Strategic Outlook

Egyptian Instability and Suez Canal Security (Part I)

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Calm waters in a restless country. Can it last?
Calm waters in a restless country. Can it last?

The following article is special to our International Maritime Shipping Week. While we often discuss the threats to maritime shipping, this week looks at dangers arising from such global trade, and possible mitigations.

As months of massive opposition protests culminated on July 3, 2013 in a military coup against Egyptian President Mohamed Morsi, the eyes of the commercial maritime industry were fixated on the Suez Canal. Though the general report from the vital waterway is ‘business as usual,’ the political and security situation in Egypt remains incredibly fluid. In the restless Sinai Peninsula, militant groups have seized a perceived moment of weakness to launch a fresh round of attacks against Egyptian authorities. In the major cities, including those along the Canal, pro- and anti-Morsi demonstrations and security crackdowns have turned violent, resulting in hundreds of deaths. Military deployments have been increased in the Canal Zone, but the balance between security and efficiency is a delicate one.

As an exercise in speculative analysis, this article examines the questions of who might attempt to shut down the Suez Canal, while the second installment will assess how such an objective could be achieved. Of particular relevance for International Maritime Shipping Week, is the possibility that a vessel transiting the Canal might unwittingly become a pawn in a scheme to close it.

Potential Perpetrators

There is no shortage of local and regional groups hostile to Egypt’s interim military government. As the military’s legitimacy and public support is largely based on the relative stability it provides, an attack on the Suez Canal would serve to undermine and embarrass the interim government, demonstrating to the world that the military is unable to protect the country’s vital interests. That said, the integral boost that Canal revenues provide to the Egyptian economy—accounting for some 2.5% of GDP—makes it unlikely that a political actor with aspirations to govern the country, such as the Muslim Brotherhood, would publically seek to disrupt the Suez Canal.

Riding West from Sinai

Militants in the Sinai Peninsula—a mix of local Bedouins, Palestinians arriving from Gaza, and handful of foreign jihadists—have engaged in low-level conflict with the Egyptian state for decades, but have dramatically escalated their attacks since Morsi’s ousting. The targets of militant attacks are usually symbols of Egypt’s political and military authority in the Peninsula, including security checkpoints, police stations, administrative buildings and army camps. Militants have also struck at critical infrastructure such as oil pipelines to Israel and Jordan, power stations, and the airport at El-Arish. An influx of weapons looted from Libya and the function of Gaza as a smuggling hub has meant that Sinai militants are increasingly well armed, brandishing unguided missiles, RPGs, mortars, and guided anti-tank and anti-aircraft weapons.

Egyptian security checkpoints and military outposts are now subject to near daily attacks by Sinai militants.
Egyptian security checkpoints and military outposts are now subject to near daily attacks by Sinai militants.

As the Egyptian army attempts to crackdown on the militants, there are several indicators that Sinai insurgents may attempt to broaden their campaign and target the Canal Zone. On July 8, armed gunmen attacked the Port Said traffic police directorate and the city’s western seaport in a series of drive-by shootings that mirrored those seen in northeast Sinai. On June 25, a rocket fired from central Sinai landed in an empty area east of the Canal in what Egyptian officials speculate may have been a military drill by an insurgent group. It was also reported that another inaccurate rocket launch in early July was an attempt to hit oil installations in the city of Suez. In addition, Egyptian military sources claim that a cache of Iranian-sourced Fajr-5 rockets seized in Sinai on August 9 were part of a plot to attack Suez Canal facilities.

Forcing a closure of the Canal would be incredibly difficult, but options for disruption are many (see Part II). Regional security expert Ehud Yaari notes that even a lone jihadist in the Sinai could fire an anti-tank missile or RPG at a ship moving slowly through the Suez Canal. This would be unlikely to block the Canal, but may result in delays, increased insurance premiums, and demands for hazard pay for shipping companies.

