By Nataša Kubíková

The Egyptian government has been dedicated to venturing new gas market regulations under the New Gas Law, which was the topic of a high-profile event jointly organized by the British Egyptian Business Association (BEBA) and the Egyptian Gas Association (EGA) on July 19th, 2016 held in Cairo Marriott Hotel.

The objective of the presentation and following discussion among gas industry leaders in Egypt was to introduce new parameters of the gas market regulatory environment, which is being prepared by the Egyptian Natural Gas Holding Company (EGAS).

“Worldwide, the gas industry is becoming more liberalized,” stated Eng. Khaled Abu Bakr, EGA’s Executive Chairman and CEO of TAQA Arabia, who moderated the event.

He continued saying that “in Egypt, gas is the prime source of energy, representing 57%. It is against this background that Egypt’s government and gas industry policy makers have considered how to develop the clean reliable infrastructure energy, how to raise the quality of life, and how to improve energy efficiency to achieve sustainable economic development.”

“A clear answer to these challenges was to properly liberalize the gas market and develop strong, independent market gradually” in order to “contribute to the gas energy governance and advance effort towards optimizing gas utilization” in Egypt, according to EGA Chairman, who opened the floor for presentations.

Gas Regulatory Framework

An executive team of EGAS, under the leadership of Eng. Amira El-Mazni, EGAS Vice Chairman for Gas Regulatory Affairs, presented recent progress they made in the preparation on the new gas law.

“Egypt’s commitment towards the reform of the Egyptian gas market took a few steps towards the development of a new regulatory framework to promote creation of a liberalized gas market, which is characterized by competition in the downstream gas segment,” said Eng. El-Mazni. She further explained that “reasons for regulating the gas market are to encourage investments and infrastructure, facilitate additional gas supply, and diversify sources by introducing new suppliers that are eager to compete fairly for the benefit of the consumers, who eventually become free to choose their own [gas] supplier.”

Currently, in the framework of Energy Sector Policy Support Program (ESPSP), the European Union (EU) and Egypt sought to improve energy policy and regulatory climate in the country. Egyptian official representatives held a series of consultation sessions with various stakeholders in the course of 2016 on drafted documents in order to push forward the new legislation. In addition, “the EU launched a specific technical assistance to support the reform of the [Egyptian] energy sector followed by another rich program to complement these preparatory works until October 2016,” noted EGAS Vice Chairman.

As a result of these efforts, “the emerging gas regulatory team has drafted a set of documents necessary to start the actual market operation under this new framework, which includes the new gas law to govern the proposed frameworks, network code, tariff calculation methodology, and licenses,” she added.

The status of the new gas law at present is such that “after having been approved by the Cabinet of Ministers in October 2015, it has been reviewed by the State Council before its ratification by the parliament,” as the EGAS gas regulatory team’s head revealed.

The New Gas Law

The new gas law, as Eng. Amira El-Mazni stated, “is to govern the proposed framework applicable only for the downstream segment of the gas market, while the upstream sector will remain governed by its respective concession agreements.”

The aim of the new regulatory framework for the Egyptian gas market is to establish a Gas Regulator that will monitor the functioning of the market in this new setting. “In addition to monitoring the market, the gas regulator’s role is to set tariff methodologies for regulating activities, issue licenses, and resolve disputes,” Chief of the regulatory team added. Therefore, a Gas Regulator is to be an independent entity that will abide by the principles of transparency and neutrality, while having legal powers and authority to perform its role satisfactorily.

Gradual Market Opening

As to the novelties outlined by the new legal document, “it introduces the principle of Third Party Access by defining the new market players, identifying their roles, responsibilities, and relations among each other. It allows for a better opening-up of the gas market over a period to be defined by the government,” explained Eng. El-Mazni.

“The third parties access (TPA) to the transmission and distribution systems and to the customers is to be granted on non-discriminatory basis for licensed players to reach gas infrastructure upon payment of a regulated transparent and cost-reflective tariff approved by the Gas Regulator,” she further specified,

Introducing new players into the gas sector dynamics will necessarily modify the current status in which “today’s shippers are only EGAS and EGPC,” pointed out Eng. El-Mazni.

