Combustible political climate has Morsi stuck in paradox over gas

Energy, politics and the economy are invariably intertwined, and Egypt is no exception.

Energy, politics and the economy are invariably intertwined, and there is no exception to this in Egypt.

As the political situation remains tense two years after the crowds first gathered on Tahrir Square, the government is reluctant to scrap subsidies for natural gas that inhibit economic growth and sap its finances.

Anger over the stagnant economy fuelled the demonstrations that ended Mr Mubarak's 30-year reign in 2011. As unemployed youth raged against the regime, one of the few state handouts they enjoyed was heavily subsidised gas.

While improving the economics of daily life, the subsidies also lie at the heart of Egypt's increasingly acute gas shortage. With about 77 trillion cubic feet, the country holds Africa's third largest reserves. It is the world's 13th largest gas producer.

In spite of these riches, the country will soon be in the paradoxical situation of both exporting and importing gas, as long-term export agreements clash with domestic needs.

As ever-increasing amounts of gas are consumed at home, Egypt's industry has been granted licence to ship in 1 billion cubic feet per day to keep its factories supplied. Plans for a liquefied natural gas (LNG) gas terminal are already under way.

The imports are adding to the strain on the budget, already burdened by subsidies. In the fiscal year of 2011 to 2012, they cost the government about 96bn Egyptian pounds (Dh53.14bn), estimates the research firm IHS Global Insight.

This expenditure has prevented the government from pumping sufficient funds into developing new production, which has led to the current shortage and has clouded the supply outlook.

With the government failing to offer producers an attractive price for their gas, the latest licensing round for gas blocks was met with a lukewarm response, and the auction has been delayed. "[The price is] completely out of line with the cost of development," said Robin Mills, the head of consulting at Manaar Energy. The price paid for offshore gas has been raised, but onshore production is still badly remunerated.

The problem has been made worse after payments to gas producers were interrupted by the revolution. This has curbed production and reduced export revenues, gas companies say. "The payments to all operators have slowed, and this is causing less investment and drilling, which in turn causes a decline in Egypt's production, which affects the state revenues, so it is a vicious circle," said Majid Jafar, the chief executive of Crescent Petroleum, the parent company of Dana Gas.

Dana Gas is still owed considerable sums by Egypt's government.

Calls are mounting for a reform of the subsidies system.

With political stability in Egypt still fragile and the lessons of the Arab Spring fresh on his mind, the president Mohammed Morsi has been hesitant to address the problem. His hand may be forced by the IMF, however, as the fund has made subsidy reform a condition for a sought-after $4.8bn (Dh17.63) loan.

Industry is already paying higher prices for gas, but painful cuts to consumer subsidies are yet to happen. Mr Morsi's reluctance is due in part to the time it would take to translate higher gas prices into increased production. "It's short-term pain, long-term gain. They won't see the benefits for some years," said Mr Mills.