Egypt’s gas consumption has doubled in the past decade, but production has been in a downward trend since 2009. Currently, the country consumes about 6.7 billion cubic feet of natural gas a day, but produces only 5.4 billion, 0.8 billion of which is exported. The production fell by 8.5% in the first nine months of this year compared to the same period of 2012. Since gas export obligations are still in place, but import options are hardly established, the country is experiencing shortages. The shortages are set to worsen rapidly unless Egypt manages to produce or import more gas or curb consumption.
Consequences of Shortages
Gas shortages have disrupted the production of some other goods, particularly cement. This summer, production at South Valley Cement had to be suspended due to lack of gas (i). In October, Titan Cement Company said its factories had reduced cement production by 24% because of low and volatile gas supply, writes Daily News Egypt. Additionally, since about 60% of the gas produced for the domestic market is utilized in electricity production, the shortages risk putting power plants on halt.
Due to shortages, Egypt has been forced to slash its gas exports, to an extent that as of mid-November, two of the country’s LNG export plans, the Damietta facility operated by Eni and Spain’s Gas Natural SDG, have not shipped any cargoes this year. Pipeline exports to Jordan, which should amount to 240 million cubic feet per day, have been reduced to around 50 million most of this year and have dropped further, to “negligible” quantities, since September, writes the Jordanian Times. “We will compensate Jordan later when we have natural gas surpluses after satisfying local needs,” promised the Chairman of EGAS Taher Abdel-Rehim. However, until this happens, Jordan has to use more expensive fuels for power production, which it says will cause losses reaching USD 5.24 billion by the end of year.
Causes of Shortages
Egypt has Africa’s third largest proven gas reserves, amounting to 77.2 trillion cubic feet, informs the US Energy Information Administration. Besides, the US Geological Survey estimates that Egypt’s Nile Delta basin contains as much as about 230 trillion cubic feet of not yet fully proven, but technically recoverable reserves.
There has been a number of gas discoveries made in Egypt recently. For example, BP announced a new offshore discovery in September. The deepest well ever drilled in the Nile Delta, reaching about 7 kilometers under the sea bed and costing USD 380 million, led it to discover an estimated 1.2 trillion cubic feet of gas, indicating that there may be very productive geology at these depths, reports Reuters.
However, Egypt lacks capacity to produce gas from its reserves. “The development of gas fields has been hindered in recent years by the lack of a satisfactory price for producers selling gas to the government,” noted Wafik Alfred Hanna, Senior Partner at Deloitte, referring to the Deloitte Resources – Intellinet (The Economist intelligence Unit). “Certainly if gas prices were higher in Egypt, we could exploit some discoveries we made in the Mediterranean,” said the Chief Executive Officer of Eni, Paolo Scaroni, in November. Political instability, payment delays, and uncertainty about government policies have also had a negative effect on investments. For these reasons, BP has not yet acted on another deep discovery, Satis, which it made more than a year ago. BG announced in September that it was delaying its West Delta Deep Marine project due to “ongoing political and social instability in Egypt”. Dana Gas last year had to restructure about USD 1 billion of its bonds because of payment delays in Egypt and Iraq. By the end of September this year, the amount Egypt’s government owes increased to USD 297 million. Dana recently said it could boost its production quickly by 25% if the government paid off the debt and the company was permitted to sell output at a higher price, writes the Wall Street Journal. According to Bloomberg, Dana has also proposed that the government could pay 65% of its dollar debt in Egyptian pounds. “Clearly Egypt is becoming more gas deficient,” said Tom Hickey, the CEO of Petroceltic International, adding that there is more upside in oil because the price is not capped.
Efforts to Raise Production
In order to make gas exploration and production in Egypt more attractive for companies, the government is revising the prices it pays them for gas. The Minister of Petroleum and Mineral Resources Sherif Ismail, informed in November that EGAS would sign seven new contracts and modify seven others within two weeks. However, three weeks later the negotiations had not yet been concluded.
In December, the government announced it had approved the repayment of USD 1.5 billion of its USD 6 billion debt to foreign oil and gas companies. The repayment, USD 0.3 billion of which will be in Egyptian pounds, was set to start on December 1st. A further USD 3 billion is planned to be paid back in monthly installments until 2017.
