An EGAS/GASCO joint working group is composing the drafts of a law and a decree that will enable to establish a gas regulator in Egypt next year. This is the first significant step towards opening the country’s gas market to competition.

 

According to Eng. Amira El-Mazni, Assistant Vice Chairman at EGAS and the head of the working group, the establishment of the gas regulator is a part of an Egypt-EU energy reform program. Other two components of the Energy Sector Policy Support Program (ESPSP) are formulating Egypt’s energy strategy to 2035 and energy efficiency program.

 

Technical Assistance From Europe

 

Due to the fact that gas transport requires large investments in infrastructure, gas supply has historically been a monopoly in many countries. However, competitive markets generally lead to better service quality and lower prices compared to monopolies. Therefore, several countries – EU member states, the US, Canada, Australia, and Argentina for example – have opened up, in other words liberalized, their gas markets in recent decades, and Egypt plans to follow their example. In Egypt, the market opening is also expected to ensure proper return on investments for gas producing IOCs, and hence increase gas supply. “Opening up Egypt’s gas market is a first step towards making this industry more efficient and therefore more competitive,” stated Anastassios Gentzoglanis, Professor of Economics at the Université de Sherbrooke. “But it should be a part of a bigger vision, not bits and pieces that you later try to connect,” stressed El-Mazni.

 

To find a technical consultant for the ESPSP program, the EU organized a tender, which was won by a consortium of three European companies – Sofreco headquartered in France, Mercados based in Spain, and Adetef, an agency for international technical cooperation set up by the French government. The EU pays to the consortium for providing technical assistance to the Egyptian government. “Their Technical Assistance for the Reform of Energy Sector (TARES) contract with the EU was signed in January 2013 and the work started shortly afterwards,” informed El-Mazni. The program is expected to be completed in December.

 

The origin of the idea to open up Egypt´s gas market is the “evolvement of previous work that the EU has done under the EU-Mashreq project a couple of years ago,“ explained El-Mazni. According to her, this work was a part of the EU´s attempts to bring the markets of its neighboring countries in compliance with EU rules in order to ease import and export. In case of the Mashreq region, it was related to the plans to extend the Arab Gas Pipeline to Turkey, where it could connect to Europe. “Europe needs to diversify its supplies and Egypt needs to develop its markets,” said Gentzoglanis, referring to the fact that liberalizing the Egyptian gas market is a mutually beneficial step.

 

Subsidy Reform the Biggest Challenge

 

The essence of the Egyptian gas market opening is that third parties, primarily IOCs, will get access to the local gas transmission and distribution networks, which presently can be used only by EGAS and EGPC. EGAS will remain the owner of the networks and GASCO and local distribution companies will continue to operate them, but third parties will get the right to use them too. The gas regulator would set requirements for third parties to access the networks and issue licenses for that.

 

To ensure that third parties can access the networks under fair conditions, a process called unbundling needs to take place. Unbundling means separating network operators´ activities involving the grid from their other activities in the gas sector. In the EU, network related and other types of activities have to be legally and functionally separate, but in Egypt only accounting unbundling is planned to take place. Accordingly, the finances of GASCO that relate to the grid need to be separated from the finances of its other activities for example, such as operating the Western Desert Gas Complex, which is a processing facility. The EGAS/GASCO working group has determined that in GASCO there already exists such separation of finances, but now one needs to look into whether this is also the case when it comes to the local distribution companies.

 

A prerequisite of the market opening is a subsidy reform, since free competition is not possible as long as prices are below production costs. El-Mazni said that the gas regulator would at least in its initial years not get involved in price formation, since reforming subsidies is a very complicated process that involves socioeconomic and other impacts. “The regulator would be there to make sure that whatever prices set by the government are respected and implemented inclusively,” she explained. El-Mazni added that the reform of gas subsidies should go hand in hand with reforming other energy subsidies. This is so because in case of lifting gas subsidies, but not the subsidies of liquids, consumers would switch from gas to liquids. According to World Bank experts, the subsidy reform is the main challenge to the gas market opening in Egypt. “I’d say the subsidy reform is going to be a challenge,” agreed El-Mazni.” If the situation remains as it is, there will be very little role for the regulator to play.” 

Preparations for Market Opening

 

The EGAS/GASCO joint working group expects to finalize the drafts of the law and the decree for the establishment of the gas regulator in December, then they will be sent to the parliament for approval. It is not clear when Egypt will have the parliament in place, but El-Mazni expects the approval to come and the regulator to be established next year. Its initial staff will be about 30 people.

