Key Takeaways
- The disruptions in Red Sea traffic as a result of ongoing geopolitical tensions in the Middle East are adversely affecting global trade flows.
- A significant portion of shipping that would usually pass through the Suez Canal is rerouting around the Cape of Good Hope.
- Diverted shipments include liquefied natural gas and oil exports from Gulf Cooperation Council countries, particularly Qatar, going north to Europe.
- We believe that the diversions will have a minimal impact on rated Qatari entities exposed to oil and gas since their customers are predominantly in Asia.
- A closure of the Strait of Hormuz would be far more significant for these rated companies and the global hydrocarbon market.
The attacks on ships in the Red Sea are a worrying development of the conflict in the Middle East. The diversions that these attacks are prompting include shipments of liquefied natural gas (LNG) and oil from Gulf Cooperation Council (GCC) countries, particularly Qatar, to Europe.
Barring the risk of a regional war, S&P Global Ratings believes that the impact on rated Qatari and other Middle Eastern entities exposed to oil and gas will be manageable. This is because most of their customers are in Asia. Nevertheless, the closure of the Strait of Hormuz remains a risk. Even a partial closure would have a far more significant effect on rated Qatari entities exposed to oil and gas because it is their primary export route.
Seaborne Trade Flows Through The Suez Canal Are Meaningful
The disruptions in the Red Sea are affecting the shipping route between the Bab el-Mandeb Strait and the Suez Canal. The Suez Canal usually sees about 10% of global seaborne trade (see chart 1). LNG shipments usually pass through the Suez Canal and mainly consist of deliveries from Qatar to Europe. Significant LNG exports from the U.S. and Russia to Asia go in the opposite direction.
LNG flows through the Suez Canal have increased to more than 4.0 billion cubic feet (bcf) on average since 2019, compared with about 3.3 bcf in 2018 (see chart 2). In 2022, we calculate that LNG flows through the Red Sea accounted for 8% of total LNG trade and reached about 4.1 bcf in the first six months of 2023.
Chart 1
Chart 2
So far, containerships in the Gulf of Aden have seen the sharpest decline compared with other bulker and tanker transit ships. However, more traffic is being diverted. In January 2024, media sources reported that QatarEnergy had stopped sending tankers through the Red Sea, although production continues.
Prolonged pauses and disruptions to traffic through the Red Sea could slow the delivery of Qatari LNG to Europe (roughly about 10%-15% of European LNG trade), as well as Russian and U.S. LNG to Asia (10%-15% of Asian LNG trade) (see charts 3 and 4). Rerouting around the Cape of Good Hope seems to be the preferred alternative route, but this adds at least 10 days to the journey, reducing margins for shipping companies that do not have pass-through cost-charter agreements.
Chart 3
Chart 4
We calculate that in 2022, oil passing through the Suez Canal and Sumed pipeline reached a meaningful 7.2 million barrels per day, translating into just under 10% of global oil production (see chart 5).
Chart 5
What This Means For Qatari Entities Exposed To Hydrocarbons
Companies or projects with direct exposure to hydrocarbons in the rated GCC corporate and infrastructure portfolio include Qatari oil and gas shipping company Nakilat Inc. (AA-/Stable/--), QatarEnergy (AA/Stable/--), and Qatari LNG project QatarEnergy LNG S(3) (AA-/Stable). Overall, we don't expect the Red Sea disruptions to impinge on these entities.
Nakilat Inc.
While physical risk to its vessels is a possibility, we expect the Red Sea disruptions to have a limited economic impact on Nakilat Inc. As a result, a rating impact seems unlikely at this stage, particularly as Nakilat Inc. is more exposed to Qatari LNG sales to Asia than to Europe.
We do not expect the current geopolitical tensions to affect Qatar's LNG exports to Asia. In addition, Nakilat Inc. has long-term take-or-pay contracts with full cost pass-through clauses including insurance. We saw the benefits of these contracts throughout the COVID-19 pandemic and even the attacks on the Strait of Hormuz in June 2019 (see chart 6). We don't expect Nakilat Inc.'s EBITDA margins in 2023 or 2024 to differ materially from historical levels.
