Suez Canal Allows VLCCs

November 28th, 2006

Egypt to Spend $5 Billion on Suez, Allow Supertankers (Update1)
By Abeer Allam
(Bloomberg)

Egypt plans to spend at least $5 billion over five years to expand the Suez Canal, speeding up Middle East oil shipments to Europe and the U.S. and increasing revenue from the world's longest man-made waterway.

The canal will be deepened by 10 feet and widened by 17 percent to an average of 365 meters (1,198 feet), Admiral Ahmed Fadel, chairman of the Suez Canal Authority, said in an interview in Ismailia. The Egyptian government will spend at least $1 billion a year from 2010 through 2015 on the project.

``We want to get the biggest possible share of future world trade,'' said Fadel in an interview yesterday. ``We want to create more bypasses to handle future huge tankers.''

The expansion will let vessels use the canal without emptying half their cargoes into the adjacent Sumed pipeline first, stoking demand for very large crude carriers, or VLCCs, operated by Frontline Ltd. and Euronav NV. The largest vessels that can use the link without stopping are suezmaxes. About 7 percent of the world's seaborne trade transits through the canal. The waterway earned Egypt $3.6 billion in the past year.

``It will create stronger demand for VLCCs,'' James Davis, an analyst for Lloyd's Marine Intelligence Unit, said by phone from London. Demand for suezmaxes and so-called aframaxes, which haul 650,000-barrel cargoes, may fall, he said.

Previous Expansion

The canal, through which 18,000 ships passed in 2005, has spent about $800 million on expansion projects since 1980 to accommodate growing traffic. Global trade will grow 8.9 percent this year and 7.6 percent in 2007, according to the International Monetary Fund.

As many as 220 VLCCs, each able to transport 2 million- barrel consignments, transited the canal in the past 12 months, according to Lloyd's MIU. A further 264 elected to take the longer journey around South Africa.

Some oil companies discharge their entire 2 million-barrel cargoes into the pipeline that runs by the 166-kilometer (103- mile) waterway from the Red Sea terminal of Ain Sukhna to storage tanks at Sidi Kerir on Egypt's Mediterranean coast. They then return to the Persian Gulf for new cargoes and the oil they discharge is collected by smaller vessels in the Mediterranean.

Quicker transits through the canal may encourage some oil- tanker operators to take cargoes directly to where they are needed, curtailing demand for smaller vessels operating in the Mediterranean Sea, according to Lloyd's MIU.

Suez Crisis

The waterway, built by Ferdinand de Lesseps in 1869, was nationalized in 1956 by President Gamal Abdel Nasser after the U.S. and the U.K. withdrew financial support for the Aswan High Dam project. The move prompted an Anglo-French-Israeli invasion of Egypt in what is known as the ``Suez Crisis'' or ``the Tripartite Aggression'' in Egypt. International pressure forced the troops to withdraw and Egypt retained control of the canal.

The waterway is one of Egypt's largest foreign-currency earners, together with tourism, oil and gas exports and remittances from Egyptian workers abroad.

Suez Canal revenue rose 8 percent in the fiscal year that ended June 30 because of growing trade between Europe and Asia, the surge in oil prices and the 3 percent increase in Suez Canal transit fees. In the first 10 months of this year, revenue rose 10 percent to $3.2 billion from a year earlier.

The expansion will enable tankers carrying 350,000 metric tons of cargo, equivalent to more than 2 million barrels, to pass through the canal. Ships carrying a maximum of 200,000 tons are currently able to use the waterway.

Sumed Capacity

The Sumed oil pipeline has a capacity of 2.5 million barrels of oil a day. Egypt and Persian Gulf monarchies, including Saudi Arabia, Kuwait and Qatar, own the pipeline, which mainly carries Saudi oil. The pipeline opened in 1977.

``We agreed with Sumed officials in 1997 that we should be complementing each other and we should offer transit service as a package,'' Fadel said. ``We would do anything to keep Suez Canal's route the most economically competitive and that is why we are conducting current expansions.''

The project also will speed up shipments of oil from Europe to Asia, according to Lloyd's MIU. A BP Plc-led pipeline will pump up to 1 million barrels of Azeri crude oil to the Turkish port of Ceyhan. Fuel oil that's used to power ships is also transported from Russian exporters in the Baltic Sea to Singapore and China.

The Suez Canal has gone through several expansion stages. Following nationalization, it was deepened 4 feet to handle ships with a 38-foot draft. It then closed for eight years after Israel occupied the Sinai Peninsula, east of Suez.

Five-Year Plan

When the canal was opened for international trade in June 1975, the authority began a five-year plan to build three bypasses near Port Said, Timsah Lake and Deversoir along the canal coastline to allow transit of ships in both directions. The bypasses' combined length reached 69 kilometers.

From 1980 through July 2001 the canal was deepened in two stages to allow passage of ships with a 62-foot draft, and 200,000 tons capacity. By the end of 2007, it will be able to handle 66 foot-draft ships, with 220,000 tons capacity.

``With every stage we make sure the return will be higher than the spending and we keep adjusting our plans to cater for a changing world,'' Fadel said.