Over the course of 2014 Egypt’s energy sector has seen some welcome developments. The announcement of a debt-repayment programme for funds owed to international oil companies (IOCs) has restored confidence in the upstream segment and brought pledges of increased investment from larger operators such as the UK’s BP.
The government has also demonstrated its willingness to tackle the underlying problem of the current energy pricing mechanism, by taking the first steps to weaning the nation off costly and inefficient subsidies. In the meantime, exploration for new resources continues. However, considerable challenges remain to be overcome, and the power outages that Egyptian individuals and businesses have suffered in 2014 are likely to remain part of daily life in the nation for some time to come.
Rapid Development
The extraction of oil and gas has long played a central role in the Egyptian economy, accounting for 15.3% of the country’s total GDP in the 2013/14 financial year, according data from the Central Bank of Egypt. The North African nation’s first oil strike was made in 1886, and after two decades of further exploration the first commercially viable discovery was made in 1908 at Gamasha in the Nile Delta region. By 1913 operations had begun at the nation’s first refinery, established by the Anglo-Egyptian Oil Fields Company in Suez. It was joined by the Royal Governmental Oil Refinery in 1922, by which time exploration for further reserves was being more effectively managed through the Petroleum Search Authority.
By 1937 the government had established its concession model, granting licences for areas of land not less than 4 sq km, renewable on an annual basis, and major IOCs had established themselves in the market: an Anglo-Persian Oil (now known as BP) and Royal Dutch Shell partnership, which included Anglo-Egyptian Oil Fields; Socony-Vacuum Oil Company; the Standard Oil Company of California; and the Standard Oil Company of New Jersey. By the 1960s, the largest player in the market was Anglo-Egyptian Oil Fields, but in 1964 it was nationalised and transformed into the Egyptian General Petroleum Corporation (EGPC) under the presidency of Gamal Abdel Nasser. While private investment continued on more muted levels during the following decades, a reorganisation of the sector in 2000 into separate authorities for oil, gas and petrochemicals was in part a move to more effectively manage cooperation between the government and the many IOCs that operate in Egypt.
Public Sector
The government retains control of the energy sector through two ministries: the Ministry of Petroleum (MoP) oversees hydrocarbons extraction and exploitation through a range of parastatal agencies, while the Ministry of Electricity and Energy (MoEE) oversees power generation, transmission and distribution and controls the government agencies charged with developing the renewables industry. Within the MoP, the EGPC takes the leading role with regard to the oil sector. The company is involved in the upstream, downstream and petrochemicals industries, acting as regulator, joint venture partner, licence provider, refiner and marketer. In 2001 the ministry established the Egyptian Natural Gas Holding Company (EGAS) as a parallel institution, intended to play a role similar to that of the EGPC in the oil sector within Egypt’s rapidly expanding gas sector. Its primary responsibilities are the oversight of foreign investment in the upstream segment and the liquefied natural gas (LNG) industry, including both production and transport. Since 2004, new gas concessions have generally been allocated to EGAS, while old concessions continue to fall within the purview of the EGPC.
In 2002 the ministry made a further division of responsibility with the creation of the Ganoub El Wadi Petroleum Holding Company. Previously known as the South Valley Development Company, the new institution was granted authority over oil and gas development activities in Upper Egypt, which is largely defined as the southern half of the country. Its remit includes over half of Egypt’s total landmass, including the large population centres of Sohag, Assuit, Qena and Aswan, and the firm has seen some significant discoveries in recent years.
The Private Sector
While the government retains oversight of the oil and gas sector, and has a clearly defined participatory role, private investment has been central to the expansion of production in Egypt’s hydrocarbons sector. More than 50 IOCs operate in the sector. According to the African Development Bank, by the end of the first decade of 2000 around 80% of oil and gas services were operated by private firms, while 90% of all exploration activity was conducted by IOCs.
Market participants include several majors, such as such as BP, British Gas, Royal Dutch Shell, Lukoil and Eni, as well as mid-sized and independent players such as Apache, Dana Gas, Hess Corporation, Petroliam Nasional, TransGlobe Energy and Repsol. Ahmed Farid Moaaz, country manager at Sea Dragon, told OBG, “Larger capital investments upstream are still needed to exploit the 70trn scf of gas reserves that are underdeveloped.”
