into 2024 for an additional 1.5mn b/d. Most of the net demand will come from aviation fuels, which unfortunately brings a matching increase in emissions. Coal consumption is above 8 billion tons a year, with projections through to 2026 at the same rate. So, the sector’s ambitions are high, but actual fossil fuel-based emissions will continue to rise, at least for the next 2 to 3 years.

Is the IMO proving an effective guide to the sector in the green transition?

The International Maritime Organisation is targeting GHG projections to be nearing net zero around 2050 and it has recently identified additional measures to curb emissions, such as incorporating additional technologies, and creating both market-based and industry-based fuel alternatives into the marine supply chain. There are already alternatives ready for use today - biofuels, LNG, ammonia, ethanol – but the issue is one of scale and economics. We have about 60,000 fleets globally but only 1200 ships, or 2%, have the capacity to consume alternative fuels. And looking at the order book of about 4700 ships, there are only 1000-1300 of those that match alternative fuels. So, there are headwinds for the marine industry to add significant additional growth in the alternative fuel space.

Is there enough policy clarity to spur effective marine sector decarbonisation?

Ambitions set by the likes of the IMO and COP28 are all well and good, but they need to be turned into policy at the state level. When it comes to marine decarbonization, we see the three pillars as regulation, innovation, and infrastructure. Regulation is the key component and needs to set a clear track to 2030 and beyond, moving from perhaps being prescriptive to descriptive so that investment can accelerate. The entire industry is waiting for clearer signals on this.?

Watch full Interview here!

Over the last week, Gulf Intelligence has held high-level interviews with energy experts in the Middle East, Asia, Europe, and the US. This intel is harvested from the exclusive briefings.

ENERGY MARKETS VIEWS YOU CAN USE

Amena Bakr
Senior Research Analyst, Energy Intelligence        

OPEC+ cuts have proven to be effective so far.

We’re seeing inventory levels that usually build up during the first quarter drop. Initial estimates for January show them down by about 60 million barrels. Brent is holding strong in the $80s, which is great for many of the group members. In the first week of March, they’re expected to decide on what to do with the latest tranche of voluntary cuts of 2.2mn b/d, whether to extend for another quarter or bring back some of that supply gradually.

Are expectations for demand shifting?

Our estimates still see growth in demand of around 1.2mn b/d this year, which is much below the 2.2mn b/d that OPEC expects, mainly in the second half of the year. If that does happen, it leaves space for the group to bring back some of that supply into the market, which will happen gradually and on a pro-rata basis to avoid any shocks.

Is Saudi Arabia abandoning its role as swing producer?

It’s a fine line between the traditional policy where Saudi used to keep spare capacity for the security of the global markets, versus keeping spare capacity for market management. What the Kingdom has said is that it will no longer keep that buffer for global security. And the spare capacity it decides to keep for market management will be at its discretion. At the same time, Saudi is still investing in capacity. There’s a misconception that because it has abandoned the plans for 13mn b/d, that they’re not putting money into maintaining capacity, but that is still ongoing. Plus, the plan is to use non-associated gas from the Jafura project, which will displace 1.4mn b/d of liquids, so that additional capacity could potentially be exported.

Dr. Iman Nasseri 
Managing Director – Middle East, FGE Dubai        

What is OPEC+ likely to decide about post-Q1 supply?

There are signs of demand recovery and an upward trend through the year. That indicates that OPEC+ would have a trajectory ahead of them to gradually phase out some of the cuts. That would basically keep the market balanced and prices at around $80 to $85, incorporating expected continued growth in China and the 400,000 b/d of post-Covid impact yet to be recovered. Overall, the trend suggests that there is an opportunity for OPEC+ to unwind about half of the latest 2.2mn b/d cuts this year.

How is the market pricing in supply disruptions from the Red Sea?

The market is getting more and more confused on how to price in the multiple geopolitical risk factors. Last year, we had a recovery in Iranian and Venezuelan barrels and the market has built in uncertainty about how long that will last. Then we had Gaza and Bab Al Mandeb. If we look at the short term, the fundamentals of the market are not as tight as the prices suggest, so that could just be an overcooked situation of the impact of trade reroutes of oil supply. But at the end of the day, the size of the risk has shrunk. All the above individual factors would have had a $5 to $10 impact in the old days, but now, all of them combined might be adding a $5 risk premium, at most.

Outlook for LNG prices?

Current low LNG prices are a very short-term phenomenon. Everyone expected a tight 2024 and 2025, but due to the warm winter and to portfolio players stocking up on spot cargoes, that tightness didn’t happen, and so we ended up with low prices and an oversupplied market.

Vibhuti Garg 
Director - South Asia, IEEFA        

India is exhibiting very strong economic growth and consumer demand.

We’re seeing tremendous growth in vehicle sales, both electric and ICE. On refined products, diesel demand might drop because of good alternatives and India’s climate, ambitions, but there’s still a strong push on LPG and other refined products by the government. Moreover, India is poised to have an export led refining products strategy, even if it is not consumed domestically.

Outlook for AI impacting hydrocarbon demand in India going forward?

India has big ambitions on hydrocarbons, so the efficiency that will come with technology innovation will have a big impact. On the other hand, it also has a big push on biofuels, and we’ve started blending ethanol with petrol, already achieving a target of 20% and with an ambition to raise that further, which will drive demand for oil down. And while oil prices have softened a bit, the strategy for the country is still to try and reduce oil consumption because it’s the first time in many years it has been able to reduce the current account deficit and so is in a better position with its economic growth.

Impact on India’s fuel mix as it seeks to build additional nuclear capacity?

India has been looking at expanding nuclear capacity for a long time but due to limited availability of fuel and a lack of strong tie ups with other nations for supply, the plan has been postponed quite a few times. But given the country’s energy demand is now expanding at a rate of 7%, nuclear is being considered. The government is eyeing small nuclear reactors, rather than big projects, and I would say it’s going to be a wait and watch policy, with a limited share in the total energy mix.

Dr. Charles Ellinas 
CEO, Cyprus Natural Hydrocarbons Co. & Senior Fellow, 
Global Energy Center - Atlantic Council        

Egypt is having problems with its gas.

Production is going down continuously while domestic demand is rising. There are a few new small discoveries that will be developed but in the meantime, opportunities for Cyprus have opened up for gas exports to Egypt. Chevron is expected to come back with a revised plan for the Aphrodite field there by April and ENI is making progress on its gas discovery in Block 6 within a couple of months and will also put forward a plan to develop that gas and sell it to Egypt. The East Med gas market remains active, with oil majors persevering with their efforts, and developments centering around Egypt. There could be more drilling in Cyprus, but Egypt is where the future opportunities are, with a growing domestic demand market. And despite the problems the government is having with production, it’s still pushing for increasing use of gas in transport.

Could Egypt become a large gas exporter again?

Exports of LNG from Egypt last year were only 3.7 million tons, and this year they’re expected to be even less. It’s the domestic market that’s attracting investment interest – gas prices compared to production costs are still quite healthy. That’s why, for example, Chevron has embarked on a $24 billion project to expand production at the Tamar field by 60%, with most of the gas destined for Egypt.

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