Home demand threat to Egypt's gas boom

Workers build a pipeline for transporting natural gas to Israel in north Delta Nile.

Recent years have seen a burst of activity in Egypt's energy sector as the government moves full speed into natural gas production, seeking to reduce a burgeoning oil import bill and achieve its wider ambition of becoming a regional energy player. Last month alone, Egypt announced new energy agreements worth US$2.3 billion (Dh8.49bn). But despite the new deals and a further 11 blocks opened to international bidding, Egypt's natural gas output may struggle to meet the demands of a ravenous industrial base and a population grown used to cheap energy, thanks to a subsidy programme that reached 62.7 billion Egyptian pounds (Dh42.14bn) last year. Oil and gas account for about 15 per cent of Egypt's GDP and are the country's major sources of foreign investment. The sector attracted $9bn in the last financial year according to the minister of petroleum, Sameh Fahmi, who announced last month that 17 energy agreements worth $3.5bn had been approved by the Egyptian cabinet in the five months up to August.

But despite several significant discoveries this year, including three by Dana Gas of the UAE, Egypt's sixth-largest natural gas producer, which pushed up the country's estimated gas reserves to 77.2 trillion cubic feet and oil reserves to 4.4 billion barrels, demand for energy is outstripping supply. In 2007-2008, the country's oil import bill more than tripled to $5.1bn as a result of expanding industrial and domestic energy consumption. A report by analysts at Business Monitor International (BMI) predicted Egypt's oil consumption would grow 37.3 per cent between now and 2018, at the same time as oil output falls. "We are forecasting a decrease in Egyptian oil and gas liquids production of 11.9 per cent," the report said. BMI expects gas production to rise from 55 billion cubic metres (bcm) last year to 85 bcm in 2013, outstripping domestic demand, which it predicts will grow from 33 bcm to 42 bcm over the same period.

Ballooning gas production, together with memories of last year's oil price rises, have seen the government move quickly into gas, allocating $1.1bn to drill 23 new exploration wells this year, which are expected to produce about 800 million cubic feet per day. But output growth is likely to disappear quickly as the country's insatiable energy appetite picks up again as the economy recovers from this year's downturn. Capacity in the electricity sector, which consumes about 58 per cent of gas output, is expected to grow from 18,000 megawatts in 2005 to 32,000 by 2013, during which 11 thermal plants are planned for construction. A programme to substitute natural gas for fuel oils across the economy will also consume its share. This year 500,000 houses will be added to the 3.1 million already connected to the gas grid, while everything from public transport to brick factories is converting to gas. The Egyptian government is trying to reduce the pressure on gas through a big push into renewable energy, and also reviving the country's dormant nuclear programme, which was resurrected this year. Renewables currently account for just over 10 per cent of total energy production, mostly from the Aswan Dam. The government aims to increase this to 20 per cent of total consumption by 2020, with about 12 per cent of that from wind. A three-year plan is also trying to tackle the issue of industrial subsidies. Industry accounts for 26 per cent of gas consumption. The plan, launched in 2007, would have seen energy-intensive industry paying close to cost price for gas, estimated at $3 per million British thermal units (btus), but the programme was put on hold until the end of this year after enthusiastic energy sector lobbying. What this means is that the government is likely to find its ambitions of becoming a regional natural gas exporter curtailed by the demands of its own economy. "There's not enough available gas today to go around for everybody," says Reham el Desoki, the senior economist at the local investment bank Beltone Financial. "It would be very difficult to increase exports of natural gas at a time when you're trying to provide for domestic industry. It was already very challenging to meet the obligations for the Arab Gas Pipeline." The Arab Gas Pipeline, connecting Egypt to Jordan and Syria, is expected to take up about 77.3 billion cu ft of gas by 2013. Egypt exports gas through the Arish-Ashkelon pipeline to Israel, and a third pipeline connecting offshore Mediterranean fields to Libya is scheduled for construction. This year, Egypt also signed on to the Nabucco pipeline, which will connect the Middle East with Europe via Turkey, a move which led analysts at Cambridge Energy Research Associates to declare that "Egypt may have already committed its gas to other pipelines". Pumping more foreign investment into the energy sector could be the answer to supply shortages, but heavy-handed state intervention is dampening foreign enthusiasm. "There are a lot of different issues international companies have to deal with relating to the bidding [and] licensing process," Mrs el Desoki says. Foreign investors are forced to form joint ventures with the notoriously opaque ministry of petroleum holding company Egyptian General Petroleum Corporation (EGPC). The standard model used by EGPC allocates 35 per cent of production to the foreign contractor as cost recovery. Of the remaining 65 per cent, up to 83 per cent for oil production (the share increases with the price of Brent crude), and 85 per cent for gas, goes to the state. The contracts also give Egypt a right to purchase the foreign contractors' share of production, a right the state is increasingly exercising to meet growing local demand. While exact prices for state purchases (in fact all contract details) are not publicly disclosed, last year gas purchases were made at $2.65 per million btus, a figure that has probably moved closer to $3 since, but is still significantly below market price. Oil executives say that, contracts aside, the biggest disincentive to energy investment is the substantial arrears on payments accrued by EGPC. "Generally, the arrears issue previously existed in a number of different sectors," Mrs el Desoki says. "With regards to petroleum companies, we have no idea how much the arrears are and who they are owed to." A big overhaul of the entire energy sector is slated, aimed at reducing the state's position in the sector, "separating its role as regulator and the role it currently has, which is also commercial, in terms of production and distribution," Mrs el Desoki says. The government is hoping this will improve EGPC's access to credit, to help resolve the arrears issue. It may also pave the way to privatisation within the sector and the introduction of market-based pricing to attract foreign companies. Whether it will be sufficient to prevent Egypt becoming an energy importer remains to be seen. [e-mail]