 

The establishment of the regulator is just the first significant step towards opening the gas market. The working group is already preparing the next steps too. According to El-Mazni, it is designing “the ultimate gas market that we would like to have”. She brings the highly liquid UK gas market as an example of such an “ultimate market” which to aim for. For achieving this, a methodology for calculating the tariff of using the gas grid needs to be formulated “and the tariff needs to be fair to everybody, meaning shippers, consumers, owner, and operator of the network.” Besides, a code for using the grid has to be made up and the process of booking grid capacity for interested shippers needs to be designed. The EU has sponsored the visit to Egypt of several former heads of European energy regulators, who have met with the EGAS/GASCO working group and have given them recommendations and cautions based on their own experiences.

 

Once could ask whether it is proper to take the European gas markets as an example for Egypt as conditions in these two entities are very different. According to Gentzoglanis, the European energy markets are “totally different” from Egypt’s, and it is widely understood that it is not possible to “expect a European-style performance for Egypt´s gas sector”. “Nonetheless, using the well-known European model and similar policies and regulations to restructure the Egyptian energy market would contribute to making Egypt’s long term energy goals a reality,” he added. “Given the local context, each county may have different path and pace for energy sector reform which should not be necessary following exact model applied by other countries,” said World Bank experts, yet adding that Egypt could learn from the gas markets reform experiences of countries in Europe, Latin America as well as Asia.

 

Why not an Overall Energy Regulator?

 

Several countries – such as the UK, the US, Canada, and Australia – have a common regulator for electricity and gas whereas Egypt plans to have two separate organizations. According to El-Mazni, it does not make a difference whether to have an overall regulator or two separate ones. “If we have one regulator, you want to have two departments that will be independent from each other,” she explained. “They will follow more or less the same methodologies, but the nature of the business requires the gas regulator staff to have the necessary experience and background in the gas sector.”

 

In the opinion of World Bank experts, at this stage of market development it does not make a significant difference whether to have an overall regulator or two separate ones. Gentzoglanis thinks that it makes sense to have a separate gas regulator, particularly at the beginning. “The restructuring of the gas industry is quite the task by itself and requires a different expertise than the electricity industry…” he explained. “The issues faced by gas regulators are quite different from those facing electricity regulators,” agreed Dr. Paul Jerome Sullivan, Professor of Economics at the US National Defense University. “Over time the two might be able to merge into an overall energy regulator, but right now Egypt does not seem to have the administrative and technical capacity in the government to have a common regulator like FERC in the US.”

 

“When and if in the future regulatory functions are extracted from the ministries and the regulators are reporting to the cabinet of ministers for example, then it makes sense to have one body regulating everything,” noted El-Mazni. Currently Egypt’s regulators are chaired by the respective ministers – electricity regulator by the minister of electricity and renewable energy, telecommunications regulator by the minister of communications and information technology, and the water regulator by the minister of housing, utilities and urban development; hence the gas regulatory is expected to be chaired by the minister of petroleum.

 

The Challenge of Regulatory Independence

 

The fact that regulators are chaired by the respective ministers puts their independence into question. “In these situations, it would not be a surprise to see situations involving conflicts of interest and decisions which are not free of political meddling,” noted Gentzoglanis.

 

The regulator should be independent not only institutionally, but also financially. “As soon as [the regulator] matures, it should not be funded neither by the government nor by the industry, in order to really be independent,” stressed El-Mazni. Egypt´s gas regulator is supposed to become self-sufficient by making money from issuing licenses. However, until licenses bring not sufficient income, the regulator is expected to be financed by the Egyptian government and/or international donors such as the EU and the World Bank.

 

Another issue that can affect the independence of a regulator is involvement in policy implementation. This is the case of the electricity regulator Egypt ERA, which is implementing for example several energy efficiency awareness measures alongside its regulatory tasks. “The electricity regulator does not have the necessary law to enable them to practice their mandate,” said El-Mazni. But the gas regulator is planned to be established together with issuing a law, and will then have enough tasks to do within its mandate. However, the gas regulator is expected to initially play a role in encouraging the gas market evolution because as El-Mazni explains, “Unless the regulator is playing a proactive role, the rate of opening up the market will not be fast enough.”

 

Will the Regulator Be Failure or Success?