Chart 6
Nakilat Inc. is a wholly owned subsidiary of QGTC (unrated), one of the world's largest LNG transportation companies by capacity, with 69 wholly and jointly owned LNG carriers, four liquefied petroleum gas vessels, and one floating storage regasification unit. QGTC provides shipping and marine-related services to a range of participants within the Qatari hydrocarbon sector.
QatarEnergy
QatarEnergy and QatarEnergy LNG charter Nakilat's vessels, and as such, we suspect that QatarEnergy will incur any additional fuel charges and insurance premia if necessary. However, since more than 70% of QatarEnergy's customers are in Asia, we anticipate that the impact on its profit margins will be slight. QatarEnergy is Qatar's national oil and gas company and accounts for about 20% of all the LNG produced globally on a gross basis.
QatarEnergy LNG S(2) (QE LNG S2) and QatarEnergy LNG S(3) (QE LNG S3)
QE LNG S2 and QE LNG S3 are LNG production facilities in Qatar, generating about 39% of the country annual LNG production. We do not expect the Red Sea disruptions to have a material impact on the projects' operating margins or financial performance.
Historically, the projects have distributed about 30% of their annual production to customers in Europe and shipped them through the Suez Canal via the Red Sea. Since the projects are responsible for shipping the LNG, we expect an increase in shipping and insurance costs due to the recent disruptions. However, while it is difficult to quantify the magnitude of any cost increases at this stage, there are a number of mitigating factors that may allow the projects to minimize them.
In particular, the projects' sale-and-purchase agreements (SPAs) contain certain rights that could neutralize any potential impact. It is worth noting that the projects have generated stable operational and financial results during other periods of diplomatic tension across the region and throughout the pandemic. Moreover, the projects are highly cash generative and have a robust financial profile and this gives them a significant buffer against any cost increases.
QE LNG S2 and QE LNG S3 sell almost all of their annual LNG production (approximately 29.7 million tons) under long-term take-or-pay SPAs, which largely guarantees their production offtake.
Red Sea Disruptions Delay Rather Than Prevent Deliveries
Restricting transit through the Gulf of Aden delays rather than prevents delivery to the world market. Rerouting LNG to Asia-Pacific frees up U.S. cargoes for supply to Europe (see "CreditWeek: How Will The Red Light In The Red Sea Affect Supply Chains And Inflation?," published Jan. 18. 2024). As a result, the Red Sea disruptions have not disrupted the global oil or gas market significantly.
However, there is still a risk of transit through the Strait of Hormuz being restricted. Since around 30% of seaborne crude oil exports and 20% of LNG pass through the Strait, even a partial closure would prove highly disruptive to the global markets for both Western powers and GCC producers' important trading partners such as China and India. The Strait is the primary export route for oil and gas from Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Iran, and Iraq.
Related Research
- CreditWeek: How Will The Red Light In The Red Sea Affect Supply Chains And Inflation?, Jan. 18, 2024
- Emerging Markets Monthly Highlights: Red Sea Tensions Hinder Disinflation, Jan. 18, 2024
- Regional Gas Is More Exposed Than Oil To War In The Middle East, Nov. 15, 2023
- QatarEnergy, Aug. 28, 2023
- Qatari Shipping Company Nakilat Inc. 'AA-' Ratings Affirmed; Outlook Stable, Feb. 23, 2023
- Ras Laffan Liquefied Natural Gas Co. Ltd. (3) Rating Raised To 'AA-'; Removed From Criteria Observation; Outlook Stable, Jan. 25, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Rawan Oueidat, CFA, Dubai + 971(0)43727196; rawan.oueidat@spglobal.com |
| Secondary Contacts: | Trevor Cullinan, Dubai + (971)43727113; trevor.cullinan@spglobal.com |
| Sofia Bensaid, Dubai +971 (0)4 372 7149; sofia.bensaid@spglobal.com |
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