Access to the market usually comes through a hybrid contractual mechanism. Bidding rounds for concession areas are held regularly, and concession licences granted to IOCs by the relevant MoP authority. Upon the discovery of oil or gas the concession arrangement is concluded, a development lease issued, and a joint venture is formed between the MoP authority and the IOC. The joint venture then prepares a development plan, which must be approved by the MoP, while the IOC remains responsible for the operational and financial concerns of exploration and development. Once production commences, the relationship between the IOC and the MoP is altered once again, this time to a form of production sharing agreement.
Oil
Egypt’s oil is distributed across several areas, with most fields to date located in northern half of the country in regions such as the Nile Delta, the Sinai Peninsula, the Gulf of Suez, and in the Western and Eastern Desert. Jeroen Regtien, Shell’s vice-president for Egypt, country chairman and managing director, told OBG, “With the right investments, the Western Desert region can offer many opportunities for enhanced recovery, drilling and potentially unconventional resources.”
Proven reserves have been growing steadily over recent decades, with BP data showing a rise from 3.4bn barrels in 1992 to 3.5bn barrels in 2002 and 3.9bn barrels at the close of 2013. Exploration efforts continue to buoy the reserve total and, according to the EGPC, accounted for the bulk of the 86 discoveries made during 2013. Unrest in the country has not interrupted primary exploration activity.
Onshore oil is relatively cheap and easy to find in Egypt, and the country produces three main oil grades: the Suez and Belayim blends, the relatively high sulphur content of which means that they are primarily retained in the domestic market, and the sweeter Western Desert blend, which accounted for 51% of total production in 2013, according to the US Energy Information Administration (EIA). Ahmed El Nakkadi, vice-president and general manager of the East Mediterranean for Schlumberger, told OBG, “The onshore oil and gas industry in Egypt offers multiple opportunities for small and medium-size independent players, as it is a less capital- and technology-intensive environment than offshore.”
“However, as Egypt’s wells are ageing, production levels have suffered and they are increasingly in need of remediation from technology providers to maintain production through integrated solutions with innovative technologies,” he added.
After peaking at around 935,000 barrels per day (bpd) in 1996, the production trend has been one of gradual decline. By 2002, according to BP data, crude production had fallen to 751,000 bpd, and by 2007 this figure reached a recent record low of 698,000 bpd. After a recovery to 730,000 bpd in 2009, Egypt’s oil production has plateaued: in 2013 it averaged 700,000 bpd, according to the EIA, slightly down from 728,000 bpd in 2012.
This decline has come at a time of increasing domestic demand for oil, and as a result Egypt’s oil production has fallen short of its consumption since 2008. This deficit has meant the nation has to import refined petroleum products at increasing volumes. Given that Egypt’s refining capacity currently exceeds its oil production levels, crude oil is also imported for processing and, in some cases, re-exportation.
Looking To Gas
Gas, if anything, plays a potentially more prominent role than oil, although in spite of significant reserves the country’s consumption still exceeds its production. After its discovery in the Nile Delta in 1967, Egypt’s reserves of gas grew rapidly. In 1982 total reserves stood at 14.1trn standard cu feet (scf), most of it associated. A series of non-associated gas finds in the 1990s saw this figure rise to 60trn scf by end-2002, and by the close of 2013 proved reserve stood at 65.2trn scf, the third highest level in Africa behind Algeria and Nigeria. Production data show a similar ascent: in 2003 output stood at 1.06trn scf, while by the end of 2012 this figure had risen to 2.15trn scf.