An Escalating Circle of Political Violence

Two weeks ago, this author assessed that “there is a very low probability that the Muslim Brotherhood will abandon its current strategy of sit-ins and protests in favor of armed revolt against the military.” Recent events, however, have increased the likelihood of political violence spilling over into the Canal Zone. Clashes between Morsi supporters and security forces that left some 80 dead on July 26 were in fact only a preview of the carnage witnessed on August 14, when a police effort to clear protest camps in Cairo was backed by army units firing automatic weapons and sniper rifles. By August 15, the Egyptian ministry of health had recorded 525 dead, but other estimates put it hundreds higher. This event is likely to prove a watershed moment for Egypt and has already resulted in violent blowback from Brotherhood supporters.

Sites of the clashes between protesters and security forces (The Economist)
Sites of the clashes between protesters and security forces (The Economist)

Egypt’s interior ministry claims that 43 policemen were killed during the clashes, four of them captured and summarily executed in the village of Kerdasa near Cairo. Muslim Brotherhood supporters stormed government buildings in Cairo and Suez city, while violent mobs also set fire to some 18 Christian churches across the country.

Now facing an imposed nighttime curfew and state of emergency declaration, the official line from the Muslim Brotherhood leadership is to continue with demonstrations and marches.  “We will rise and rise again until we push the military back into the barracks and restore democracy,” tweeted Brotherhood spokesman Gehad El-Haddad.

The longer this cycle of protest and repression continues, the harder it will be for the Brotherhood’s leaders to prevent its members from engaging in violent acts. There are reports that some Islamists have fled mainland Egypt to join the insurrection currently waged in the Sinai. Other protest groups have threatened to block roads and railways, and attack security directorates and public facilities if the military continues to break up sit-ins or gatherings. These types of actions will have a direct effect on Canal operations. GAC Egypt, a shipping service provider, recently recommended that transiting vessels suspend crew changes and logistical deliveries until further notice.

The worst-case scenario for the Suez Canal would be if individual Islamists become so frustrated with the Egyptian government that they resort to economic destabilization by disrupting the Canal. It is also possible that continued military violence against Islamist protestors could lead other political groups, such as the Salafists (ultra-conservative Islamists), to abandon mainstream politics in favor of armed conflict.  If such groups flee the political system, it could equate to targeted attacks against the backbone of the Egyptian economy: the Suez Canal, the Suez-Mediterranean (SUMED) oil pipeline and tourist centers.

A protest camp cleared, but the battle for Egypt rages on
A protest camp cleared, but the battle for Egypt rages on

Eyes on the Canal

Though Canal traffic remains normal, the political violence that has spread to the Canal cities of Port Said, Ismailia and Suez is of great worry for the Suez Canal Authority (SCA) and Egypt’s military government. Reinforcements from the army, navy, and air force have been sent to secure the entire length of the waterway. There are also unconfirmed reports that the SCA raised the Canal’s security level to “extreme emergency” following the August 14 massacre. The exact nature of this perceived threat—including possible targets for attack and potential impacts of worst-case scenarios—will be the focus of this briefing’s second installment.

This article contains excerpts from the Delex Maritime Analysis Center’s “Suez Canal Security Tracker” series, co-authored by Delex analysts James Bridger and Jonathan Zinger. For more information about this product offering, please contact jbridger@delex.com

Strategic Outlook

A National Strategy for Global Supply Chain Security

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The following article is special to our International Maritime Shipping Week. While we often discuss the threats to maritime shipping, this week looks at dangers arising from such global trade, and possible mitigations.

At what cost certainty?
                                   Certainty at what cost?

Last year, the Obama Administration released its first-ever National Strategy for Global Supply Chain Security. As stated, the main goals of the strategy are to promote the efficient and secure movement of goods and foster a resilient supply chain. Maintaining a secure and resilient supply chain is certainly critical to ensuring the prosperity of the United States’ economy. However, existing legislation governing maritime cargo transit and port security directly contradicts the goals of this strategy.

In 2007, Congress mandated that 100 percent of the approximately 32,000 cargo containers entering U.S. ports each day be screened. The feasibility of this mandate has been questioned by security experts from day one.

In seeking to establish a workable alternative, Congress should consider supply chain realities in fostering a risk-based approach to maritime cargo security.