While “EGPC and EGAS will remain supplying consumers and using the transmission system along with other shippers, they will enter into contracts with the Transmission System Operator,” she elaborated further. “Suppliers will compete with EGAS and EGPC for the consumers, entering into direct sales contracts with them at the free agreed prices,” she added. Together with shippers, EGAS and EGPC are thus committed to follow the Transmission Network Code and they will pay Transmission Tariff. “The shippers will also access the Distribution System following its respective Distribution Network Code and against Distribution Tariff,” according to Eng. El-Mazni.

Transmission Network Code

Susan El-Gamal, Executive General Manager for Consumption Plans-Gas Network Operations Department at GASCO, explained that “Third Party Access (TPA) is the key principle around which the Transmission Network Code (TNC) was structured.”

‘TNC is a set of unified technical and commercial rules governing the relationship between the Transmission System Operator (TSO) and shippers, stipulating rights and responsibilities of each party, in accordance with international standards,’ the presentation read.

In addition to the definition of the Gas Transmission System, nominations, measurements and physical and commercial balancing, one of the main content of TNC is capacity booking. Susan El-Gamal explained that Egypt’s gas “transmission system capacity has reached 210mscm/d, while the line of the grid is around 7,050km of transmission lines.” “The shipper will be able to book multi-annual – up to five years, annual, or infra annual transportation capacity, which will be requested and assigned at the Entry Points to the National Transmission System or the Exit Points from the National Transmission System,” as she further disclosed,

The annual booking process will take four months. It will start on September 1st when the licensed shipper will request an annual firm capacity. On November 1st, preliminary annual firm capacity will be assigned, and by November 15th, the presentation of financial guarantees by shipper is expected. Once the assignment of annual firm capacity is stated by December 1st, the start of the new gas year will be launched regularly on January 1st, according to GASCO Executive General Manager El-Gamal.

The TNC also stipulates that capacity will be allocated according to shippers’ requests, if quantities are available, or by a pro rata mechanism in cases of declined supply.

Transmission Tariff Methodology

The new gas regulatory framework further defines Transmission Tariff Methodology [TTM]. As Hatem Mahmoud, Financing & Investment Studies for Gas Grid Projects “Section Head” stressed, “we have been working for three years with the World Bank and EU experts to try to prepare tariff methodology that can be applied in Egypt.”

According to preliminary formulations, a Gas Regulator is to set the methodology and basic parameters before the start of each regulatory period on the basis of certified data and calculation provided by the TSO. This entails that the Gas Regulator sets profile of allowed annual revenues for the network operator and approves actual transmission tariff calculated each year, as the presentation clearly stated. In addition, the legislative proposal accounts for ‘an annual “reconciliation” between expected and actual revenues with a subsequent tariff adjustment,’ Hatem Mahmoud clarified.

Mahmoud further explained that “the tariff calculation methodology is a two step process. The first step is determining the allowed revenue; the amount of money that is entitled for GASCO and for chief gas network operator to collect in the gas year to recover the investment rent and operating expenses [including depreciation]. The second is defining the tariff structure, it consists of two parts; the first part is capacity/commodity split percentage [which will amount to 70% and 30%, respectively] and the second is distance-related or postage stamp oriented tariff,” which defines that users of the system pay the same tariff for gas transportation regardless of the distance.

As he continued, ‘the objective [of TTM] is to facilitate effective provision of TPA on a non-discriminatory, transparent, simple and cost-reflective tariff principle with a goal to ensure recovery of capital and operating expenditures, which will allow efficient financing of the businesses and future investments.’

Shipper and Supplier Licenses

The process of licensing will be further amended in the new gas law, as Heba El-Shahat, Drilling Contracts “Section Head”explained. “Gas activities subjected to licenses are gas transmission, gas distribution, gas shipping, and gas supply,” while “the two – Gas Shipping & Gas Supply – may be carried jointly by a single legal entity after being licensed by the Gas Regulator,” she noted.

“The purpose of the licenses, in terms of scope, is to authorize the Licensee carrying out the shipping or supply of gas for the duration period of five years commencing on the date of license issuance. The license may be renewed upon the Licensee’s request subject to the Gas Regulator’s approval or be subjected to further amendments. An annual fee paid to the Gas Regulator applies,” As she further stated.

