Lower pound will increase Egypt’s energy costs

The government has set out plans to reduce the electricity subsidy in the next fiscal year from US$3.59 billion to $2.65bn, a move that will now be more costly to consumers because of the devaluation.

Powered by automated translation

Egypt’s decision to devalue the pound will lead to increased energy costs for consumers, although foreign operators will largely be shielded.

Egypt’s central bank on Monday devalued the pound by 13 per cent against the US dollar and said it would allow a more flexible exchange rate in the future.

Egypt, which was required to start importing liquefied natural gas last year to meet domestic demand despite its considerable domestic gas resources, has struggled to pay for foreign supplies this year.

“Whenever you see these moves [on the exchange rate] it makes imports more expensive, and on the gas side you already have seen payment difficulties,” said Trevor Sikorski, the head of global gas analysis at Energy Aspects, a consultancy.

In January, Egypt was forced to turn away a BP LNG tanker because its foreign exchange crisis meant it was short of dollars, and it had to promise to dip into foreign currency loans from the World Bank, China and others to regularise deliveries from its major suppliers, including ­Royal Dutch Shell and the commodities trading houses Trafigura and Vitol.

Egypt’s financial reform has included plans to eliminate energy subsidies and last month the electricity and renewable energy ministry set out plans to cut them by a further 50 per cent by 2020, and to eliminate them altogether by 2025, exposing consumers to increasing dollar-based world prices.

The government began by increasing electricity tariffs in July 2014 by up to 15 per cent, when consumers were paying only about a third of the cost price.

The government has set out plans to reduce the electricity subsidy in the next fiscal year to US2.65 billion from $3.59bn, a move that will now be more costly to consumers because of the devaluation.

Egypt had been a net exporter of natural gas for much of the early part of this century, but production declined after the 2011 revolution, with the slide exacerbated by the poor terms offered to foreign producers as well as the government’s in­ability to meet financial commitments.

Last year, it reached an agreement with a number of major international oil companies to pay back arrears in return for increased investment to develop new discoveries offshore in the Mediterranean, the Nile Delta and the Western Desert.

This included agreeing a much higher dollar price for the natural gas produced and sold in the domestic market, as well as payments in the form of allowing producers to sell associated liquids on international markets.

Arrears owed to companies were reduced from about $5bn at the start of last year to $3bn by the end of the year, and the government has promised to eliminate them by the end of this year.

Italy’s Eni is among the biggest operators, investing up to $10bn to develop the giant Zohr gasfield, which was due to start producing next year.

Sharjah’s Dana Gas, in which Crescent Petroleum holds a large stake, is a major investor in Egypt’s gas sector and was part of the deal to receive arrears payments last year in return for investing $350 million to drill dozens of new exploration wells.

The company said it received $109m in cash from the government last year, as well as $16m in the form of waived bonus payments and other payments due.


Follow The National's Business section on Twitter