EGYPT ENERGY: In need of reform and foreign investment

In this special report, Nehad Ismail, Senior Analyst at Wikistrat, examines the future of Egypt’s energy sector and finds much cause for optimism in recent legislation alongside opportunities for new international investment

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While Egypt is a producer and exporter of oil, it is still forced to import certain oil related products. In the financial year 2015/16, the country’s Ministry of Planning reported that around 28.6m tons of crude oil, LNG, natural gas and other oil-related products were purchased, at a cost of $16bn.

Tarek-El-Molla-Egypt’s-OilMinisterThis year, 2017, will witness big steps forward in the Egyptian gas production, according to Minister of Energy Tarik El Mulla (pictured right).

Currently Egypt produces 4.4 billion cubic feet of natural gas daily, with plans to boost this figure by a further billion cu ft. by 2019. Meanwhile, the country imports 1.2 billion cubic ft. of liquefied natural gas (LNG) at a cost of around $280 million monthly. However, the Energy Minister has predicted that Egypt will be self-sufficient in gas by 2020 or before.

Egypt’s oil and gas development will be essential to the country’s economic growth. Together, the two contributed 17.5% to overall GDP in 2012/2013, according to government reports. Meanwhile, renewable energy projects for generating electricity contributed only 1% of the total energy production. Foreign investment in the energy sector formed 26% of the total Foreign Direct Investment (FDI) into the country, with British Petroleum, ENI Italy and Shell, the biggest foreign players in the oil and gas industries.

Essential Reforms

The ongoing implementation of energy sector reforms will remain a priority for the Egyptian government, which moved to liberalise its exchange rate policy towards the end of 2016, in an attempt to stimulate greater capital inflows and increase foreign exchange reserves. The government has already embarked on a raft of energy market reforms – which has helped attract significant investments in the upstream sectors of exploration and production – and has also awarded several contracts in both the oil and gas production industries, as well as in the utility sectors.

For many years, even before the toppling of the Mubarak regime in 2011, Egypt had been unable to meet rising domestic demand for energy. In the chaos that followed the fall of the 2011 regime, the country’s gas and oil producing companies suffered huge losses and international confidence in the future of Egypt’s hydrocarbon industries virtually evaporated.

Saudi Arabia and other Gulf states stepped in to provide billions of dollars to help settle Egypt’s energy debt, which served to help reassure foreign investors. However, this source of aid dried up in November 2016, due to various political factors, including the Egyptian government’s support for the Assad regime in Syria. The Saudi Arabian state oil firm, Saudi Aramco, has since halted shipments of petroleum products to Egypt indefinitely.

 Phasing out subsidies

Until a year ago the Cairo-based government subsidised fuel prices to help prevent civil unrest and the subsequent protests which invariably get out of hand. But such subsidies impact adversely on overall economic policies and the country’s foreign currency reserves. The government has plans to phase out subsidies by 2019. But for the moment, more than 5% of GDP is spent on fuel subsidies, representing a huge financial burden on the government budget.

Threats to cut subsidies on fuel have resulted in demonstrations and widespread unrest

Previous threats to cut subsidies on fuel have frequently resulted in demonstrations and widespread unrest

 Boosting electricity supply

Along with the UAE, Jordan and Morocco, Egypt has made considerable investment in solar energy. The Ministry of Electricity and Renewable Energy (MERE) has announced plans to boost the country’s use of renewable energy and several investors have already expressed an interest in going ahead with new solar energy projects.

Recent studies show that MERE plans to hit a benchmark of 20% by 2022, when the group expects renewables to provide one-fifth of all power used domestically. Egypt has already successfully increased its electricity capacity by an adding an extra 6.9GW to its grid and cutting subsidies to consumers.

 Debts, Loans and Grants

Egypt owes $3.6 billion dollars to foreign companies, which are being re-scheduled by the Central Bank and the Ministry of Finance, with funds made available by IMF Loans.

France plans to provide 175 million euros to help Egypt’s energy sector; in an official statement on its website, the government said that 150 million euros of the French funding will be allocated to the electricity sector and 25 million euros to oil. It was not clear whether the finance would be in the form of a loan or grant.
In December 2016, the African Development Bank, signed a loan agreement worth $500 million to help finance the Egypt Economic Governance and Energy Support Programme, Phase II. Back in September 2016, Cairo negotiated a $4 billion loan with China to spur on the development of Egypt’s renewable energy strategy. The loan will finance renewable energy projects to help generate an additional one gigawatt of electricity to the Egyptian grid; the projects will include a solar cells factory.

 New investment and discoveries

What will continue to make Egypt attractive to foreign investors is the competitive currency exchange rate and the low operating cost of producing oil, which currently averages less than $10 per barrel.

Meanwhile, new discoveries of oil and gas continue to attract overseas investors to Egypt’s hydrocarbon sector: In August 2016, Shell announced it had located significant new gas reserves; Egypt’s own General Petroleum Corporation made a discovery that could potentially produce over 2 million barrels of oil per day, and there have been finds which could produce as much as 311 cubic metres of gas, in the Abu Sennan area of the Western Desert.

There are also expectations of a number of new entrants in what is shaping up to be one of Egypt’s largest upstream gas projects. Italy’s Eni, which is behind the offshore Zohar field in the Mediterranean, is planning to sell a 20% share in a 30 trillion cubic feet project, which will fetch between $1.6 billion and $2.2 billion, according to media reports, although Eni says it will continue producing gas in Egypt.

In August 2016, local press reported that the American petroleum company Apache was planning to increase its investment in Egypt – on top of the company’s current investment of more than $12 billion in 23 concession areas; new exploration contracts between Apache and the Cairo government are expected to be signed imminently.

Such arrangements should serve dramatically reduce Egypt’s future need to import.

Egypt has the potential to become the largest gas hub in the Mediterranean, with reserves to satisfy much of Europe’s energy demand, according to the experts. However, as the Oil Ministry acknowledges there are challenges ahead, among them the rising demand for energy inside Egypt and the high costs of maintaining the subsidies.

Foreign investment will be essential if Egypt is to realise its ambitions for the energy sector

Foreign investment will be essential if Egypt is to realise its ambitions for the energy sector

The renewal of an ancient infrastructure, including refineries, and meeting the outstanding debt to foreign companies will also present considerable challenges. Nevertheless, the overall future of the oil and gas industry in Egypt is promising.

The Ministry of Petroleum has adopted a number of measures and policies to support the energy sector within the framework of the government’s new energy strategy, aimed at ensuring security and sustainability. It has also recently signed three new agreements for oil and gas exploration in the Mediterranean, with a total investment estimated at $220 million.

The agreements were signed between the Egyptian Natural Gas Holding Company – EGAS and British Petroleum, Total of France and Italy’s IEOC – part of the ENI group – to explore gas and oil in North El-Hammad, North Ras El-Esh and North El Tabya fields.

Minister Tarek El Mulla described the recently adopted new gas law as a real breakthrough in enhancing the industry’s regulatory framework, the major feature of which is the gradual liberalization of the country’s gas market. Government energy sources confirm  that work on further modernisation of the existing legal framework to boost international investments, is well underway. Egypt’s petrochemical potential exists but it will take dedication and a return of full business confidence to bring it to fruition. The challenges ahead for the country’s energy-related industries are considerable but the potential rewards are massive.

ENDS

 

 

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