Given the extensive economic importance of the maritime supply chain, the vulnerability of maritime cargo to terrorist and other malicious attacks has long been a concern. With this concern heightened after 9/11, Congress and the Administration moved to create a risk-based approach to strengthen maritime security centered on analyzing cargo attributes, such as contents and origin of the cargo container, to single out high-risk cargo for further inspection.

By 2006, however, Congress turned sharply away from the risk-based approach with the passage of the Security and Accountability for Every Port Act, which called for testing the feasibility of scanning 100 percent of U.S.-bound cargo, a requirement that was fulfilled though the creation of the Secure Freight Initiative pilot program.

While the program showed that “scanning U.S.-bound maritime containers is possible on a limited scale,” major challenges existed in expanding 100-percent scanning to all 700 international maritime ports handling U.S.-bound cargo. These findings, however, would be disregarded, and Congress moved to mandate that 100 percent of all U.S.-bound maritime cargo be scanned by July 1, 2012—prior even to the pilot program’s completion.

Proponents of the 100-percent mandate have pointed to the supposed success of mandating 100-percent screening of air cargo. Besides the fact that this screening was limited to domestic cargo—screening of U.S.-bound international cargo proved much more difficult—and that a significantly greater volume of cargo transits through the maritime supply chain, another critical difference is that the air cargo security mandate called for the 100-percent screening of all cargo, whereas the maritime cargo mandate calls for 100 percent scanning.

While screening calls for cargo to be assessed for risk on the basis of contents, origin, and other attributes, scanning means that each of the approximately 10.7 million maritime cargo security containers entering U.S. ports each year must be physically scanned. The growth of maritime cargo containerization in recent decades means that typical maritime cargo containers often measure some 40 feet in length. One key issue regarding screening maritime cargo is, therefore, one of scale. While the basic technology exists to effectively screen cargo containers, the expanded technology necessary to perform this function on the larger forms of containerized cargo largely does not.

Cost and infrastructure are also important factors. A single x-ray scanner, the most common technology used for cargo screening, can have a price tag of $4.5 million, plus an estimated annual operating cost of $200,000, not to mention the roughly $600,000 per year for the personnel required to run the equipment and examine the results. Likewise, the mere placement of scanners can also cause logistical problems, as many ports were not built with natural bottlenecks through which all cargo passes. With today’s economy relying heavily on the timely and efficient movement of goods, such delays could amount to around $500 billion in total profit loss. And once scanning technology is installed, it may encounter multiple problems, such as incompatibility with previous technologies, outages due to weather, and insufficient communication infrastructure to transmit electronic data to the U.S. National Targeting Center-Cargo, where it is assessed.

A large part of the post-9/11 anxiety regarding maritime cargo security has centered on the “nuke in a suitcase” scenario, an extremely low probability event. The vast majority of cargo traveling through the maritime supply chain consists of legitimate goods. The 100-percent maritime screening mandate, however, fails to recognize this reality and instead treats every piece of cargo as a genuine threat.

Congress should rethink the 100-percent cargo security mandate and instead return to a risk-based approach to cargo security, centered on analyzing manifests and other data, to single-out only high-risk cargo for further inspection. Ensuring the security and prosperity of the maritime supply chain is simply too important for Congress not to get this right.

Emil Maine is a National Security Research Assistant at the Heritage Foundation, where he conducts independent research on U.S. defense posture. The views and opinions expressed in this article are his own.

Beans Boots Bullets

Gooey Kablooey: How Agro-Terrorists Will Destroy You By Destroying Your Food

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 The following article is special to our International Maritime Shipping Week. While we often discuss the threats to maritime shipping, this week looks at dangers arising from such global trade, and possible mitigations.

It's the one to port
                           Cargo ships in San Francisco harbor. Is one of them out to ruin your dinner?

Sometime in 1843 or 1844, a ship most likely from Baltimore, New York, or Philadelphia landed in a European port. Among the seed potatoes in its hold was the North American fungus Phytophthora infestans. The resulting potato blight swept across Europe, and when it combined with the abominable agricultural policy in Ireland, the outcome was nearly a million dead and a 25 percent reduction in population if including emigration. 

