Robin Mills: The Egyptian economy is running on empty as it awaits a recharge of energy strategy

Egypt badly needs to recharge its energy strategy, because problems with energy have been an important part of undermining Egypt’s budget and trade balance.

Long queues stretched around Cairo petrol stations on Thursday evening as motorists rushed to beat rising fuel prices. In tandem with the sharp devaluation of the Egyptian pound, the government has cut subsidies again. But with the country’s indicators blinking on zero, Egypt badly needs to recharge its energy strategy.

The Egyptian pound fell by almost a third as the central bank said on Thursday that it was letting the currency float. Devaluation had become inevitable as a requirement for securing an essential IMF loan and easing a drought of foreign currency that had led to shortages of sugar.

Problems with energy have been an important part of undermining Egypt’s budget and trade balance. Even after cuts earlier this year, subsidies account for nearly half the forecast budget deficit of 9.8 per cent for the 2016-17 fiscal year. The drop in subsidies was mostly because of falling global oil and gas prices, not internal reforms. The price of gas has gone up, but electricity tariffs have not been raised proportionately, shifting the subsidy burden rather than removing it.

Overdue payments to oil companies, which were meant to be cleared by the end of this year, have been rising again, reaching US$3.58 billion. The companies cannot invest in new production without being paid, so drilling has slumped to half the level of two years ago. Oil production, which had been quite stable since 2008, has declined sharply this year, further cutting revenues. Refining output has also dropped, requiring more imports of oil products, at a time when Saudi shipments have been cut.

Egypt was a significant LNG exporter until 2013, but rising domestic demand and a collapse in production have abruptly turned it into a major importer of gas. While the government has allowed Shell to export a few cargoes recently to meet contractual commitments, the country imported some $1.1bn of LNG at current prices this year up to August.

Gas production has improved this year on the back of new field developments, but underlying output remains in steep decline. Shell is holding off on the important next phase of its West Nile Delta project until it receives some of what it is owed.

The country, of course, is looking to ENI’s giant Zohr offshore field, meant to start production by the end of next year. But given likely delays and sharply rising domestic demand as new power plants are commissioned, it is doubtful whether even Zohr will be enough to close the supply-demand deficit. Although a great, and lucky, success, its discovery seemed to encourage irrational exuberance and complacency in the government.

Gas to factories continues to be cut off unpredictably, undermining important export industries. Meanwhile the electricity supply has improved, but renewable energy plans have been mired in bureaucratic disputes.

The latest fuel price rises will boost already high inflation, but they barely cover for the devaluation. Local currency prices are up from 30-47 per cent, so the subsidy burden in dollars has at best narrowed slightly.

The government now needs to build quickly on the loan and the large, politically risky devaluation. It needs to move swiftly to abolish most remaining subsidies to protect its budget and control demand. High inflation requires compensation to low-income Egyptians, but this is hard for the bureaucracy to manage without waste and corruption.

The greater availability of foreign currency should allow the government to pay down debts to oil companies and stabilise production levels. Raising gas prices uniformly to a market ­level – the equivalent price for LNG imports – would encourage investment in offshore and tight gasfields.

The Egyptian energy economy has been running on empty for too long. It should now get a short-term boost, but only major maintenance will keep the whole show on the road.

Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis

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