Egypt and its looming energy crisis

In his latest research paper “On Efficient Utilization of Egypt’s Energy Resources: Oil and Natural Gas,” Dr. Tarek Selim warned that Egypt will become a net importer of oil by next year and that it is time to plan for the future of energy or else we will witness an energy crisis. Dr. Selim shed the light on the current status of oil and natural gas and shares his findings and recommendations with Egypt Oil & Gas Newspaper.

You were once quoted saying, “Current energy sources are not enough… If we stay with the status quo, there will be an energy crisis,” what did you mean?
When I said that, I meant energy sustainability, as an economist, we look to sustainable development where there is a maximization of welfare, which is basically consumption related for this generation without compromising other generations to have this welfare. By welfare, I mean economic growth, so the government has basically announced that the targeted economic growth is 6%, we need for this an equivalent of 3% of energy growth per year for the next 30 years in order to cope with the targeted GDP growth rate.
The current proven reserves are 3.7 billion barrels (bbl) of oil and around 66 trillion cubic feet (tcf) of natural gas. These quantities are not enough to generate this 3% growth rate or to generate energy sustainability on the long run.
According to my analysis, in terms of oil, Egypt will be a net importer of oil by next year. The reason for this lies in two main factors; the over consumption due to population growth and limited resources and production from oil wells becomes more and more costly, as the wells are becoming more mature causing what we call in economics x-inefficiency, meaning that the production cost is rising with time due to either production technology cost or the maturation of oil wells themselves. At the same time, the amount of oil reserves has been depleting, as shown in figure 1. The annual production of oil is decreasing by the average of 3.5% a year. I believe that this decrease will continue as the population growth rate is rising, while the oil reserves are limited.
Another issue is the investment gap in the oil sector; current oil investments do not reflect the efficient level of investment required for oil production. We need for the next 20 years, a 5% increase in investment every year in order to come up with an efficient investment schedule for oil. But, with the current scenario, it is difficult to reach this.

Why do you think it is difficult?
It is mainly because of the institutional arrangement in Egypt and lack of financial resources in the economy. However, it can be attainable through joint ventures, foreign investments, expansions in investments and entrepreneurship businesses. Although the image might look a little dull, but for the oil especially, I think there is potential if we expand our investments by 5% a year for the next 20 years, which will lead to a 3% growth in total energy. That is the required sustainable level of energy for the future.

Last month, Sameh Fahmy proposed to reverse the 1997 decision that prohibits the multi-pricing of LNG and gasoline, do you think this movement will open the door for more investments?
Pricing in general has been a major problem in Egypt’s energy sector. When we talk about pricing, we have to talk about subsidies. The amount of subsidies allocated for the oil and gas sector are very excessive, which makes the prices artificially low. Subsidies lead to under production, as we cannot achieve economies of scale with subsidized prices. There is no economic incentive for you to expand your investment and achieve economies of scale because it is not market based. The prices are fixed, and the government is acting as what we call in economics: a monopsonist; the only buyer. Monopsony is another symbol of inefficiency because the government being the only buyer of oil means that it is fixing the prices for oil companies to sell their products to the public.

What about the situation of natural gas?
For natural gas, the situation is much brighter. First of all, the proven reserves of natural gas count for 66 tcf and the amount of its probable reserves is the double. In contrast to oil, the natural gas proven reserves are enough for the coming 20-25 years. However, it is still subject to depletion by the year 2025-2030, as we still have an investment gap. The current investments in the natural gas sector are not sufficient for long term energy sustainability. According to my analysis, we need approximately $120 billion of additional investments to be achieved in the next 20 years; which is a huge amount. But, in the best case scenario, we need to achieve this increase during the coming 10 years; $12 billion a year, given that Egypt’s attraction of foreign investments does not exceed $6-7 billion per year. This is a challenge to achieve this rate, yet we can still work on it until we reach the shortage of natural gas by the year 2025. This means that investment expansions can be conducted to generate an average of $4-5 billion, sufficient for attaining the targeted rate.