Last year, around 25 million food shipments entered the United States, primarily by sea, but only roughly two percent of them were inspected by Food and Drug Administration agents, and nearly all of these inspections occurred on U.S. soil (the largest share at the massive port of Los Angeles). Meanwhile a 2012 report by the Centers for Disease Control shows that from 2005 – 2010 at least “39 outbreaks and 2,348 illnesses were linked to imported food from 15 countries”, and that “nearly half (17) occurred in 2009 and 2010.”

The fact is, importing foods to the United States is not only big business, it’s risky business. Food imports almost doubled from 1998 to 2007, with much of the growth in fruit, vegetables, and seafood; and agricultural inspections have struggled to keep up. While the Food Safety Modernization Act passed by Congress in 2010 allowed for the implementation of the computerized Predictive Risk-based Evaluation for Dynamic Import Compliance Targeting (PREDICT) system, a human inspection is still required to render a verdict. 

But there’s more. The introduction of blight or disease into the food supply of the United States would be a major long-term success for an adversary. That’s right, agro-terrorism is real and you should be worried about it. A subset of bioterrorism, agro-terrorism is the introduction of an animal or plant disease with the purpose of causing economic, health, and social damage. The seemingly low shock value of the topic means less public attention, but it is real enough that former Secretary of Health and Human Services Tommy Thompson gave a warning speech on its dangers—and was eviscerated for calling attention to the risk for adversaries. 

The problem is that the United States’ food supply really is vulnerable to agro-terrorism. In terms of targets, the agricultural sector is an easy mark due to modern livestock-raising methods; their feed preparation and distribution process; the geographically dispersed location of farms and ranches; and the relative safety of handling animal and plant pathogens by a human.

The low inspection-rate of imports coming by sea, and relatively smaller dollar amounts going to security for those imports, provide perhaps the safest vector for the undetected transmission of a pathogen. An adversary could rely on blind luck, transporting tainted food and hoping that it is added to a distribution system to achieve limited results. But an organized network could be more deadly by using existing sea routes for transport of contraband to smuggle pathogens to a recipient within the United States for more targeted distribution. Just as trafficked drugs or persons slip past the low inspection capacity of Customs and Border Patrol, pathogens infecting food could land in the hands of a determined adversary. 

What would the effects be of such a pathogen? Economically, the calculation is complicated. The 2001 foot-and-mouth outbreak in the United Kingdom, probably caused by the illegal import of tainted meat that was subsequently fed to pigs, is estimated to have cost that government $13 billion, including second-order impacts to businesses and restaurants dependent on the sale of livestock. But this figure does not include the cost of lost exports from the meat embargo immediately imposed by Britain’s trading partners.

In the United States, where the CIA World Factbook estimates the agriculture sector makes up $172 billion of the nation’s 2012 GDP compared to the United Kingdom’s $17 billion, the second and third order effects would be even greater. A 2002 limited study by National Defense University estimated that an outbreak of foot and mouth disease restricted to only ten ranches in the United States would cost up to $2 billion in cascading effects. A widespread outbreak would be orders of magnitude greater.

The health effects for citizens are more obvious, if only because of the legend of the Irish Potato Famine in the mythos of America’s development. But as with all forms of terrorism, a small death toll is all that’s needed to cause widespread panic. A 2005 outbreak of E. coli related to bagged spinach killed but three and sickened about 250, yet spread fear (and excuses for subbing fries for salad) across the country. If such as scenario was followed by a public statement from the responsible party, with promises of additional attacks, the response could collapse confidence in the entire food system, resulting in wide-spread loss of jobs and cascading social unrest. 

So what’s an American to do? The short answer is “not much.” The sheer volume of transported goods, the importance of the human element to detect agriculture disease, and the necessarily quick transfer of perishable items make stopping agro-terrorism before it occurs a near impossibility. Like many other forms of asymmetric attack, a determined adversary will succeed.