In addition to reassuring the existing investors, the government is trying to lure new ones. It recently asked Russian companies to draft a map of Egypt’s oil and gas reserves by using satellites. According to Egyptian officials, Russia would be asked to bid for development of new reserves. However, it may be hesitant to do so after the Russian gas producer Novatek exited the Egyptian market in February due to political instability (ii).
The government is also encouraging companies to explore Egypt’s shale gas resources. According to EGAS, 100 trillion cubic feet of extractable shale gas has been discovered in the eastern and western deserts. The company is currently studying the feasibility of shale gas exploration in the western desert with Shell and Apache, writes Egypt Independent.
There are signs that the government’s efforts are paying off to some extent. For example, in September RWE Dea launched gas production at its Disouq concession, expecting an output of 160 million cubic meters per day by mid-2014 (iii). Foreign oil and gas companies have committed to spending USD 8 billion for research, exploration and development according to the investment budget of 2013/14, said Sherif Ismail. “Some new fields will start production during the second quarter of 2014,” he informed. BG and Petronas have said that they would produce additional 400 million cubic feet of gas next year at investments worth USD 1.5 billion. BP is considering drilling a USD 360 million exploration well close to Damietta, informs All Africa. In October and November, the government signed 14 oil and gas exploration contracts, the first such awards since 2010, which require minimum investment of USD 585 million. Next year, EGAS plans to launch an international tender for deep water gas exploration in the Mediterranean.
Challenges for Raising Production
“There is still a lot of potential for natural gas in Egypt,” believes Dr. Paul Sullivan, Professor of Economics at the US National Defense University. However, there are big challenges for realizing this potential. Due to increased risks related to operating in Egypt, exploration companies want a larger stake in revenues, noted Professor Christopher Knittel, the Director of MIT Center for Energy and Environmental Policy Research. According to Sullivan, producers will probably want longer term contracts, but these carry higher risk for the government since gas prices are likely to fall due to the shale revolution and more integrated gas markets resulting from spreading LNG exports. Sullivan stressed that besides improving political stability and paying off debts, the government has to become more rational and timely when it comes to decision-making in gas issues. “World gas markets are getting more competitive by the day and Egypt needs to keep up,” he said. Sullivan does believe Egypt has potential to attract new investors from emerging economies such as Russia and China. “The US is losing leverage in Egypt due to its policies on Egypt. Russia and China would be very happy to fill in the gap,” he explained.
He is rather skeptical about the potential of shale gas in Egypt since the country so far does not seem to have very much of this resource and producing it requires a lot of water. However, Sullivan added that, “there is no harm in trying” since shale gas wells can be completed, as well, shut down more quickly than conventional wells where pressures are usually higher. Shale gas production can be turned on and off readily depending on how much the producers can get paid for the gas. Knittel believes that some exploration for shale would make sense in Egypt since the country’s geology may prove good for its production.
Gas Import Options
At least as a temporary measure, Egypt needs to raise gas imports in order to meet surging demand. In October, Israel said that Egypt had expressed interest in importing its gas via the pipeline connecting the two countries, which until spring 2012 transported Egyptian gas to Israel. “If it turns out that they do want gas and that these things are real, I see no reason why not (to sell it),” said Israel’s Energy and Water Minister Silvan Shalom. According to Wafik Alfred Hanna, Israeli investors have also discussed the possibility of using the two LNG export terminals that Egypt has for exporting Israel’s gas further. However, Egypt in October denied its interest in the Israeli gas, saying it is eyeing LNG imports instead, reports World Bulletin. Last year the government launched a tender to build a LNG import terminal, but canceled it later. In October this year, the government issued a tender to rent a floating LNG import unit, expected to be in use by April. Hence, if Egypt is determined to import LNG it would be cheaper from Israel. “It may be cheaper to import gas via pipeline from Israel on the ground cost terms, but it could be hugely expensive politically to have this happen for any Egyptian leader,” noted Professor Sullivan. “I would not rule out imports from Israel in the future, but that would entail many changes in the region, including a comprehensive peace accord and an improvement in the relations between the Egyptian people and Israel.”
There are speculations that Egypt may attempt to buy Israeli gas via Cyprus. These stem from the fact that Egypt is negotiating with Cyprus over buying its gas in exchange for the use of Egypt’s LNG export facilities, writes the Middle East Monitor. However, Egypt’s Prime Minister Hazem al-Beblawy assured in December that the country would not import Israeli gas through Cyprus.