However, consumption of natural gas within the domestic market has also grown rapidly, rising from 1.05trn scf in 2002 to 1.81trn scf at the close of 2013. When combined with Egypt’s export commitments, this has placed pressure on the MoP to increase production levels, which have been in slow decline since 2009. Much of the increased demand from gas comes from its use as a fuel for power stations, therefore reversing the production drop-off has become an issue for domestic electrical generation. Just three non-associated gas fields in the Nile Delta and the coastal offshore regions – Abu Madi, Badreddin and Abu Qir – account for around half of total gas production, and it is widely considered that the easy finds in onshore and coastal Mediterranean areas have already been made. The future lies in the more technically challenging deepwater offshore blocks, which require larger levels of investment than the already established plays. Osama Abdel Waha, CEO of the Egyptian Drilling Corporation, told OBG, “Production from deepwater blocks could help meet the country’s rising demand for energy provided the necessary capital and technical investments are made.”
Attracting this investment from IOCs is a major goal of the MoP and it has had some significant success in recent years. The government received some good news in July 2014 in the form of an announcement by one of the upstream sector’s largest operators, BP, that it would invest $10bn in its Egyptian gas fields over the next four to five years.
Investment
The announcement was welcomed given the push by the ministry to increase capital spending. The government has already held a number of bidding rounds for exploration blocks since the revolution of 2011. While these have continued to attract the attention of IOCs, concerns have arisen regarding two structural problems that have hindered upstream investment. Although the EGPC buys gas at a rate linked to international prices, it makes it available on the domestic market at much lower rates – a discrepancy that has caused it to fall behind on payments to IOCs and to run up high levels of debt, estimated at $6.2bn by August 2014.
Facing Debt
However, in late 2013 the EGPC established a debt payment schedule that envisaged LE1.6bn ($227.2m) being paid to foreign companies over the 2013/14 financial year (see analysis). The government has already made significant repayments, with $1.5bn paid out by December 2013, according to press reports, which should help improve the sector’s overall attractiveness. In late 2014, the EGPC was looking to secure a loan of at least $1bn in order to cover its payments.
The pricing model by which IOCs are paid is determined by weighted formulas tied to global market rates, but given the increasing cost of production for enhanced oil recovery and offshore developments, alongside cost recovery issues within contracts, overhead projections are rising for the sector as whole. Despite such challenges, some in the Egypt’s energy sector still see cause for optimism.
Furthermore, as the MoP addresses these two long-term challenges, it has shown a degree of flexibility in its relations with IOCs that has brought some short-term relief. In some cases it has allowed producers to export to third parties directly, and it has taken steps towards establishing a more favourable price scheme, particularly with relation to the deep-water fields in which much of Egypt’s future gas supply presently sits. The new formula introduced in 2013 by EGAS has raised the price that it will buy gas from producers from $2.65 per million British thermal units (mBtu) to a varying schedule of between $3.95 and $5.88 per mBtu. A longer-term solution to the EGPC’s financial challenge lies in the dismantling of the subsidy system.
In 2014 newly elected President Abdel Fattah El Sisi announced a number of fuel subsidy cuts that in some cases saw a 175% increase in natural gas prices for end users – a significant first step in this important yet controversial process (see Economy chapter). In the meantime, Egypt’s bidding rounds continue. At the close of 2013, the EGPC and EGAS launched a simultaneous bidding round for exploration blocks in what is one of the largest international auctions since before the 2011 revolution. Both bidding rounds, for a total of 22 blocks, had an initial closing date of May 19, 2014. However, in April 2014 it was announced by the EGPC that this deadline would be extended until July 3, 2014.
Refining
The nation’s first refinery was established by English-Egyptian Oil Wells Company in Suez in 1911 and commenced operations two years later. The country currently has nine refineries, most of which are operated by the EGPC and other state agencies, comprising the most extensive refinery industry in Africa. In 2014 the country’s total refining capacity was 704,000 bpd, and the largest refinery currently operating in Egypt is the Mostorod facility, which has a nameplate capacity of 142,000 bpd, according to the EIA. This ageing installation is at the centre of the MoP’s expansion plans for the refinery sector, and in 2014 construction finally began on a long-awaited project that will take the currently unused atmospheric residue from the facility and transform it into a number of sought- after products, such as diesel and kerosene. The project, first proposed in 2006, is being undertaken as a public-private partnership, with backing from the EGPC, Qatar Petroleum International and Egyptian private equity firm Qalaa Holdings. The development will have the capacity to produce 4.1m tonnes of high-quality oil derivatives per year and is expected to reduce Egypt’s diesel imports by around 50%. “Capacity optimisation in the downstream sector is needed in order to overcome bottlenecks,” Khaled Abubakr, executive chairman of TAQA Arabia, told OBG.
