All lies in the infrastructure

Connecting more residential, commercial and industrial units to the natural gas grid should be met with an appropriate expansion plan to provide the adequate infrastructure to accommodate the new customers. Though the Ministry of Petroleum is carrying a major part of this heavy burden, the contribution of private sector has been a factor contributing to the implementation of this national plan

Back to 1997, the Egyptian government decided to engage the private sector in its national plan to develop and expand the country’s distribution network. Since then, the private sector has been building and operating gas networks as private Local Distribution Companies (LDCs). The Egyptian General Petroleum Corporation (EGPC) signed franchise agreements with private investors to develop the distribution network in specific concession areas and connect them to all customers for 20 years. This decision changed the gas distribution sector in Egypt that used to consist of one state-owned monopoly operator and allowed private LDCs to work under the EGPC guidance (and later Egas) and receive compensation for their investment over a five-year period.

From 1997 to 2000, the original compensation set for the connection of each residential unit counted for 2670 egyptian pound (EGP). This sum has been reduced to EGP 2500 (the Ministry of Petroleum pays EGP 1000, while the customer pays the remaining EGP 1500 over a 10-year period).

Currently, there are two state-owned companies, Egypt Gas Company (80% government owned) and Town Gas Company, in addition to 10 privately owned LDCs, which are: National Gas Company (El Sharkeya Governorate and 10th of Ramadan City), Natgas Company (6th of October city and parts of Alexandria), El Fayoum Gas Company (Upper Egypt), Repco Gas (Damietta), Nile Valley Gas Company (Upper Egypt), City Gas (Suez Governorate), Transgas (Kafr El Sheikh), MEGAS, Cairo Gas and Aqalim Gas. The last two companies are subcontractors to Town Gas Company.

Besides, there are another four companies that have been qualified to enter the market as local distribution companies, which are Modern Gas, Fagr, Arab Contractors and MY Gas.

Engaging the private sector has not been the sole attempts of the Ministry of Petroleum to serve its expansion plan of the natural gas distribution infrastructure. The Ministry committed to connect six million residential units country-wide by 2011, which was later amended to 5.5 million by the year of 2014. In august 2008, approximately 2.9 residential units were connected to the distribution target, according to Egas reports.

The vitality of such expansion plans lies in mitigating the country’s risk against rising oil prices as the current levels of government allocated subsidy for liquid fuels could not be sustained with the rising demand on oil resources. Moreover, expanding the natural gas infrastructure beyond its current size to reach new areas such as Upper Egypt is a main supporter for the much-needed economic development for this area through industrial development and increased investment.

Obstacles challenging expansion plans

– Installation cost: the EGP 1500 connection fees paid by consumer is sometimes a burden on low-income consumers that consume a lower volume of fuel. At lower consumption levels, it is not sufficient to fund the cost of a new connection to the gas distribution grid, despite the fact that there is an annual fuel cost saving by switching from LPG to natural gas.

– LDC Connection incentives: the incentives for LDCs to connect commercial and industrial customers are based on gas consumption, which is a different mechanism than that of residential customers. Therefore, connecting residential customers to the grid is less desirable for LDCs due to the low incentive. Therefore, this mechanism needs to be modified by increasing the benefits of conversion to the government from LPG subsidy saving, which would by its turn justify the increased incentives to LDCs.

– Challenges of development: there are various challenges facing the development phase, which are: current LDCs are limited and would not be able to provide all the needed work resources, traffic challenges resulting from road inconveniences due to network installations and finally, gas has not been delivered to the full region of Upper Egypt, hence less there will be less natural gas applications to optimize the economics of infrastructure development.

To sum up, the speed by which the Ministry aims at developing the natural gas distribution grid causes some challenges that could hinder the plan execution. Yet, these barriers can be dealt with, if the development plan for each region is well studied and included into an overall implementation strategy.

By Yomna Bassiouni


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