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Egypt: Is Russia’s Vostok Oil megaproject a threat to the Suez Canal?

By Sherif Tarek
Posted on Tuesday, 22 June 2021 22:08, updated on Tuesday, 29 June 2021 09:10

A ship is seen after sailing through Suez Canal as traffic resumes after a container ship that blocked the waterway was refloated, in Ismailia, Egypt, 30 March 2021. REUTERS/Hanaa Habib

Russia is setting up a major oil project that would use the icy Northern Sea Route to supply Asian markets. So do the managers of Egypt's Suez Canal, a vital global trade chokepoint, have anything to worry about?

Russian company Rosneft is working to set up its huge Vostok Oil project, which could cost an estimated $150bn and produce 1m barrels of oil per day by 2027 if all goes according to schedule.

That could be a threat to the Suez Canal’s oil traffic.

  • The data collectors at the firm Kpler reported that in 2020, 39.2 million barrels of oil per day were transported by sea.
  • The Suez canal route accounted for 1.74 million barrels per day, or 4.4% of the global total.

Moving forward

This month, the Russian energy producer held meetings with contractors and suppliers, seeking to start shipping oil in 2024 from the project via the Northern Sea Route, part of which runs along the Russian Arctic coast near the North Pole.

The Vostok Oil project – in which commodities trader Trafigura owns a 10% stake, and a consortium of Vitol and Mercantile & Maritime is set to purchase another 5% share – will include two sea terminals, three airfields and a railway.

What kind of investor would put on hold his investment for eight months each year to pass through this new channel?

Vostok’s trade route will provide a much shorter passage to Asian markets than the Suez Canal, according to a Citigroup report, but the project has risks and disadvantages that could hurt its attractiveness.

“Highly impractical”

Mohab Mamish, a presidential advisor for Egypt’s canal projects and a former chief of the Suez Canal Authority (SCA), says that Russia’s plans are not a threat at all.

Mamish shrugs off the possible impact of Vostok Oil, insisting that the Suez Canal will be more competitive in the international oil trade for at least three decades, citing the Russian project’s unfavourable conditions.

“First of all, the North Pole is frozen for six months [every year],” he tells The Africa Report. “And there are two more months during which it unfreezes, and in the process, creates ice spikes under water” that hamper and damage ships.

“This will leave it [Vostok Oil] four months to be operational,” he says. “What kind of investor would put on hold his investment for eight months each year to pass through this new channel?” Mamish asks.

To overcome this problem, Mamish adds, arrangements must be made, such as deploying icebreaker vessels, which he says are quite costly. This will make Vostok Oil “highly impractical”, even though it will shorten trips compared with the Suez Canal.

Climate change

But Yezid Sayigh, a senior fellow at the Carnegie Middle East Center, notes that with climate change causing Arctic ice to melt, Vostok Oil might indeed offer a viable alternative to the Suez Canal.

“The thawing of the Arctic region due to global warming is opening up an alternative maritime route that will greatly shorten distances for shipping to travel between East Asia, Europe and North America,” he tells The Africa Report.

“This is the principal challenge to the Suez Canal,” he says. “I guess that the SCA would have to offer discounts to transit fees in order to keep the cost to shippers of using the canal, when they can save on fuel costs by taking the northern route.”

Parts of the Arctic sea could become ice-free as early as 2040, suggests a recent research by the University College London, indicating that ice in the far northern area is thinning twice as fast as previously estimated.

‘Superior’

SCA chairman Osama Rabie has recently disclosed plans to expand and deepen the southern stretch of the Suez Canal, where a container ship, Ever Given, was infamously jammed in March and ground ship traffic to a halt for six days.

Pushing oil prices higher until the ship was refloated, the blockage caused Egypt to incur an estimated $1bn worth of losses, for which the North Africa country has been seeking financial compensation.

Around 12% of global trade passes through the Suez Canal each year. Extending from the Mediterranean to the Red Sea, it is the shortest sea link between Europe and Asia.

The 151-year-old route is a key source of hard currency for Egypt. In 2020, the SCA’s revenue stood at $5.6bn, down from $5.8bn the year before, due to the pandemic-induced slowdown.

“The Suez Canal, amid the status quo and after the [2015 launching of] the ‘new Suez Canal’, became superior,” Mamish says, referring to a military-supervised $8bn expansion of the canal that was inaugurated six years ago.

SCZone

Sayigh, who is an expert on the oversized role of Egypt’s military in the economy, also says that investments in the Suez Canal Economic Zone (SCZone) has taken the conduit’s economic significance beyond navigation.

“Egypt is already taking sensible steps to maintain the attractiveness of the Suez Canal by developing the zone as an industrial, services and transport hub, so that companies will invest and move goods in and out,” he says.

“So even if the overall volume of shipping using the canal declines, this might be compensated by overall growth in those other sectors,” Sayigh adds.

The SCZone – which spans 461 square kilometres and consists of two integrated areas, two development areas and six ports – attracted $15bn in investment from 2015 to 2020, according to the SCZone chairman Yehia Zaki.

Bottom line

The cost of using Vostok Oil’s planned shipping route are still unknown, and the planners will have to deal with more obstacles to make it viable in the long term. For now, the Northern Sea Route is only being discussed for oil shipments, and so Egypt’s role in international trade is relatively unthreatened. To deal with potential shifts in the market, the Egyptian government is focusing on the development of various SCZone projects as a means to strengthen the canal’s role.

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