While meeting the nation’s demand for diesel is the short-term ambition of the MoP, its longer-term refining strategy is to move beyond basic fuels and into petrochemicals and other products not subject to the current subsidies, which would therefore have the potential to be more lucrative for the EGPC.
The Assiut Petroleum Refining Company (ASORC) is also undertaking work to upgrade its 47,000-bpd refinery in conjunction with the EGPC. The project, which will cost an estimated $2.8bn-2.9bn, will include a 1.4m-tonne-per-annum diesel hydrocracking complex to convert low-quality heavy fuels into high-quality petroleum products. ASORC secured $198m in financing from the Islamic Development Bank to fund the project in late August 2014.
Marketing & Distribution
The private sector has been able to market and distribute oil-based products since 1990. Most of the firms involved in the sector act as both licensed marketers of refined products and retailers to end users. EGPC and EGAS are the sole sources for refined products and processed gas, which they source from domestic production as well as imports. Oil-based products are the main focus for Egypt’s downstream firms, while industrial companies and distributors for residential use are the main customers for gas. As of mid-2012 there were 12 companies in the sector – four state agencies and eight privately owned ones.
ExxonMobil is a major player in the downstream sector, with a key focus on fuel and lubricant marketing. Active in Egypt since 1902, ExxonMobil Egypt exports to around 35 countries and its local workforce serves Egypt as well as other markets around the world. Hesham Elamroussy, chairman and managing director of ExxonMobil Egypt, told OBG, “The Egyptian people have a lot of aspirations and Egypt has been through major changes and challenges over the past few years. This has impacted the country at large and the business environment in particular. The recent progress that Egypt is making on the security and economic fronts would support an improved business environment and contribute positively towards Egypt’s future.” ExxonMobil has more than 350 fuel service stations across the country, including a chain of convenience stores, and the company also operates two lubricant blending plants. The market for lubricants has remained robust, according to Elamroussy. “In general, Egypt is considered the largest consumer market in the Middle East and it is well positioned to export to Europe, Africa and Asia,” he told OBG.
Sustainable fuel blends may be an area for development going forward, according to Kamilia Sofia, CEO of the Egyptian Methanex Methanol Company. “Egypt’s new energy strategy should follow the example of other developing markets if it wants to improve consumption efficiency – particularly those that include targets such as a sustainable fuel blending model as China has done, for example,” Sofia told OBG.
The upheaval of recent years has been a challenge for the downstream sector, as indeed it has for much of the economy. Foreign demand for Egypt’s downstream products, for example, did not benefit from the devaluation of the local currency over the past few years, even as imports of raw materials from abroad became more expensive. Nevertheless, things are beginning to look up for the sector, given what appears to be a return to political stability and a positive growth trajectory, and the government’s long list of mega-projects, such as the expansion of the Suez Canal, is expected to translate into greater demand for downstream products.
In summer 2013 France’s Total signed deals with Royal Dutch Shell and Chevron to buy their domestic retail operations, adding roughly 150 stations to its network, making the French company’s Egypt retail business its largest outside of Europe.
Fuel Smuggling
Fuel smuggling is a major issue facing the distribution sector, and one that has become increasingly pressing of late. According to a report in the Daily News Egypt, smuggling results in the loss of around 20% of the total amount of fuel allocated to the local market, due to issues with monitoring and distribution control. To address this, the government has recently introduced GPS monitoring of vehicles transporting petroleum, tracking from refineries to depots and then petrol stations, and implemented a smart card system, resulting in a 60% reduction in smuggling operations.
