Improving Egyptian energy prospects boosts overall economy

The announcement in 2014 that BP, one of the largest foreign investors in Egypt, plans to spend more than $12bn on its Egyptian operations over the next five years marks a significant reversal of fortunes for Egypt’s gas sector as well as for the country’s revenues.

That it should represent such a stark turnaround for Egypt is somewhat surprising. Egypt – which has been producing hydrocarbons for well over a century now and is the largest non-OPEC producer in Africa – has some of the region’s most competitive production costs, particularly with its onshore blocks. The sector has been buffered from most of the fallout from the post-revolution turbulence. The country’s transport, export and processing infrastructure is well developed and with oil reserves estimated at 3.6bn barrels and gas reserves at 65.2trn standard cu feet (scfd), there is still plenty of scope for growth.

However, investment in exploration and production has slowed in recent years. In November 2015, Minister of Petroleum Sherif Ismail, speaking to the local press, stated that as a result of there being no new concessions in the two years after the 2011 revolution, the number of areas being explored by oil and gas companies decreased from 53 in 2010 to just 27 in 2013. This investment shortfall has begun to show itself in gas production data: according to the BP Statistical Review of World Energy 2015, Egypt’s natural gas production peaked in 2009 at 62.7bn cu metres, before declining to 48.7bn cu metres in 2013.

Recent Challenges

This has had a significant impact on the country’s fiscus – eroding export revenues and forcing the maintenance of high domestic subsidies – as well as its overall energy security. For several years now, successive governments have faced a mounting challenge of providing sufficient gas both for the nation’s power plants and consumers, as well as for the country’s export obligations. Consumption has risen since 2009, from 42.5bn cu metres to 48bn cu metres in 2014. This exacerbated Egypt’s already-deteriorating fiscal position in the wake of the 2011 revolution: the generous subsidisation of gas and refined products – crucial for minimising inflationary pressures for lower-income households – on the part of the state was increasingly taking its toll on the nation’s balance sheet.

In the 2013/14 financial year, for example, Egypt’s subsidy bill rose to LE187.7bn ($25.6bn), one of the largest components of current expenditures and a majority of which – some LE126bn ($17.2bn) – was directed towards the energy subsidies, according to a statement made in November 2014 by Minister of Finance Hany Kadry Dimian.

Debt Buildup

Compounding the challenge was the build-up of arrears owed to upstream producers. The debt owed by the agencies of the Ministry of Petroleum (MoP), primarily the Egyptian General Petroleum Corporation (EGPC), to international oil companies has risen in recent years. While no official figure regarding its obligations had been released by the state-owned company, press reports estimated it to be as high as $6bn.

The arrears were the result of a difficult and unenviable position faced by the MoP: on the one hand it was compelled to purchase product from international oil companies (IOCs) at a price as close as possible to the international market rate in order for them to maintain their operations, whilst on the other hand it was required to make fuel available to the domestic market at much lower rates – a discrepancy which caused EGPC in 2012 to run up high levels of debt and fall behind on payments to IOCs.

Recovery Story

However, much has changed since mid-2014. Among the more prominent developments was an improvement in the broader macroeconomic environment, a result in part of the successful conclusion to the presidential elections in May 2014.

The electoral victory of President Abdel Fattah El Sisi – in terms of economic policy at least – has helped to provide a measure of stability after three years of uncertainty. The new administration, which according to official rolls garnered 96.9% of the popular vote, used its mandate to launch a number of ambitious reforms, including an overhaul of the costly subsidy regime.

Subsidy Reforms

In July 2014 the government introduced subsidy cuts across a range of fuels with the aim of reducing the discrepancy between the price at which the government purchases products and that at which it sells them. The move resulted in significant price increases for consumers: diesel grades rose between 64% and 78%, natural gas (which most of the nation’s taxi fleet relies on) saw a 175% increase, while 92-octane petrol was made 40% more expensive. The reduction in the subsidy level will make it easier for the MoP to avoid running up debts with IOCs in the future.

While there may be further subsidy reductions on the agenda, with the country working to get rid of energy subsidies within three to five years, falling global crude oil prices mean the government could get away with less drastic cuts in the next round. In total, a 40% drop in the price of benchmark Brent for the last six months of 2014 eased Egypt’s energy import bill, giving the government time to consider its next step.

Payback

In the meantime, the government has been working to reduce its arrears. In October 2015, the outstanding amount was thought to have shrunk to around $4.9bn, after the government had paid off $1.5bn of the deficit. While a considerable amount remains to be paid, the most important function of the government’s efforts to reduce its debt to the IOCs is as a demonstration of Egypt’s willingness to address the concerns of the upstream producers. In November 2014, for example, a $1.5bn syndicated bank loan was agreed with the National Bank of Egypt and National Bank of Abu Dhabi with hopes that moves to pay back foreign companies will encourage energy firms to boost exploration in the country. It also said it will issue a tender for $2bn in funding guaranteed by forward sales of crude oil shipments for five years, to help finance its arrears.

The International Chamber of Commerce in Geneva ruled in December 2015 that the EGPC and Egypt’s state owned gas company EGAS owe an Israeli electric firm $1.76bn. This ruling will put pressure on Egypt to start importing gas from Israel, which would reflect a new dynamic for the two countries, with Egypt historically exporting gas to Israel. Egypt has vowed to appeal the case.

New Interest

And it has been these sorts of initiatives that have helped pave the way for the $12bn commitment by BP. In the fourth quarter of 2014 Egypt signed a string of exploration deals with IOCs to conclude a protracted bidding round that was launched at the close of 2013. France’s Total, BP, the UAE’s Dana Gas, Italy’s Eni, Edison and Irish firm Petroceltic were amongst the international outfits to snap up onshore and offshore acreage exploration licenses. The success of the Egyptian round was in stark contrast to regional neighbours such as Libya, where IOCs are divesting in the face of political violence, and Algeria, which only managed to attract takers for four of the 31 blocks that it offered in late 2014.

Partially fuelling the enthusiastic response to Egypt’s offerings was the relaxation of a pricing policy that had limited remuneration for gas production to $2.65 per million British thermal units – a level which was sufficient for dense, onshore gas formations but cumbersome for offshore, deep-water acreage. This followed a 2013 pledge by the Minister of Petroleum to raise the rate paid to producers as a response to higher development costs for deepwater oil extraction.

The announcement of BP’s $12bn investment programme is certainly a clear fillip to the gas sector. The new capacity the company plans to install is expected to double its gas supply to the local market in the next decade, according to recent press reports on the project.

In the short term, Egypt’s gas problem will be addressed by imports – in November the country inked a deal with Norwegian Hoegh LNG for a floating storage and regasification unit in the Red Sea, and imports of liquefied natural gas began in the first quarter of 2015 – but the improved investor sentiment brought about by the government’s efforts to address its pricing and debt challenges suggests that Egypt’s longer term ambition to raise domestic production is a realistic one.

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Egypt 2016

Energy & Utilities chapter from The Report: Egypt 2016

Cover of The Report: Egypt 2016

The Report

This article is from the Energy & Utilities chapter of The Report: Egypt 2016. Explore other chapters from this report.