One thing that can be done is preparation to mitigate the effects of such an attack. The long-delayed National Bio and Agro-defense Facility (NBAF) took another lurching step forward in the FY14 Homeland Security Appropriations Bill in both the House and Senate. Designed to be one of the most sophisticated laboratories in the world, it would study the most dangerous pathogens in hopes of finding antibiotics or resistants to limit the damage an outbreak could cause.

Multiple Homeland Security Presidential Directives also require Federal and local coordination preparations and plans to respond to an agro-terror attack. In most cases, mitigating the effects of such an attack will require identifying the pathogen, containing it, and then taking steps to destroy it before it can escape from the containment zone. These steps can only be taken in time with prior coordination and practice.

Finally, we need to do what the Irish couldn’t—be able to quickly tell which ship, at which port, and from which point of departure carried the blight. While impossible to inspect every cargo container, with a concerted effort the United States can establish a system that provides more efficient and effective tracking of the containers themselves over the course of their travels, from loading to unloading. Shedding more light on their journey creates a less-hospitable route for potential practitioners of malfeasance.

Sherman Patrick is a Senate staffer working on national security issues. The views expressed in this article are his alone.

Beans Boots Bullets

The Great Oil Contango of 2008-2009 & Maritime Security: A Retrospective

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Oil storage commodities swinging at anchor in idled VLCCs.
                                                                     Fill ‘er up! 

The following article is special to our International Maritime Shipping Week. While we often discuss the threats to maritime shipping, this week looks at dangers arising from such global trade, and possible mitigations.

It sounds like a variant of a famous and complex Latin dance, but Contango is actually a financial phenomenon involving the trading of futures-based commodities. For the layman it goes like this: take a product such as crude oil. If you buy it now, you pay X, the “spot price”. Due to market conditions, you’re confident that a year from now you can sell it for a higher price of X+, the “future price”. Such a situation is a Contango. To take advantage of it you sell contracts now to purchasers willing to take the commodity at the future date, price, and quantity. You are now a speculator or “arbitraguer”. The challenge becomes storing enough of it until that time comes to deliver the agreed commodity. As long as storage and other overhead costs didn’t exceed X+ (the “spread”), you turn a profit.

Like many historical events, the so-called Oil Contango of 2008-2009 was a the result of several factors:

  • The first year of the Global Financial Crisis had passed and the effects were being felt in full, namely low consumer spending and unfavorable market conditions (sub-prime mortgages, credit collapse, etc)
  • OPEC was reluctant to reduce production rates for fear of sending the already unstable markets into free-fall – the surplus was growing at a rate of 1 to 2 million barrels daily
  • The resulting oil glut combined with low spending because of the crisis resulted in a low spot price (X), but with an expectation of a higher future delivery price (X+) as the economy slowly recovered

The key of for those willing to do business was to find storage at cheap enough prices that made large purchases of oil contracts profitable. Here’s where history becomes stranger than fiction. The glut literally overran land-based storage facilities. In the United States, a small Oklahoma town called Cushing is considered the benchmark for crude oil as traded on the New York Mercantile Exchange. It’s status is derived from being a primary hub connecting many delivery points within North America, and it’s maximum storage capability is approximately 42 million barrels (about 10% of U.S. oil production). At the time of the Contango, it cost approximately $1 a barrel per day to store crude there. But the oil glut had a big side effect – a lot of tankers were idled, and thus their operating prices declined. Around November of 2009, the daily rate for a million barrel capacity crude carrier was $10,000 a day at it’s lowest. The profit “spread” looked to be about $10 a barrel. Those market conditions made it very attractive for firms with the wherewithal to take full advantage of the Contango.

No one turns down Mr. Gere for a dance Contango.
                    Care for a dance Contango?

And what a list of arbitrage firms there were – Citibank, Morgan Stanley among them. While banks are typically loath to touch anything but paper instruments of commodities (i.e. not purchase the assets themselves), here they were directly chartering any decent-sized vessel capable of holding a million barrels or more. These were some of the very same institutions that took it on the chin during the Global Financial Crisis, and had every incentive to make up for their losses.