Price Hike
While Egypt’s fuel prices, especially for petrol and diesel, had been among the lowest in the world due to an extensive and costly system of subsidies, the government moved to reduce the subsidies in July 2014. As a result, prices for diesel grades increased by 64-78%, those for natural gas went up 175% and the cost of 92-octane petrol rose by 40%. The price for 95-octane petrol, however, rose by just 6.8%, as the subsidy on this grade of fuel had been largely removed in November 2012. The move should help to minimise the strain on government finances, rationalise demand and bring sale prices closer to actual market prices – and closer to cost-recovery levels for the country’s refineries. Elamroussy told OBG, “The Egyptian fuel market, including supply, prices and margins, is fully regulated by the state. The recent subsidy reforms are very encouraging, as they relieve pressure on the national budget and allow funds to be redirected towards programmes to boost living standards and contribute to general improvements in the economy.”
Imports & Exports
The levelling off of Egypt’s oil and gas production over recent years, combined with an increased domestic demand for fuel oils and natural gas, has placed considerable pressure on the nation’s ability to generate revenue from hydrocarbon exports. Egypt’s crude oil production plateau along with the MoP allowing IOCs to export some of their product directly in lieu of payment has led to a drop off in the country’s crude oil exports: in 2009 102,000 bpd left Egypt, according to OPEC data, a rate which fell to just 6600 bpd in 2013.
To satisfy the rising demand for crude oil, Egypt was compelled to import it at a rate of 80,000 bpd as of late 2013, according to FACTS Global Energy. Much of this was destined for the Midor refinery, which cannot process Egyptian oil grades, and this inefficiency in refining has contributed to a drop in the export of refined products from 54,000 bpd in 2009 to 42,000 bpd in 2013, according to OPEC.
With regard to natural gas, Egypt is in the process of changing from a gas exporter to a net importer. Having already established a dry gas export business in 2003, via the Arab Gas Pipeline, the nation itself became a major exporter when its first LNG export infrastructure facility became operational in 2004.
However, declining production levels and increased domestic demand have significantly reduced Egypt’s ability to export natural gas, and outbound flows have consequently fallen from 18.3bn cu metres in 2009 to 7bn cu metres in 2013, according to figures from OPEC. To meet growing demand at home, Egypt has turned to importing gas from regional neighbours: as of June 2014, Algeria was expected to deliver five gas cargoes, each of 145,000 cu metres, before the end of the year. Other possible sources, according to government statements, include Russia’s Gazprom and Gaz de France.
The year 2014 should also see the installation of LNG import infrastructure on the Red Sea coast that will allow the country to import larger volumes of gas. In the meantime, Egypt’s two LNG facilities on the northern coast lie almost dormant as gas supplies have been diverted for the purposes of electricity generation. Increasing natural gas production levels and curbing domestic demand so that Egypt’s lucrative gas export activity can resume are therefore two important goals for the MoP.
Domestic Energy
Egypt’s domestic energy usage is predominantly reliant on hydrocarbons. According to the “BP Statistical Review of World Energy 2014”, natural gas accounts for 53% of the nation’s primary consumption, followed by oil at 41%. Some 50 power plants are distributed across five generation companies: Cairo, East Delta, Middle Delta, West Delta and Upper Egypt. The oldest of these steam, gas, wind and combined-cycle units is the 175-MW Cairo West plant, the various units of which were commissioned between 1966 and 1979. The Cairo North and Nubaria 1 and 2 plants, both of which produce 1500 MW, are combined-cycle projects commissioned in 2005 and 2006, and are the country’s largest thermal plants. However, rapidly rising demand has encouraged Egypt to seek out alternative energy sources in recent years.
Considering Alternatives
Egypt has an already established hydroelectric capability thanks to the construction of the Aswan High Dam. A sixth power generation firm, Hydro Power Plants, is the operator of the High Dam development, commissioned in 1967 and the single largest power project in the country in terms of installed capacity. Four other hydro projects (Aswan Dam I and II, Esna and New Naga Hamadi) add between 64 MW and 280 MW each. Of the power generation companies, Greater Cairo oversees the largest amount of installed capacity, accounting for 21.3% of the total, according to the Egyptian Electricity Holding Company (EEHC), while the most utilised technology is steam, which accounts for 43.6% of installed capacity by type. According to the EIA, the Aswan High Dam has a capacity of 2800 MW and accounts for nearly 10% of the national total, and the anticipated rehabilitation of a second dam near to Assiut in 2017 is expected to bring an additional 32 MW onto the grid.
