Egypt is experiencing incredible pressure on its energy resources due to past, misguided, policies and ever increasing demand. This is one of many development challenges the country will be facing in the coming years.
These issues were addressed at the Egypt Economic Conference in Sharm el Sheikh earlier this year. There was considerable international interest and strong financial commitments were made, with as much as US$12 billion investments committed in the upstream oil and gas sector.
However, right now Egypt has a huge financial exposure due to decades of energy subsidies and population growth, which have resulted in the Egyptian General Petroleum Corporation (EGPC) struggling to meet its payment obligations to foreign energy operators in the country.
This is what has led to the current situation of energy shortages and the need to import expensive LNG to guarantee electricity supply this summer.
What is going well
Egypt has now opened its oil and gas sector by offering 18 new exploration blocks in its two latest bid rounds. This has been met with considerable interest from companies such as BP, Total, ENI, Dana and others. Through this, Egypt hopes to increase production of oil and gas to feed its domestic energy demand and recovery of the economy.
Egypt potentially has over 70 trillion cubic feet (tcf) of gas, enough to cover its needs for a long time to come, provided it gets this out of the ground. It has a target to reach self-sufficiency in energy by 2020. This is reflected in the liquefied natural gas (LNG) import contracts it has entered into, which have durations of between 3-5 years.
Also, there is increasing activity and interest in developing non-conventional gas and renewable energy projects, mostly solar and wind, to increase the power production in Egypt and bridge the electricity supply-demand gap. EGPC’s immediate main priorities are in boosting overall energy supply, addressing its historic accumulated debt, reforming energy subsidies and modernising governance of the sector – formidable tasks.
What is problematic
Egypt is facing many problems. The German Marshall Fund of the United States recently said: “The economic outlook in Egypt is anything but positive. This will be observed by foreign investors. It does not mean that such projects cannot go ahead, but it seems that the overall climate is simply not a healthy one”. The bombing of the Italian consulate in Cairo and insurgency in the Sinai epitomise the problems.
First Egypt needs to have the right political and security conditions, before it can see increased commercial activity. Egypt is optimistic about stability, not only about catching up with gas production for its own needs, but also resuming gas exports after 2020. But right now the situation is not stable and the economic outlook is not positive yet.
Recent data on gas production highlight the problems. Egypt’s average natural gas production declined by 4.5% to 4.4 billion cubic feet (bcf) per day, down from 4.6 bcf/day in 2014. This comes at a time when Egypt is experiencing acute gas supply shortages.
This slowdown is a result of foreign gas companies not keeping up with depleting reserves, by bringing up new gas production. The Egyptian Petroleum Ministry expects natural gas production to reach an average of 5.4 bcf/day, and consumption to reach 5.57 bcf/day in fiscal year 2015/16. But it remains to be seen whether such gas supply levels can be achieved.
Increasing the gas price is one of the measures the Egyptian government has taken in recent months to encourage exploration in order to boost declining domestic gas production. Earlier this month Egypt increased the price of gas it will pay to ENI and Edison for gas from new discoveries to a maximum $5.88 per million British thermal units (mmBTU), and a minimum of $4, from $2.65 now.
Egypt has also been paying some of the outstanding debt it owes to foreign energy companies. However, even this is facing challenges.
At the end of March the government told steel, petrochemicals and cement producers that gas supplies would be halted indefinitely. The government took a decision that it is more important to maintain electricity supply to households than provide energy to factories.
The industrial slowdown means Egyptian companies are struggling to export, adding to a foreign-currency squeeze that’s left the country dependent on handouts from its backers. This in turn makes paying off the debt to the oil and gas companies more difficult.
Egypt’s aged debts to foreign oil companies stood at $3.5 billion dollars at the end of June, a 6.1% increase from March. However,
Egypt had paid foreign energy firms $9.37 billion in arrears in the nine months to March 31, and hopes to repay all debt by mid-2016. Its total foreign debt is about $40 billion.
Egypt has been experiencing one of its most serious energy crises in decades due to a combination of political, security and economic instability, and the growth in domestic energy consumption – the future looks challenging.
Implications for Cyprus
Egypt is looking to import gas from Israel and Cyprus.
This includes the possibility of using Egypt’s unused LNG export terminals to reach global markets.
In summary the key issues are:
Supply of gas for Egypt’s domestic use: Even if Cyprus starts developing Aphrodite now, first gas will be available by 2020. That’s also the target date by which Egypt expects to stop gas imports.
And then it is also the price. Cyprus gas arriving in Egypt will cost between $7-$8 per mmBTU, while domestically produced gas, even with the latest increased pricing, will cost between $4-$5.88 per mmBTU.
Supply of gas to Egypt’s unused LNG plants: LNG delivered to Europe and Asia is about $7 per mmBTU. The cost, excluding profits, of transporting Aphrodite gas to Idku or Damietta, liquefying it, shipping to Europe and regasifying it may be of the order of $11 per mmBTU.
And it may be some time before global gas prices go up. This may make such a project uneconomical at least for the foreseeable future.
Acquisition of BG by Shell: Analysts say that Shell will have little appetite for pursuing further production in Egypt. In addition, Ernst&Young says that Shell may dispose of BG’s LNG plant at Idku.
And then there is Shell’s commitment to Turkey and Turkey’s opposition to dealings with Egypt, adding to complications.
Financial and security concerns: The security concerns are described in this article. A key issue however is Egypt’s ability to clear its debt to the gas companies and maintain future payments.
Bankability of a project such as Aphrodite may be a challenge without an assured payment stream for the gas for the 15-year duration of the project.
Selling Cyprus gas to Egypt has many challenges to overcome to become a success. Hence the need for a Plan B for the Aphrodite field development.
(Charles Ellinas is a hydrocarbons business consultant)
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