Though the street protests that led to the recent deaths of more than 1,000 people in Egypt after a bloody military crackdown seem to have diminished, there is apprehension in the oil and gas sector that difficult days may be ahead.

As of now, the unrests have not disrupted oil and gas production or the market; however, international oil companies are operating in Egypt in an uncertain environment.

“If the army-backed government in Cairo bans the Muslim Brotherhood or excludes other groups in the run-up to the political transition to civilian rule next year more violent unrests could occur. There could be a civil war in Egypt like the bloody civil war in Algeria in the 1990s and this would be catastrophic for oil and gas markets,” an oil expert in Lagos said.

After the military deposed Mohammed Morsi of the Muslim Brotherhood on July 3, 2013, several companies, including oil and gas firms such as BG Group and BP, withdrew some expatriate staff from Egypt over safety concerns.

Shell denied that it would halt its operations in Egypt, but the Daily News Egypt quoted Ahmed El-Gabry, director of Shell Egypt’s media office as saying the company’s operations stopped for a day but resumed. El-Gabry added “we can’t anticipate what will happen in the future, but for the time being we have no intention to close our offices in the country.”

Currently, oil companies including Apache Corp. and other Western companies are assessing the situation. Apache said it is assessing the value of its Egyptian interests, which accounted for around 20% of its global oil and gas production and 27% of its revenue in 2012. Apache has been responsible for many of the oil discoveries in Egypt in the past five years, the US Energy Information Administration (EIA) said in a July 2013 report on the country.

Unrest could impact transit

Egypt is the largest oil producer in Africa that is not a member of the Organization of Petroleum Exporting Countries (OPEC) and the second largest natural gas producer on the continent following Algeria, according to the EIA. In 2012, Egypt’s total oil production averaged around 720,000 b/d, down from more than 900,000 b/d in the mid-1990s, as oil fields matured.

Although Egypt is not a major oil exporter like Saudi Arabia, one of its backers and the world’s largest oil exporter, the country plays vital and strategic roles in the international oil and gas markets through operation of the Suez Canal and the Suez-Mediterranean (SUMED) pipeline.

The Suez Canal, located in Egypt, is a 163 km (101 mile) long canal that connects the Mediterranean Sea with the Red Sea. The canal and the 322-km (200-mile) SUMED pipeline are strategic routes for Persian Gulf oil and gas shipments to Europe and North America. The pipeline is the only alternative route nearby to transport crude oil from the Red Sea to the Mediterranean if ships are unable to navigate through the Suez Canal. Crude flows through two parallel pipelines, with a total pipeline capacity of around 2.35 MMb/d, according to the EIA.

The canal is an important transit route for oil and LNG shipments traveling northbound from the Persian Gulf to Europe and North America and southbound shipments from North Africa and countries along the Mediterranean Sea to Asia. The EIA said in 2012, oil (crude oil and refined products) and LNG accounted for 24% and 5% of total Suez cargoes, measured by cargo tonnage, respectively.

Any political unrest, civil or religious war in Egypt that leads to the closure of the two routes would have a big and negative impact on global oil and gas markets.

The EIA in its July 2013 report quoted the US Department of Transportation as saying that closure of the two routes would necessitate diverting oil tankers around the southern tip of Africa, the Cape of Good Hope, adding approximately 4,345 km (2,700 miles) to transit from Saudi Arabia to the US, increasing both costs and shipping time. Shipping around Africa would add 15 days of transit to Europe and 8 to 10 days to the US if the canal was closed.

‘Companies remain wary’

Fears of a disruption in oil and gas supplies to Western countries following the recent military crackdown led to an increase in oil price. But a reduction in production or total shut down of oil and gas production could have a greater impact on global oil markets.

“Energy companies remain wary of the situation in Egypt and fear there may be a civil or religious war if events there aren’t properly handled,” the Lagos oil expert said.

For example, the BG Group, which depends on Egypt for about a fifth of its production, said given the current situation the company’s investment program in Egypt is under continuous review.

“Events in Egypt remain a primary concern and will continue to be so as the political, social, and business environment evolves,” BG CEO Chris Finlayson said in the company’s 2Q 2013 results issued July 26, 2013.

Though Finlayson said BG’s offshore operations were continuing in Egypt, oil analysts said an escalation of the unrest in Egypt could shut down production leading to gas delivery problems for BG and its customers.

Also worth paying attention to is the recent gesture by Saudi Arabia, Kuwait, and the United Arab Emirates. After Morsi was deposed, the three OPEC-member countries promised Egypt a total of US $12 billion in loans, grants, and fuel shipments. Reuters reported that $5 billion of the amount already has arrived in Egypt. And Prince Saud al-Faisal, Saudi Arabia’s foreign minister, said his country was ready to provide more billions of dollars to Egypt if necessary.

Despite Saudi Arabia and the other two countries having huge foreign currency reserves, it is possible that they may increase oil outputs above OPEC quotas to recoup through higher oil sales the loans and grants they are making to Egypt. If this happens, it could lead to over production of oil, and this could lead to lower oil prices.