Under the licenses, there are a number of common obligations both for shippers and suppliers to follow. According to Heba El-Shahat, the shippers and suppliers are to “follow the accounting guidelines applied in Egypt, and separation of accounts for shipping and supply activities.” Among other obligations, she concluded, a licensee must also allow an agency to audit its accounts providing all other relevant technical and financial information required by the Gas Regulator and operators.

Conflict of Interest

Following the presentations, in the subsequent Q&A session, attendees from among key gas sector leaders and representatives discussed a series of involved challenges and contributed to the preparation of the final new gas law document.

Eng. Khaled Abu Bakr pointed out that the mechanism of power allocation should guarantee a fair and equal distribution of gas market shares among shippers and suppliers in the current liberalizing processes. On that account, Eng. El-Mazni noted that “as soon as the law is issued, the Prime Minister will name GASCO as the Transmission System Operator,” which would ensure that the authority is assigned in such a way as to avoid potential conflict of interest. As she added, “with respect to GASCO and its affiliation with EGAS, we have drafted a law that takes care of the issue by means of founding separate accounts for GASCO;” in order to differentiate the upstream and downstream sectors activities conducted by this entity.

In a series of enquiries, former EGAS representative, Eng. Ibrahim, also drew attention to EGAS’ possible conflict of interest. Eng. Amira El-Mazni thus further affirmed that “in terms of conflict of interest of EGAS, being a supplier and a user of the grid, the priority for using the grid [will be given]. As we have seen, the booking and allocation is not a haphazard process, it is a scheduled process where all interested shippers will book the capacities they wish for in order to avail the capacity as requested,” she clarified.

“The process should be controlled, and we will have a seasonal process when we will announce that we are ready for interested shippers to start booking the capacity,” assured EGAS Vice Chairman, El-Mazni.

Upstream Sector Partners

Gas industry participants further pointed to the fact that the new gas law focuses on the downstream sector only. While “the proposed change is quite material, it will provide lot of opportunities for the different sectors in the industry,” said BP’s representative, Mohamed Taweel. He thus ventured an enquiry about the processes in which “the upstream sector can move from current highly regulated structures with the concession agreements set for long term gas arrangements into playing a part in the newly drafted structure either by taking a role as a supplier or a shipper.”

Eng. El-Mazni affirmed that upstream partners are probably new entrance in the gas markets, “the mechanism would be, for those partners with the concession agreements, to include the clause allowing them to access the right of selling profit shares to them in the local gas market, with EGPC, EGAS or GANOPE as their partners.”

“For those concession agreements that will not have this clause, they will need to revise this gas sales agreement in order to introduce this right and practice it,” EGAS’ Vice Chairman for Gas Regulatory Affairs concluded.

Liberalization as Gradual Process

EGAS Vice Chairman, El-Mazni further reiterated for the audience that “the liberalization process needs to take place gradually.” Eng. Amira El-Mazni thus stated that “the regulator’s main role is to monitor the gas market; it is not the party in charge of liberalizing the market, which is for the government to decide” how the implementation of new regulatory framework will be accomplished.

Therefore, as she elaborated, “the reform and liberalization process is formed by the government so that they can take necessary mitigated measures for the change until the completion of the process and maturity of the market” are both achieved.

In response to an enquiry by a Dolphinus representative, Mohamed TalaatKhalifa, who proposed a possible involvement of the Central Bank of Egypt in the process of seeking priority funding for the energy commodity and the proposed reform scheme, which necessarily requires foreign currency reserves, Eng. El-Mazni agreed. Yet, as she explained, the idea of an integrated communication pattern for different economic segments in the country to contribute to the debate is important, she also revealed that in her understanding “the government will not let go entirely” of the liberalizing processes for instance by involving the banking sector in it entirely.

She emphasized that “energy is not just an on-shelf commodity, it is a serious building block and it will affect all the industries and consumers directly and indirectly.” Therefore, the necessary measures will have to be taken in line with this government’s strategy.

According to Eng. El-Mazni, the intention is also for “the government to take care of all types of consumers [whilst in the process], not just those that cannot afford the free market prices of the gas, but also of all the industries. The government will make a decision if it opts for subsidizing certain industries or certain consumer sectors [to ensure that] the commodity is available at a fair market price.”