Coming Decade’s obstacles hindring progress of the petroleum sector

Discussion surrounding Egypt’s supply and production of petroleum and natural gases has been heating up steadily over the past several years. As a vital yet decidedly limited market in the region, the petroleum sector faces some serious challenges, prompting a series of conferences, reforms and debates to be held by ministers, heads of state, and industry leaders. For an issue of such importance, several angles are required to tackle potential obstacles; the economic view states that Egypt is wasting labor and production costs on foreign import, while ignoring the limited nature of a stagnant petroleum supply. Domestic policy makers argue that changes must be made to benefit in-country profits and protect against losing profits to the foreign markets, while those involved in foreign policy argue that to withhold petroleum exports from loyal international buyers would jeopardize Egypt’s regional relations and cause detrimental policy relations decades from now. No matter what the standpoint, the arguments and issues are many-fold, ranging from scientific, geologic limits to Egypt’s petroleum and gas reserves to the politics of taxes, tariffs, and foreign relations.

The year 2010 alone has had its fair share of ups and downs for Egypt’s petroleum industry. As much of the world market continues to grapple with the repercussions of the global financial crisis, the leading global markets have decreased demand significantly, causing Egypt’s production rates to slow. While Egypt’s Ministry of Petroleum maintains that there is little concern for one of its highest-grossing markets in the coming quarter, many have expressed a reasonable amount of concern.

In spring of 2010, talk began to surface in the petroleum market of a growing domestic diesel shortage in the market. While the claims were quickly shot down and dismissed as rumors by Minister of Petroleum Sameh Fahmi, the news had very real effects amongst buyer behaviors, which may have run the risk of driving up local diesel prices. For such an indispensable local product, the ripple effect of rumored shortage to panic buying to faster sales rate could bear some serious consequences on the diesel-dependent market. Situations such as these demonstrate how very volatile perceptions of the petroleum market are, even with products as readily available as diesel and other gases. The situation also raises the issue of how very intertwined local communication, buyer awareness, and market changes are with one another, and how vital it is to ensure buyers are confident in the everyday market stability. While rumors such as those circulating this past March about diesel shortage are difficult to track down, it clearly demonstrates one of the many challenges that regularly effect investors, buyers and suppliers in the petroleum sector.

Another obstacle faced in the petroleum market is the perpetual sale of petroleum products on the black or gray markets, which creates some unpredictable price rates and supply levels, while syphoning off supplies at unregulated rates. While the sales have a generally minimal impact on the market as a whole, these actions present considerable potential risk. Exporting petroleum to Gaza has been one of the more significant sources of this particular obstacle.

Besides the internal issues that affect Egypt’s petroleum and gas sector, international trade has its fair share of price fluctuations, which have erratically either spiked or stagnated sales. With the unpredictable international prices of oil trading of the recent years, Egypt’s international petroleum commerce continues to face issues with international trade partners. Since 2007, ministry heads have overseen a series of export freezes, tax implementations and tariffs, often to the perplexity of foreign buyers.

Causes for such shifts in export policies have varied. As recently as late August 2010, the Ministry of Petroleum ordered a hold on all foreign petroleum exports to conserve Egypt’s supply for domestic demand, which had risen sharply due to heightened demand and pressure on the power grid resources. In a bid to avoid trade conflict between the Ministry of Petroleum and Ministry of Electricity, petroleum exports were at one point reduced to a reported rate of 70 percent.

Egyptian Natural Gas Holding Company (EGAS) head Mahmoud Lateef supported the export reductions in spite of the threat of strained international trade relations, maintaining that Egypt must prioritize domestic needs before foreign trade profit. Still, the taxing, tariff and reduced export tactics may cause trade conflicts, with some serious consequences in foreign trade relations.

With 28.9 million tons of petroleum consumed in Egypt in the fiscal year 2008-2009, concerns for Egypt’s reputedly waning supplies remain serious. While there have been talks to devise a conservation plan and develop action points to help conserve national supplies, the most significant point of action has been to remove all subsidies placed on petroleum products. The ban is to be implemented for the coming 5 years.

Yet another international trade issue effecting Egypt’s petroleum and gas predicament are prominent international consumers, such as Israel’s Israel Electric Corporation (IEC), whose demand for Egyptian gas remains constant and aggressive. In an agreement reach in 2005 between the two governments, Egypt was to export an annual 1.7 square meters of natural gas to Israel for 20 years. Due to the impending gas market changes as well as changing values in the global petroleum market, this agreement has been amended to better cater to Egypt’s needs and capabilities. The General Petroleum Authority has adjusted the terms for a revised trade agreement, in which IEC is to receive an annual 2.1 Btu from Egypt for the coming 20 years; however, spokespeople maintain that room for necessary stipulations that occur within those 20 year may be granted if necessary to reflect appropriate market value.

Other concerns for the petroleum and gas industry deal strictly with issues of supply. With concerns that Egypt is in danger of depleting its domestic gas reserves by the year 2020, Ministry representatives are hard pressed to develop a solution. Some potential solutions, such as that proposed by former ministry undersecretary Hussein Abdallah, who believes Egypt’s key to survival in the industry is to reign in production to cover domestic needs only from this moment onward, remain tenuous at best. If Egypt sustains its current rate of consumption and export, reserves will be depleted by 2020, and Egypt will have no choice but to purchase petroleum and gas supplies at world market value.

In Egypt’s steadily growing economy, this could potentially set the economy back USD 90 billion annual spending on petroleum energy. Abdallah’s proposal therefore puts Egypt first before profit from international trade, which would greatly reduce intake from international trade, but may be the best way to preserve precious natural domestic resources.

As demonstrated above, the majority of issues faced in Egypt’s petroleum and gas industry today stem from basic supply concerns, coupled with labor and production costs, and the vital role petroleum and gas reserves play in maintaining the country’s international trade relations. The obstacles stem from the hard facts of supply and demand, but much reform and innovations to trade regulations and terms of use must be applied to the industry to avoid the effects of a severe petroleum drought. By adjusting terms of trade and shifting focus from international income and exporting, to domestic needs and conserving supplies, Egypt can expect to see some significant changes in trade and production attitudes over the coming decade.

By Clarissa Pharr


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