Robert Mabro’s Egypt’s Oil and Gas: Some Crucial Issues attempts to analyze one of Egypt’s main agents of economic development: Energy. Mabro’s paper was published by the Egyptian Center for Economic Studies (ECES) as part of its distinguished lecture series.
In his paper, Robert Mabro focuses on Egypt’s oil and gas industry and the fundamental issues which revolve around the sector. He tackles a variety of pressing topics including subsidies, the role of the sector in the international market, and the position of gas exports in the future of Egypt.
ECES’s publication series was created in an effort to bring to Egypt international scholars and practitioners renowned in their respective fields and for their important contributions to economic thought and policy formulation. ECES is a non-profit, non-government think tank founded in 1996 by leading members of Egypt’s private sector in order to promote economic development in Egypt through solid, objective research designed to assist policy makers in developing appropriate reform options.
The work begins with an introduction to the oil and gas industry in Egypt. Mabro provides a brief history of the industry starting from the nineteenth century and the initiation of the first oil finding in the industry, chronologically moving to the more recent production of natural gas in 1975, up to the modern form of corporate and government regulation of the sector, which are essentially embodied in the production-sharing agreements (PSAs) under which foreign companies operate within the country. A description of the industry is given using figures of proven reserves and daily production regarding both oil and natural gas. Domestic consumption is then pitted against exports in an attempt to present the need to resort to natural gas for national consumption while exporting the more costly oil in order to better profit from the newly focused on gas reserves, which is much cheaper in the international market.
Mabro then turns to discussing subsidies on oil and gas in domestic consumption; describing subsidies as a fiscal burden on Egypt. One of Mabro’s main concerns is what he terms “distributional distortions.” These distortions are found in the fact that all subsidies to individuals or households benefit all consumers whether poor or rich. He suggests that the remedy to the distortions can be found in a graduated tariff system. However, such a system does exist in Egypt; the system has nonetheless proven inept in its function of equitable distribution.
He points out that subsidized fuels are not only provided to households and individuals but to the transport sector, power stations, commercial and financial establishments and industry. The last of these beneficiaries presents the greatest dilemma for the fiscal budget of the nation. These subsidies are concentrated in such industries as cement, petrochemicals, textiles, metals, and fertilizers. However, one of the main problems surrounding the issue of industry fuel subsidies is the fact that whatever money saved due to the subsidies are not always fully passed on to the consumer. This makes the whole basis of subsidizing fuel to these industries futile.
Mabro argues that another hurdle found in the sector is domestic monopolies. The Egyptian General Petroleum Corporation (EGPC) monopolizes both oil and gas, directly and indirectly through their subsidiaries. This monopoly determines the allocation of gas production between domestic and export markets by making investment decisions based on cash costs that determine cash flow as opposed to opportunity costs of fuel. Thus, while at the time being, natural gas is focused on in terms of export while oil is domestically subsidized, the optimum utilization of both oil and gas is found in the current situation’s reverse, where gas should be used domestically and oil exported.
Turning to Egypt’s role in the international oil and gas market, Mabro dissects each market separately. Positing Egypt as a price taker in the former and a larger player in the latter that is as much as it needs. The discussion of the two markets leads Mabro to the complicated issue of gas exports. Once again, domestic consumption is pitted against exports. According to the author, whether exporting gas is a viable option with domestic needs kept in mind is based on the reliability and credibility of reserves estimates. If government estimates are accurate and Egypt has ample reserves to sustain domestic demand growth and export expansion, then there would be no problem, but sufficient studies have not been conducted nor have the size of gas reserves really been provided.
Once information is freely and openly provided, Mabro suggests that natural gas contracts with foreign companies, which sell gas at a lower price than that of the international market, be reassessed and reconsidered. Egypt should benefit from its exports and not suffer a diminished return. This point leads Mabro to his conclusion that the government should put forth a more scrupulous intellectual exertion in an endeavor to reach a solution to Egypt’s energy dilemma of misallocation; a merging of economic benefit and societal development.
In essence, Mabro makes a case for the need to undertake drastic policy measures regarding energy subsidies. Whether this means a gradual cut of subsidies or a sudden slash is not as important as the realization that these subsidies do need to be eliminated, their presence is no longer helpful to the society at large but only assists the rich and barely reaches the poor. Mabro also stresses that there should be a restructuring of Egypt’s export strategies. Gas should be utilized domestically, where the national distribution grid should be expanded to include the whole of Egypt and oil should be the focus of exports seeing how its international market price is much higher than that of gas. Egypt’s role in the international oil and gas market has undoubtedly become much larger than it once was, but it still lacks in the ability to generate true revenue. Turning a national profit will mean having to renegotiate gas export contracts and to ultimately close the gap between sale and purchase prices.
The lecture emphasizes one more solution to the energy problems of Egypt; a solution that will eventually be the final solution to not just Egypt’s looming energy crisis, but the world over. Mabro stresses the need to seriously begin taking steps toward energy conservation and the search for renewable energy sources. Despite recognizing the need to reduce Egypt’s (and the world’s) reliance on oil and gas, Mabro suggests that the search for alternative energy should be pursued while keeping in mind its impact on economic development.
Professor Robert Mabro began his career at the School of Oriental and African Studies and is currently a fellow at St. Antony’s College in Oxford. He founded the Oxford Energy Policy Club, the Oxford Institute for Energy Studies, and the Oxford Energy Seminar. He received the first OPEC award for contribution to oil studies in 2004 and the award of Commander of the Most Excellent Order of the British Empire (CBE) by Her Majesty the Queen of England in the New Year’s Honors List in December 1995. His works include thirteen books and monographs, the most recent of which is entitled Oil Markets and Prices: The Brent and the Formation of World Oil Prices.
Mabro gave his lecture at ECES on May 11, 2006.