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Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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Oil Tankers Shun Suez Canal In Search of Cheaper Route

At a time when Egypt has just raised $8 billion to expand the Suez Canal project, reports are surfacing that global cargoes are increasingly bypassing the canal due to low oil prices, as shippers prefer to take a longer route that is cheaper.

Numerous cargo ships are now opting to take the longer route south of Africa, bypassing both the Suez Canal and the Panama Canal. All told, since last October, 115 vessels running goods from Asia to North Europe and the U.S. east coast have sailed around South Africa instead of going through the Suez Canal, according to a report by Danish SeaIntel Maritime Analysis.

The report notes that while carriers could continue to reroute some Asia-Europe cargoes, they may keep the Suez Canal route for some services in cases where shippers require a faster transit time. Related: The U.S. Still Dominates World Oil Prices

It’s all about fuel. Falling fuel prices mean that vessels can afford to take a route south of Africa that would normally take up to a week longer, depending on the origins. Now they can foot the bill to burn the extra fuel it takes to go faster, closing the time gap and making the Suez Canal—which charges a lot more for passage--less attractive.

Vessels sailing from Asia to the East Coast via the Suez Canal have to pay on average US$465,000 for passage, according to SeaIntel, which calculated that the South Africa route would save an average of US$235,000 per voyage. It also noted that some services could save as much as US$19 million a year at the high, and as much as US$7.3 million per year in the worst-case scenario.

This puts the Suez Canal is a tough spot. At the end of the day, it means it would have to slash its passage prices by half to compete and remain relevant while oil prices are low. Related: Oil Finds Some Support As U.S. Output Falls

“SeaIntel concludes that both the canals face a significant challenge in the current low bunker price, as it means that for many services it is cheaper to sail south of Africa on the backhaul than to use the canal routings… We expect this to intensify as carriers can deploy larger vessels, with lower cost per container, without having a significantly longer transit time, direct to the densely populated urban centers on the east coast,” the report said.

For Egypt, it’s a nightmare that is contributing to both economic and political instability. Cairo only just managed to raise $8 billion in funds to finance a major extension project, and the canal is one of the main sources of the country’s foreign currency.

The government’s stability is being questioned by dire economic straits that have seen Egypt’s foreign currency reserves reduced to half of what they were before the 2011 uprising. Debt is rising. Right now, the country can barely pay for food and fuel, and its Suez Canal profits are taking a hit.

The new project would expand the canal to two lanes of traffic and further reduce transit time down to 11 hours from 18 hours. Related: How To Spot Survivors In North American Oil 

More specifically, the expansion is to include a new 35-kilometer channel, while the original canal would be widened and deepened extensively. Egypt was hoping to add another $13 billion to its revenue by 2023 with this expansion project. As of 2014, revenues from the canal were only at $5.5 billion.

Already, the public had criticized the expansion project as unnecessary, and the government had been banking on this to shore up its revenues and currency, none of which is happening. With cargoes now increasingly bypassing the canal, the expansion project is even less feasible.

It’s a bad time for President Abdel-Fattah al-Sisi, who was hoping the canal would be a major coup.

It’s also a bad time for Panama, which was likewise pursuing an expensive expansion project that would have nearly tripled the size of vessels that could pass through. The project was originally slated to be completed by June, but costs keep rising, and with fewer ships passing through it only makes sense in a longer-term view of a hoped-for oil price rebound.

By Charles Kennedy of Oilprice.com

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