However, given Egypt’s limited water resource, wind and solar technology represent the most promising routes. Prior to the revolution, the Supreme Council of Energy – established in 2006 as a body that coordinates the various policies of the wider energy sector – approved its strategy for electricity generation based on diversifying energy production sources, rationalising the use of energy and expanding the renewable component. It set a renewable target of 20% of total production by 2030, of which the share of grid-connected wind power will be in the region of 12%, or around 7200 MW. Wind power has developed from the experimental projects established in the 1990s to the nation’s first major wind farm at Zafarana on the Gulf of Suez. Established in 2001, the facility has grown in several phases to include 700 turbines of varying models (600 KW, 660 KW and 850 KW) to reach a total installed capacity of 545 MW as of June 2013. Zafarana’s performance over the 2012/13 financial year demonstrates the utility of Egypt’s wind resource: an average wind speed of 6.7 metres per second allowed it to attain an availability factor of 94.1% and a capacity factor of 25.2%, resulting in energy production of around 1.3bn KWh.
The development of the country’s wind sector is being undertaken by the New and Renewable Energy Authority (NREA), which currently has seven projects in the implementation or preparation stage, with a combined capacity of 1340 MW. The NREA is also overseeing the development of the national solar energy industry. To date, solar has played a secondary role to wind in the renewables mix: two facilities in development at Hurghada and Kom Ombo are each expected to add a modest 20 MW to the grid in 2016 and 2017, respectively. However, in July 2012 the NREA launched the Egyptian Solar Plan, which envisages the addition of about 3500 MW of installed capacity by 2027, with private investment contributing some 67% of project costs. In June 2014 authorities revealed the first details of a major solar energy plant to be built in the Wadi El Gadid region, and to be paid for with $6bn worth of Egyptian and Saudi Arabian financing (see analysis).
Nuclear
Nuclear power is another possible input for Egypt’s future energy mix, and has been a topic of debate since the creation of the Egyptian Nuclear Atomic Authority (EAEA) in the 1950s. Since then, Egypt’s nuclear activity has been restricted to the research reactors operated by the National Centre for Radiation Research and Technology, a division of the EAEA. Prior to Egypt’s 2011 revolution, plans for two new nuclear facilities with a total capacity of 4000 MW had reached an advanced stage, with Australia’s Worley Parsons appointed as consultant and a completion date slated for 2019 – which has been pushed to 2025. The Hosni Mubarak regime also passed legislation on nuclear power in 2010 and enlisted the Korea International Cooperation Agency to help train nuclear engineers. While the political disruption since then has extended the timeline for Egypt’s nuclear projects, they remain largely on track. “We are ready for bidding on the two nuclear units to take place. At this stage we are looking at pressurised light water reactors, each with a capacity of 900-1650 MW. The bidding process is expected to take around a year, followed by a four-year construction process and a further year of commissioning,” Ibrahim Aly El Osery, advisor on nuclear affairs and energy at the MoEE, told OBG in summer 2014.
COAL: As with many markets around the world, coal is also one of the alternatives being considered in Egypt. The government cleared factories to use coal as an energy source in 2014, and a number of them have already begun to switch over, especially in the cement industry (see Industry chapter). Sofia told OBG, “Coal has become an attractive source of energy to invest in. One of its main benefits is the fact that it can be ramped up in a short period of time.”
Transmission & Distribution
The difficulties in securing adequate supplies of gas for the current network of gas-fuelled plants are largely responsible for the regular power cuts suffered throughout 2014. According to MoEE data, 70% of the 152bn KWh of generated electricity in 2012 was fuelled by gas, with the remainder coming from coal (20%) and renewables (10%), and therefore Egypt’s power output is particularly sensitive to gas supply. However, the problem has been exacerbated by decades of underinvestment in electricity infrastructure.