Do you think this target can be achieved?
I think it is possible for several reasons. The government can encourage switching from oil to natural gas usage. However, there could be more incentive for the transportation sector to have more cars run by natural gas. Another approach to follow is to capture investment opportunities on our probable reserves. Besides, all subsidies should be removed by the year 2010. This can be done by a 25% reduction every year.

Do you agree then with researchers calling for the elimination of subsidies?
Yes, I agree but in specific conditions as I mentioned. All subsidies can be lifted in case of scarce resources such as oil, excluding natural gas. We can achieve energy sustainability with the presence of subsidies only for natural gas, but this sustainability will never be achieved if subsidies are allocated for all energy types.

Do you think that lifting energy subsidies will be opposed by consumers (public)?
When fuel prices were raised last summer, people complained for a while and then they got used to this increase. I agree that we have to be very careful in applying such a decision because it will create social and economic losses. Lifting energy subsidies will result in creating two major losses. First, there will be an increase of required expenditures from households; I estimated the amount of expenditure needed to break-even these subsidies and it is almost 100LE per month for every household incorporating four persons. This represents an additional economic burden on the government. To tackle this negative consequence of removing subsidies, we need to enforce a minimum wage law. In order to set this law, we have to formalize the informal sector that represents 40-50% of the economy and find out the incentives for this objective. Egypt signed the UN Millennium Development Goals, which sets a minimum wage standard for work contract, equivalent to 342LE per month in the case of the Egyptian status.
The second loss lies in inflation. Lifting energy subsidies will create from 5-7% additional inflation repression on the economy because energy is involved in almost everything in our daily life.

Raising the issue of exports, in Al-Wafd Newspaper Dr. Tarek Heggy criticized the government for exporting natural gas at low prices and wasting large amounts of natural gas that could have been used in the local market. Can you comment on this?
I do not want to blame or criticize the government, but in general, I am not a proponent of exporting our gas at fixed prices, which I agree with Dr. Heggy. Prices go up and down, which mean that there is a probability of losing economic profit as prices are fixed. At the same time, the recent exports’ agreements setting fixed prices diminish the risk level of the price game. It is a safe-guard system. But personally, I believe we should utilize a market-based pricing system rather than the safeguard one.

If you are in a decision making position, will you go for a market-based or safeguard pricing system?
From an economic point of view, I will suggest a market-based pricing system because the prices may go up substantially and hence, we lose a lot of opportunity cost in case of fixing prices. Fortunately, the probability of energy prices declining are very low, with the presence of major powers like China in the international market, existence of a lot of reserves in Russia, mainly natural gas… the energy market is expected to boom in the next 20 years.

What are your suggestions concerning the use of alternative energy?
The use of alternative energies implies the use of mainly solar and nuclear energies as oil equivalents. Based on the conclusions of my analysis, the alternative energy use must increase to 5% by 2010, 10% by 2015 and 25% by 2025. It is worth mentioning that currently the increase is less than 1%. Also, we can substitute domestic oil consumption by minimum reduction targets of 7,000 bpd in 2010 and 10,000 bpd in 2025 through solar/alternative energy use. Besides, I believe we should start our nuclear project in order to be able to substitute oil by 80,000bpd in 2015 and 225,000 bpd in 2025 and have an economic alternative to oil imports. Finally, the Kyoto Protocol Standards involving the trade of carbon emissions between countries has achieved a potential gain of $130 per ton of reduced carbon emissions. Egypt also has the potential to attain such a profit through carbon emission trade and improve its environment through the use of alternative energy.

Dr. Tarek Selim is an assistant professor of economics at the American University in Cairo (AUC). His educational achievements include a Ph.D. from George Washington University, 2002, MBA from Johns Hopkins University, 2001, M.Sc. Iowa State University of Science and Technology, 1997, M.Sc. the American University in Cairo, 1995 and B.Sc., the American University in Cairo, 1992. He has worked in several places such as USAID (Economic Research Consortium), Ames Research Laboratory (USA), Institute for Physical Research and Technology (USA), Center for Economic Development (USA) and Proctor and Gamble-Egypt. Dr. Selim’s fields of research are diverse and include research in industrial economics and market organization, environmental economics, development economics and project evaluation.


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