With protests forcing shutdowns at key oil shipping ports in Libya and violent political upheaval roiling Egypt, Credit Suisse energy analysts assessed which oil and gas companies’ operations are most exposed to conditions in the two North African countries.
The energy companies most exposed in terms of value to Egypt and Libya are Vienna-based OMV, Houston-based Apache Corp., Spanish oil giant Repsol, Italian multinational ENI and British natural gas company BG Group, Credit Suisse integrated oil and gas analysts wrote in a note this week entitled “North African Summer: Egypt, Libya and the Companies.” Of the 13 major energy companies Credit Suisse analyzed, the ones that rely on Egypt for the highest percentage of their total oil and natural gas output are Apache and BG Group, which have an estimated 20 percent and 18 percent of total production in the country, respectively. OMV and Repsol have the highest production exposure to Libya, with operations in the country representing 11 percent and 10 percent of their respective total production.
But just because companies source a great deal of production from Egypt and Libya doesn’t mean that operations in those countries account for an equally large chunk of their income. “While the share of production to the group is high, these countries are somewhat lower profit areas for these corporates,” Credit Suisse’s energy analysts wrote. Libya, for example, has very high tax rates that reduce the cash flow to oil companies with operations there, they noted. The ratio between production and cash flow is not equal in Egypt, either. BG only earned 15 percent of its net income from Egypt last year despite the fact that 20 percent of its natural gas production took place in the country, the analysts noted.
Even in net asset value terms, however, Apache has the most exposure to Egypt, with the country accounting for 17 percent of the total estimated net asset value for this year. OMV has the most exposure to Libya, with its operations there accounting for 22 percent of its total estimated net asset value.
So far, the biggest impact of the unrest in the region has been on Libyan oil exports. The OPEC member has the largest proven oil reserves in Africa, estimated at roughly 47 billion barrels, according to the United States Energy Information Administration. Production has fallen by 1 million barrels per day to just 600,000 barrels per day since the end of June, when oil workers began striking. The strike has mainly impacted oil export infrastructure in the eastern part of the country, including the area around the Sirte Basin, which contains 75 percent of Libya’s commercial oil reserves, Credit Suisse commodities analysts wrote in a recent note, “Commodities Advantage: Fundamentals in the Driver’s Seat.”
Egypt is the largest non-OPEC oil producer, producing about 720,000 barrels of oil each year. But the country’s role as an energy transit route is more important than its actual production levels, Credit Suisse energy analysts pointed out, as the government operates both the Suez Canal and the Suez-Mediterranean pipeline. Three million barrels per day of oil – about 2.5 percent of the world’s crude oil trade – and 1.5 trillion cubic feet of natural gas moved through these transit points in both directions last year. But even the revolution in 2011 that resulted in the overthrow of former President Hosni Mubarak didn’t do much to disrupt operations, and the current unrest hasn’t either. But Credit Suisse oil company analysts pointed out that turmoil does tend to impact things like getting permits approved and customers paying the bills on time. “It is fair to assume that the current uncertainties may somewhat delay payments to oil companies,” analysts wrote.
But Credit Suisse cautioned that the bigger concern when it comes to Egypt is the prospect of unrest there exacerbating problems in Libya and other neighboring countries. “It is worth mentioning the effect that the current unrest in Egypt may have on neighboring Middle East and North African countries, especially Libya, which has already been seeing disruption to oil production amidst oil sector protests,” analysts wrote. “If the conflict continues in Egypt, the number of people trying to cross into Libya may prove another issue for the Libyan government to deal with.” The bank’s commodity analysts went one step further, saying that Libya’s continued instability and proximity to Egypt “present a large upside risk to oil markets,” meaning that the situation threatens to drive oil prices higher.
Brent crude oil prices had already been heading north for reasons other than the Middle East unrest, Credit Suisse commodity analysts said in a recent note entitled “Fundamentals in the Driver’s Seat.” “After disappointing output from the North Sea and strangely low Urals availability in Europe, cuts in Nigeria and Algerian loading schedules have in the last few weeks been compounded by a sharp deterioration of Libya’s supplies.” How long that particular deterioration lasts – and whether or not it will get worse – remains unclear.