With a population of nearly 90m, Egypt is served by an extensive transmission and distribution network. The nation’s transmission network runs from the Aswan Dam in the south of the country to the urban settlements dotted along its northern Mediterranean coast, with a number of branches servicing desert settlements west of the Nile, the coastal towns along the Red Sea and strategic locations on the Sinai Peninsula. In total, some 43,604 km of transmission lines and cables make up the national grid, to which has been added a combined transformer capacity of 91,863 MVA. This transmission network supplies Egypt’s nine distribution companies with generated electricity. Of these, the Canal Company for Electricity and Distribution oversees the largest share of the network, with 18% of lines and cables and distribution transformers falling within its purview. The South Cairo Company for Electricity and Distribution, meanwhile, serves the greatest number of customers, with around 4.7m on its books. In terms of purpose of usage, some 50.7% of electricity sold by Egypt’s distribution companies on the medium- and low-voltage networks is bought by residential customers, while industry (19.3%), and government and public utilities (16.4%) make up the second- and third-largest users, respectively.
Power Crisis
This complex network has come under increasing strain in recent years. Between the financial years 2001/02 and 2010/11, the EEHC’s customer base grew from 18.3m to 26.6m, and while the company reduced network losses from 13.48% to 10.6% over this period, demand now runs perilously close to supply. At the close of 2013, Egypt’s installed generating capacity stood at 27 GW, uncomfortably close to the daily peak demand that winter of around 24 GW. By August 2014, peak demand regularly exceeded 27 GW, which resulted in extended power outages and longer periods of load shedding, which began in 2013. Egypt’s electricity challenge is, therefore, a double one in which a lack of fuel is exacerbated by an inadequate generating capacity.
Tackling Capacity Challenges
A number of government bodies are tasked with addressing this issue. While the Supreme Council of Energy and the MoEE are the principal loci of strategic authority at the governmental level, it is the EEHC that formulates and implements the five-year plans by which the nation’s power generation capability is developed. The current plan for 2012-17 calls for the addition of 12,400 MW of thermal generation capacity, of which 11,000 MW will be commissioned during the planned years and the final 1300 MW will follow during the 2017/18 financial year.
The nation’s transmission and distribution networks will also be expanded to meet the anticipated increase in customer numbers and improve the quality of supply. According to the EEHC, the funding required to meet these objectives amounts to about LE103bn ($14.63bn), and it hopes to attract private sector participation by adopting a build-own-operate model. In the past, however, much of Egypt’s power infrastructure has been established with the assistance of development finance organisations. The country has a long record of working with organisations such as the Deauville Partnership, the EU and the World Bank to develop its power infrastructure. A good example of this is the Helwan South project, a financing agreement that was signed by Egypt and the World Bank in late 2013 (see analysis).
Conservation
The government is also working to address the demand side of the equation via the Egyptian Initiative for Energy Conservation (EIEC), a public-private partnership between state ministries and a number of international energy firms, including Shell, BG Egypt, Apache Egypt, Dana Gas, GDF Suez and IPR, with the technical support of BP Egypt, Eni and TAQA Arabia. In May 2014 the EIEC launched an awareness campaign, entitled Belma32ol ( meaning “moderate consumption” in Arabic) and including print, outdoor, online and TV ads, to encourage Egyptians to reduce their power consumption, with the aim of cutting electricity use among households and the commercial and industrial sectors by 20%.
Water
As far as public utilities go, Egypt’s water infrastructure is in a much better state to face local demand, although certain segments are in need of expansion. While the government has succeeded in providing pure drinking water to 100% of its citizens, for example, the coverage of wastewater services is less comprehensive. A 2010 report by the sector regulator, Egypt Water and Wastewater Regulatory Agency (EWRA), found that only 55% of citizens had access to wastewater services, and the political upheavals of intervening year have stymied attempts to remedy this shortfall.
More crucially, however, the sector as a whole faces a more fundamental challenge of supply. A long-running dispute between Ethiopia and Egypt over water rights on the Nile came to the fore in 2013 when the former diverted the river in preparation for its new Grand Ethiopian Renaissance Dam. Egypt, which is greatly reliant on the Nile’s flow for a significant portion of its electricity capacity, as well as 90% of its total water supply, is allocated 55bn cu metres annually under a succession of treaties negotiated during the 20th century. However, a number of Nile Basin countries contest this right, and Ethiopia’s new dam has the potential to reduce the volume of Nile water reaching Egypt by 17bn cu metres, according to press reports.