 

The Egypt’s telecommunications regulator, the National Telecommunications Regulatory Authority (NTRA) established in 2003, has done remarkable work in opening up the telecommunications market. As a result of this work, mobile service providers have gotten an opportunity to access the copper wire networks that Telecom Egypt has so far used as a landline services monopoly; whereas Telecom Egypt is about to enter the mobile services business. NTRA has done serious work for ensuring competition in the telecommunications market, also in cooperation with the Egyptian Competition Authority, who in December referred Vodafone, Etisalat and Mobinil to the prosecutor general following charges of engaging in a cartel agreement, writes Daily News Egypt.

 

According to Gentzoglanis, the planned gas regulator at least has potential to be more effective than Egypt ERA because gas prices are a bit less sensitive issue than electricity prices since they have lesser impact on the domestic population at large. “However, opening up the gas industry is not enough to bring forth more investment,” he added, stressing that the regulator must create a transparent market. Along similar lines, World Bank experts said that the potential of the market opening to bring more investments into Egypt’s gas sector largely depends on the “improvement of the legal, institutional, regulatory and pricing framework.”

 

Gentzoglanis pointed out the risk of the so-called regulatory hold-up whereby the decisions of a regulator are unpredictable and can deter investments. “It is thus important for Egypt to open its gas market and define clearly its regulatory framework before restructuring its gas industry,” he stressed. “If the gas regulator is able to establish a good reputation and stick to its regulations and there is no risk of policy reversal, the risks of hold-up are reduced. Definitely, this would provide incentives for further investment. Nonetheless, in the case of Egypt the regulator will be chaired by the minister of petroleum and this may cast doubts about the government’s real objectives and/or its determination to stick to its policies for opening up the gas sector,” he added. According to Sullivan, the Egypt’s planned gas regulator does not seem like an independent institution at all and can lead to more regulation instead of the deregulation that is supposed to be the result of market liberalization. “Present day Egypt is one of the last places I would expect real deregulation to happen,” he noted, adding that. “It seems to me that some in leadership in Egypt confuse regulation with deregulation.”

 

“I do not expect big changes in reality, although there might be a noisy roll out,” said Sullivan of the impact of creating the gas regulator in Egypt. It seems that the country has used up its credibility in the eyes of many observers and hence they have no big expectations regarding the planned gas market reform, but thanks to the dedicated people working on it at EGAS/GASCO with the help of European expertise, Egypt can hopefully still make the reform a success and prove that skeptics were wrong this time.

Opening of European Union Gas Markets

In the 1990s, most gas and electricity markets in the EU were monopolized. EU member states decided to open these markets to competition gradually, in part to follow the success of the UK that had started the market-opening process already in the 1980s, writes Sarolta Somosi in his PhD dissertation thesis at the University of Szeged. According to the European Commission, the liberalization includes obliging the operators of transport infrastructure (for example the grid, LNG facilities) to allow third parties access it, removing barriers that prevent alternative suppliers from importing or producing energy, removing restrictions on consumers from changing their supplier and introducing independent regulators to monitor the sector. The directives for liberalizing the gas market were adopted in 1998 and 2003. In practice, industrial clients and domestic customers have had the freedom to choose their gas supplier since July 1st 2004 and July 1st 2007 respectively. However, many governments have been reluctant to unbundle vertically integrated gas businesses. A 2007 study showed that there exist still barriers for new entrants on the EU gas markets, and a high level of concentration at the wholesale level, plus there is a lack of transparent market information. To speed up the market opening, the European Commission opened a number of cases against uncompetitive practices in the gas sector involving companies such as E.On, GDF, ENI, and RWE. Besides, in 2009 the EU adopted another legislative package, the Third Energy Package, to complete the opening of the European energy markets. This introduced stricter measures for unbundling vertically integrated companies and ensuring the independence of national regulators. Even now, the liberalization of the EU gas sector is an ongoing process, with markets in many member states not even gotten close to the liquid UK gas market, where consumers can choose between more than 20 suppliers.

COMMENT
Tom Maher, General Manager of Apache Egypt

Apache believes reform of the natural gas market in Egypt would benefit all stakeholders in the value chain. The present system has resulted in inefficiencies for both the producers and downstream end-users. Any market reform effort needs to increase the gas price to a level that results in a significant increase in investment to develop Egypt’s ample reserves of natural gas, both offshore and onshore. This in turn will increase the supply to reliable levels for industrial users and power plants. Of course any market reform effort will need to work parallel with energy subsidy reform to have any chance of being successful.

By Laura Raus

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