ALL CHANGE FOR EGYPTIAN GAS, by Neil Ford

Until fairly recently, Egypt was considered a potential gas supplier to the European Union. Now, however, it seems likely the country will require gas imports of its own in the near future. Liquefied natural gas (LNG) is an obvious short term solution but it would be far more expensive than domestic gas and so the government is likely to look at an import pipeline in the longer term. It would be relatively easy to reduce domestic demand by raising prices but Cairo may not have the stomach for such an unpopular move.

At the start of this year, Egypt had four gas export projects: two LNG producers; a pipeline to Israel; and the Arab Gas Pipeline (AGP) to Jordan and Syria. In 2010, the country consumed 1.6 trillion cubic feet (tcf) and exported a further 700m cubic feet (mcf). Even last year, officials in Cairo were talking up the possibility of the AGP being extended into Turkey in order to enable Egyptian gas to be piped into Europe, possibly as part of a wider scheme involving Iraqi gas.

Since the start of 2011, the volume of the country’s proven gas reserves has increased from 58 tcf to 77 tcf, giving Egypt a reserves life of 33.4 years – a respectable figure by most standards. It also gave the country the third biggest gas resources in Africa, after Nigeria and Algeria. Egypt’s well documented political upheavals 30 The Middle East December 2012 have also reduced short term economic growth and domestic industrial demand for gas.

In recent months, the new government seems to have worked out that the previous administration got its sums on gas badly wrong. Egypt’s growing population and industrial development will increase demand for gas, particularly from the power sector, which currently absorbs 56% of domestic gas supply. The country has an ambitious wind power programme but few other alternative sources of power production. At the same time, residential gas consumption is rising, while the fertiliser sector is demanding more gas feedstock than ever before. Orascom Construction Industries has also been forced to halt production at two fertiliser plants because of gas supply problems.

The country has experienced severe power shortages this year, consequently the government has reduced gas exports to Jordan by 80% in order to ensure domestic supplies. This has greatly affected Jordanian power production and bilateral relations between the two countries. Cairo has also cancelled the gas export deal with Israel and although the private sector companies involved will feel aggrieved, Israel is in the fortunate position of being able to develop its own recently discovered offshore gas reserves, which will more than compensate for lost Egyptian imports.

Egypt is emerging as a gas importer faster than anyone had expected. In late October, prime minister Hisham Qandil said: “We have reached a general agreement with the Algerian side to import gas from Algeria but the amount is still under negotiation. This is in order to cover Egypt’s needs in the local market and to prevent using fuel oil which is used now in electricity plants and which has negative effects on electricity plants.” Reports in Egypt suggest the government hopes to import gas as early as next May. Talks on LNG imports from Qatar have also been held. Egypt will therefore be in the unusual position of both exporting and importing LNG. As with all such schemes, the country’s two existing LNG export schemes were developed on the back of long term supply contracts and so there is little possibility they could be closed down.

LNG is generally far more expensive than piped gas imports and particularly so when it is bought on the spot markets rather than via a long term contract.

A likely long term solution would be to import gas from Iraq, partly by reversing the direction of supply on the AGP.

Iraqi gas could also be used in lieu of Egyptian supplies in Syria and Jordan. However, LNG is a valid commercial option if it is solely used to supply areas that are not yet connected to the national gas grid, such as Upper Egypt and Sinai.

The chief executive of Egyptian firm Tri-Ocean Energy, Mohamed El Ansary, commented: “Currently we don’t need to do so, but in the future Egypt will not be self sufficient in natural gas. If we are to see real industrial development in the coming five to 10 years, we will have to import.” More electricity and therefore natural gas will be required to supply new industrial and tourist projects the government has proposed in order to kick start the economy.

The development of any new projects, however, may have to wait until Cairo has sorted out its financial affairs. The state owned Egypt General Petroleum Corporation (EGPC) now owes $6bn for oil and gas supplies it has received from private firms but state regulations make it almost impossible for the company to operate on a commercial basis. The government has one obvious method of balancing the books and sustaining gas supplies – remove fuel subsidies – but seems unwilling to adopt it because of likely social repercussions. In common with many other Middle Eastern and African countries, Egypt subsidises fuel prices. Indeed, one fifth of all government expenditure is spent on subsidising petrol, diesel, electricity and cooking gas.

Again, as in its relations with most other governments, the IMF has asked Cairo to reduce or phase out this financial support, partly in order to improve its finances and partly in an attempt to reduce consumption. Egyptian oil and gas consultant Magdi Nasrallah says:

“Every day we delay restructuring subsidies bleeds state resources. The burden has become very high on the Egyptian government. It has become dangerous because Egypt is buying the share of the joint ventures at international prices and selling this share on at subsidised prices.” In many ways, the new government is caught between a social rock and an economic hard place but it has been put into power precisely in order to solve such conundrums.

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