Egypt's energy bailout not enough to brighten future

The IMF approved an $8 billion loan package to help the country's struggling economy but a sustainable solution for long-term stability is needed

Egypt has excellent conditions for renewable energy, but has not made as much progress in recent years as it should. AP
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Egypt’s Zohr gas discovery in 2015, with the apt meaning of “midday”, seemed to herald a sunny future for the country’s energy sector. But since then, a gloomy fog has descended, mingling war, economic malaise and the return of electricity and fuel shortages. Cairo received a big bailout in March – but without fixing its energy problems, the lights will go out again.

The pivotal North African state, with its population of about 110 million, has been badly hit by the past few years of global and regional crises. First it was the Covid pandemic, then Russia’s invasion of Ukraine, which drove up wheat prices, damaging Egypt, a large importer of food.

Ethiopia’s dam on the Blue Nile is a source of tension with a big regional neighbour and heightens worries over Egypt’s water situation. The terrible civil war in Sudan further complicates any constructive approach to Addis Ababa.

Israel’s war against Gaza has driven away tourists. And the Houthi campaign against shipping in the Red Sea has caused Suez Canal revenue to dry up, down 40 per cent this year versus the same period in 2023.

Egypt’s immediate financial problems were eased over the last few weeks: ADQ of Abu Dhabi transferred $10 billion of a $35 billion investment deal for land at Ras El Hekma on the north coast; the EU provided a €7.4 billion ($8 billion) package of loans and grants; the World Bank said on 18 March it would disburse more than $6 billion over three years; and an $8 billion IMF loan was approved on Friday.

Cairo carried out some reforms in return; it floated the Egyptian pound, resulting in a 40 per cent devaluation, raised interest rates and increased prices for petrol, diesel and cooking gas.

Yet because of the decline in the currency, road fuel prices in dollar terms are still below those of early 2023, even though crude oil prices are now a little higher.

Egypt's major energy crisis remains the root cause ailing the country's ability to grow, with exceedingly high spending on imports, the North African country needs a more sustainable solution.

Outstanding bills

Money owed to oil companies operating in the country swelled to $6.25 billion at the end of last year. Without being paid, they cut back their investment budgets, leading to a fall in production, which in turn boosts the import bill and trade deficit. Egypt has now turned some of its cash influx to paying down these debts.

Gas from Zohr and the construction of massive new gas-fired power plants had helped end painful power cuts and stoppages of feedstock to industries. Liquefied natural gas (LNG) exports, which had dried up in 2015, resumed and 2021 and 2022 saw them boom, bringing in welcome revenue at a time of record international prices.

But this windfall seems over, as Zohr has run into trouble. Water influx into the reservoir has led production to stumble, and the field is producing about 2 billion cubic feet a day, well below intended capacity of 3.2 billion cubic feet.

There have been few significant discoveries since 2015, and low contractual prices for gas produced onshore has led drillers to prioritise oil.

LNG exports this year have almost dried up. Only a few cargoes will be exported, and in fact Egypt is now seeking to charter a floating regasification vessel to import LNG to cover summer gas shortages.

Politically and economically damaging hours-long blackouts returned last summer after they had been banished for several years.

The national gas balance is heavily reliant on imports from Israel, which sent record amounts last year despite a one-month stoppage for security concerns following the 7 October Hamas attack.

But pipeline constraints mean this capacity won’t increase until early next year at best, delayed more than a year after work was suspended during the war. The next major increment of export capacity would be mid-2027. And it is troubling to deepen dependence on Israel while it racks up the death toll in Gaza.

Egypt devalues currency to record low

Egypt devalues currency to record low

Instead, Egypt could import gas from Cyprus, where several significant offshore discoveries remain undeveloped. But plans to develop these via tie-backs to existing Egyptian infrastructure with spare capacity have stalled, after lengthy commercial disagreements between Nicosia and the companies involved.

The Ras El Hekma development is intended to be powered sustainably, mainly by the 4.8 gigawatt Dabaa nuclear power plant under construction by Russia’s Rosatom nearby.

This would be Egypt’s first nuclear generation and would save gas. It is intended to be completed between 2028 and 2030, but could still be delayed by sanctions on Russia or financing problems arising from Moscow’s invasion of Ukraine. Russia is meant to loan $25 billion of the cost and Cairo to chip in $5 billion.

What next?

So what are the solutions? Egypt may not be able to do much to resolve the conflicts in its neighbourhood. But it badly needs to rationalise energy use at home, while protecting the mass of lower-income citizens; limit its costly fuel imports which widen the trade deficit and pressure the currency; and preferably develop some more energy exports.

Targeting fuel and electricity subsidies better, or phasing them out in favour of direct cash payments to the poor, would help ease the subsidy burden.

Revising contracts with gas drillers to offer higher prices in return for progressively larger government shares of production would encourage domestic output. The next wave of Mediterranean exploration might yield more finds, if not as large as Zohr, but these won’t come online soon.

Egypt has excellent conditions for renewable energy, but has not made as much progress in recent years as it should. No new wind power at all was installed between 2020 and 2022, and only 247 megawatts last year; just 109 megawatts of solar were added between 2019 and 2023.

The country has a great opportunity to capitalise on European funds, reduce its domestic oil and gas consumption, and export major amounts of renewable electricity

Yet the country has a great opportunity to capitalise on European funds, reduce its domestic oil and gas consumption, and export major amounts of renewable electricity. Key parts of the EU package focus on renewables, hydrogen and electricity interconnection to the EU via the planned undersea “Gregy” (Greece-Egypt) cable.

The proposed EuroAfrica connector would run from Egypt to Cyprus, Crete and mainland Greece. Together these bidirectional links could carry six gigawatts.

Numerous hydrogen projects have also been proposed, mostly along the sunny, windy and logistically suited Gulf of Suez corridor, some involving Abu Dhabi clean energy company Masdar or Adnoc fertiliser subsidiary Fertiglobe.

But these have suffered from the general problem of hydrogen projects around the world, struggling to sign up customers willing to pay premia for green supply.

Egypt’s geopolitical importance, particularly as conflict envelopes so many of its neighbours, means it will always have powerful friends. Its geography and natural resources, both hydrocarbon and renewable, offer plenty to build on.

But instead of stumbling through the fog towards the next bailout, Cairo needs to hasten to a brighter energy and economic future.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

Updated: April 01, 2024, 11:26 AM