Egypt has therefore strongly opposed the dam’s construction, sparking a political disagreement that has yet to be resolved. In August 2014 Hossam El Moghazi, the minister of water resources and irrigation, announced that his ministry has established a “new vision” for the dam that would result in no loss to Egypt’s water share and which he intended to announce at tripartite talks held between Egypt, Ethiopia and Sudan later in the month. While negotiations continue, Ethiopia has stated that it does not expect Egypt’s water share to be negatively affected on the dam’s completion.
Egypt’s lack of new freshwater sources has encouraged it to seek innovative solutions. In July 2013 it signed an agreement with the African Union’s New Partnership for African Development agency, which will see it take part in a project to establish a water transport route stretching from Lake Victoria to the Mediterranean Sea. The navigational line will run through 10 African countries, including Egypt. Although it is certainly ambitious, the initiative has the potential to resolve water supply challenges.
Sector Reform
A number of bodies oversee activity within the water sector. The ultimate authority in terms of both policy and regulation is the Ministry of Housing, Utilities and Urban Development, while a wide range of other state agencies deal with particular aspects of municipal water supply and sanitation. The National Organisation for Potable Water and Sanitary Drainage plans and develops the nation’s purification and wastewater treatment plants, distribution systems and sewage collection across Egypt, except for the urban areas of Cairo, Alexandria and the Suez Canal, where the Cairo and Alexandria Potable Water Organisation retains authority.
A range of general authorities, public and private companies, and utilities are charged with operation and maintenance of this infrastructure across 27 governorates, all of which are supervised by the General Authority for Potable Water and Sanitary Drainage. Meanwhile, the New Urban Communities Authority plans and oversees construction of water infrastructure for the new satellite towns emerging outside of traditional urban population centres. Upon completion, the management of the infrastructure will be transferred to the relevant governorate.
The organisation of the water sector has undergone a substantial process of reform since 2004, when a presidential decree grouped all drinking water and sanitation entities under a single holding company, the Holding Company for Water and Waste-water. A subsequent decree established EWRA, which is charged with meeting a number of strategic goals, including ensuring that policy is properly implemented by water entities and monitoring customer service levels. However, political instability has delayed the new water law, published in draft form in 2009, one of the effects of which would have been to grant EWRA greater independence in setting tariffs and facilitating private sector investment.
Outlook
Over the course of 2014 a range of longterm solutions to Egypt’s energy challenges have been put forward by the new government, including a controversial plan to import gas from Israel, drilling for shale gas in the Western Desert and the commencement of building work for the long-awaited nuclear power plant. However, while investment of this nature represents the most direct route to increased fuel supply, it will be some time before the exploitation of Egypt’s gas reserves is at a level sufficient to both restore its LNG export industry and satisfy domestic demand. Mahmoud Farouk, CEO of ADES Group, told OBG, “The plan for Egyptian gas producers is to increase production from 4.5bn scf of gas to up to 7.5bn or 8bn scf.”
The lag between investment and production increases is likely to be made more apparent to Egyptians through continued interruptions to power supplies in the short to medium term. Moreover, in addition to investing in physical capacity, the sector will also need to invest in its workforce. “The oil and gas industry, both downstream and upstream, needs to invest in education and training programmes, and see such expenditures as a catalyst for development,” Elamroussy told OBG.
Egypt still benefits from considerable hydrocarbons reserves that are among the most accessible in Africa, with lower production costs than some of the more recent finds in West and East Africa’s offshore areas, which means its long-term potential as a production centre is in no doubt. Thomas Maher, vice-president and general manager of Apache Egypt, told OBG, “The accessibility of both conventional and unconventional sources, in comparison to other countries, makes them an attractive source of energy yet to be exploited.” A key factor for the sector’s continued attractiveness will be in how that production is utilised and where it is then directed.
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