The result is a sweeping trend of world-wide seaborne oil-storage. In the end, all the tankers that the various arbitrage players could get their hands on could have formed a 26-mile long convoy of Very Large Crude Carriers (VLCC), totaling about 130 million barrels, or a little over 12 times what would normally be found at sea at any given time in recent history. All of it swinging at anchorage in major ports around the globe, for a year or more. The maritime security implications are numerous, and represent challenges for consideration.

With that much crude afloat and idle, the period of The Great Oil Contango presented one of the largest and most tempting targets for terrorist and other actors to strike and prolong what was already an immensely unstable global financial crisis. The risk potential was heightened by the fact that the glut easily overwhelmed the best efforts of ashore storage locations such as Cushing to supplement their capacity, adding anywhere from 5-to-10 million barrels of space.

The second-order effects are worth noting too: First, the chartering frenzy impacted not only the industries that used crude carriers, but spilled over to other sectors as firms moved beyond floating tankers and hired other types of ships for their storage capacity. Second, oil refineries eventually had to shut down or reduce shifts as OPEC and other oil producing concerns acknowledged market forces and cut back production output.

The potential environmental and safety impacts of that much oil afloat is staggering. As a comparison, the worst spill in modern history is the Deepwater Horizon well disaster – which sent about 90 million barrels into the Gulf of Mexico, devastated the U.S. southern coastline and surrounding waters, and required two years to complete major cleanup operations. The number of ships filled to the brim also increases the risk of partial spills and fire/collision hazards during the offloading, such as ship-to-ship transfers.

The Contango also caused an unintended and negative effect on the Strategic Petroleum Reserve (SPR) – several countries released their SPRs because of the market’s perception that there wasn’t enough oil in distribution – that was true – to the extent that much of it was being set aside by the arbitrageurs. While the SPR technically increased the amount of oil available on the market, it also further drove down the Spot Price (X), thereby increasing the “spread” or price differential of the Futures Price (X+). Therefore, there the incentive for abitrageurs to release any of the oil they already had was further reduced. In fact, by releasing the SPR, those nations put at risk their capability to respond to a crisis such as a wartime footing where energy to power the military is most needed.

Historically, the Contango ended, or more accurately declined, when too many arbitrageurs entered the market and wiped out the remaining availability of product, driving up prices. By doing so, they reduced the price “spread.” Additionally, the particularly harsh winter of 2010 made it attractive to unload stockpiles and cash-in as fuel demands were at an all-time high. Finally, a regulatory investigation by the U.S. Commodities Futures Trading Commission (CFTC) on practices such as the oil-storage trade convinced investments firms and traders to move on to greener pastures.

Lessons Learned: the vagaries and complexities of the modern financial market have many effects, most of them unpredictable, especially when dealing with energy supplies. In 2008-2009, several factors came together that not only artificially imposed limitations upon the world’s oil supply, but had indirect effects upon world shipping and national petroleum reserves. What was also interesting to note is that as instability began to threaten traditional supplies of oil (say the Libyan Uprising), the market price spread started to narrow as consumers were more than willing to pay an elevated spot price for energy now. The Contango also highlighted the growing influence of non-state actors such as corporations and financial firms to indirectly influence the availability and price of oil. Previously, the oil commodity market was a reasonable reflection of global supply and demand, the presence and practices of OPEC notwithstanding.

Surprisingly, for the time period during and shortly after, there wasn’t a lot of open-source intelligence or even published articles on the strategic and security implications of The Great Oil Contango. Everyone appeared to be focused on the monetary and market impact, but little else. It behooves us as industry professionals and observers to be aware of these developments and understand better the linkages to strategic security and public policy. One future trend we can expect is the greening of major navies as nations seek to minimize energy supply impacts to their foreign policy and military capabilities.

Juramentado is the pseudonym for Armando J. Heredia, a civilian observer of naval affairs. He is an IT Risk and Information Security practitioner, with a background in the defense and financial services industries.  The views and opinions expressed in this article are those of the author, and do not necessarily represent the views of, and should not be attributed to, any particular nation’s government or related agency.

Fostering the Discussion on Securing the Seas.