Egypt's fragile economic recovery threatened by gas shortage

Once an exporter, the Arab nation is no longer producing enough gas to keep electricity systems running during hot summers

The Cairo skyline. Egypt's local gas output has dropped to the lowest level in years. Reuters

A $50 billion bailout has helped ward off a worsening of Egypt’s economic crisis. Now, a growing energy shortage risks draining the vital foreign currency reserves it needs to pull off a recovery.

The Arab world’s most populous nation is in the fragile early stages of an economic turnaround after massive funding pledges handed the country’s leadership prospects of a fresh start.

President Abdel Fattah El Sisi’s next challenge is to tackle the power blackouts that gripped Egypt last year and caused widespread public discontent.

Once an exporter, Egypt is no longer producing enough gas to keep electricity systems afloat during increasingly hot summers. Last year was the hottest on record, necessitating introduction of power cuts lasting up to two hours and forcing Egypt to halt liquefied natural gas exports during the season. Experts predict 2024 will be even worse.

Bloomberg News reported last week that the country has started buying LNG cargoes, which it uses to produce electricity for air conditioning, unusually early in the year to avoid chronic interruptions.

Another summer of massive power cuts would pile pressure on a population that is already grappling with high inflation, a substantially devalued currency and a surge in domestic fuel prices.

The flip side is that heavy purchases threaten to sap foreign currency reserves just as Egypt faces strains from the war in Gaza and dried up revenue from Suez Canal crossings, a result from attacks on Red Sea shipping by Houthi militants.

“Becoming a gas importer adds to Egypt’s costs,” said Ziad Daoud, chief emerging-markets economist for Bloomberg Economics.

“Besides securing energy, authorities need to provide dollars to clear an import backlog, settle arrears with international companies, and ease capital restrictions.”

The LNG purchases mark a major shift for the country, which largely stopped importing the fuel in 2018 after the discovery of the massive Zohr gasfield boosted domestic production and turned the country into an exporter.

As recently as 2022, at the height of Europe’s energy crisis, Egypt sold record quantities on international markets, providing a welcome source of revenue at a time when it was struggling with soaring food costs. It was one of the suppliers that helped Europe keep the lights on after Russia throttled pipeline flows, bolstering ambitions that it might transform into a key energy hub.

Surging energy needs

Local gas output, however, has dropped to the lowest level in years recently, which Oil Minister Tarek El Molla has linked to a natural decline at its fields.

Domestic production in Egypt and pipeline imports from Israel will be insufficient to cover the country’s gas needs this summer, according to Jacopo Casadei, an analyst at consulting firm Energy Aspects in London.

Temperatures in Cairo are already forecast to be above seasonal highs later this month. On top of fulfilling stronger demand for cooling, gas is needed to feed energy-intensive industries such as fertiliser producers.

For now, at least, global gas prices have eased significantly, making it easier for price-sensitive customers in emerging markets to secure cargoes.

“In the short term, Egypt will struggle to achieve its vision of becoming an energy hub," said Riccardo Fabiani, project director for North Africa at the Brussels-based Crisis Group.

Egypt lacks sufficient domestic production to meet internal demand and export commitments, Mr Fabiani added.

“In the long run, Egypt will need to increase its exploration efforts to boost production and bet on renewable energy.”

Neither task, according to Mr Fabiani, is easy.

One factor that may limit how much LNG Egypt has to purchase is the steady flows it has been receiving through pipeline from Israel.

Jonathan Stern, a distinguished research fellow at the Oxford Institute for Energy Studies, says other discoveries that have yet to come online might see Egypt swing “between being an LNG exporter and importer” in coming years.

The country is in a better position now that it has received external financing, led by a $35 billion investment pledge by the UAE, according to Omar Monieb, a senior analyst for Middle East & North Africa at Eurasia Group. That will allow authorities to avoid the massive power cuts of the previous summer, while implementing shorter strategic reductions.

“They are working on different fronts, working on the technical side too to gradually solve the issue of gas shortages,” he said.

“They don’t want public discontent over this issue. The socioeconomic situation is already tense. The summer is starting and it will get hotter and hotter.”