Since Cyprus will be ready to start gas exports only after 2020, Egypt’s needs other import options in the near term. A convenient option for LNG imports could be Qatar, but Egypt’s relationships with this country are problematic. Qatar was a firm supporter of Egypt during the reign of Mohamed Morsi and even agreed to send five cargoes of LNG for free. Talks were underway for acquiring more cargoes, but these ceased after Morsi’s ouster. Yet, Egypt has not excluded gas imports from Qatar but other options are being explored. In October, EGPC Chairman Tarek El Molla said, “We still have possibilities with Algeria, Yemen, and other countries.”
“The political differences may be outweighed if the Qataris agree to sell LNG to Egypt at well below market prices, much like what they do with the US,” believes Sullivan. Gas imports from Yemen would be very risky in his opinion due to the country’s political situation. “Yemen would also likely want to sell gas at higher prices to Asia, unless the Saudis or others subsidized sales to Egypt,” he noted. “Algeria has far more gas than Yemen. It is politically more stable for now. We will have to see what happens in the future. The attack on the In Amenas field run by BP was not a good sign.”
Sullivan added that Egypt should strive for diversification of gas imports. “There are many options open to Egypt. LNG is often traded over massive distances,” he said. “World natural gas markets are in for some very big changes and one of the drivers is the shale gas revolution in the US that will likely spread to many other parts of the world. It could even be the case that US LNG exports could come to Egypt some time in the future.”
However, Egypt is currently struggling to find any import options. Al-Borsa reported in December, that negotiations of EGAS and Shell over gas imports for next summer have failed. Talks with some other companies continue as Egypt plans to import 500-750 million cubic feet of gas per day for its power plants next summer, but according to sources, EGAS has already a significant delay with preparing the imports. According to BG CEO Chris Finlayson, Egypt is converting more of its power plants into dual-fuel or oil burning due to the lack of gas.
There are also talks underway between Egypt and Gazprom to buy 13 shipments of LNG equal to 30 billion cubic feet of gas. This LNG is to be allocated to Gas France and BG since—as per the agreement that was finalized in March—the companies sent 18 shipments to Egypt and it pledged to pay for them in gas rather than money. Five shipments have already been returned thanks to free cargoes that Egypt received from Qatar in the summer.
Gas Consumption Reduction Options
Egypt can also curb its gas consumption by replacing it with other fuels. This is the option that Titan Cement Company is eyeing. Its proposals, submitted to the government, include using coal and producing energy from waste. The government agrees that it is important to find alternatives to gas. However, the Minister of Environment Leila Iskandar, has expressed her opposition to importing coal, even though her ministry has not made its final decision. Renewables, on the other hand, are more expensive. Frustrated by gas shortages at its factories, the cement company Lafarge at the end of October started importing coal without the government’s permission. “A violation report was issued and a fine will follow,” said Iskander after being informed about it. “Although I doubt that this fine will make a dent in this multinational’s budget.” (iv)
Another way to reduce gas consumption is just to consume less energy. According to Professor Knittel, raising public awareness and reducing subsidies could improve energy efficiency. “It would be difficult for Egypt to achieve large-scale reductions in consumption without raising prices,” he noted. However, higher energy prices could bankrupt many companies. “Getting rid of gas subsidies could lead to greater unemployment and a further slowdown in the economy with increased inflation,” admitted Professor Sullivan. “Maybe the best thing to do is to keep the gas and electricity subsidies until the political and economic situation is better and then start to phase them out at carefully moderated speeds and directions.” Sherif Ismail said, “Any change in the subsidy system should be put up for societal discussion.”
According to Wafid Alfred Hanna, Egypt’s gas consumption will increase another 36%, to 58.8 million ton of oil equivalent, by 2020, mainly due to the expansion of the electricity sector. Experts are not sure if Egypt will manage to avoid gas shortages in the future, but there are many ways for minimizing their likelihood. They include solving the arrears problem, speeding up and rationalizing decision making, exploring unconventional resources, ensuring diversified imports, replacing gas with other fuels, reforming subsidies, as well, increasing awareness about energy efficiency. Additionally, it is particularly important to improve political stability and security since without them, as Professor Sullivan says, “all other policies could prove to be just background noise.” The question remains, will Egypt emerge from this gas crisis in time?
By Laura Raus
i. “Egyptian cement producers cope with gas shortages.” Global Cement, 27 June 2013.
ii. “Major Russian gas producer exits Egypt.” Ahram Online, 23 February 2013.
iii. “Realising Egypt’s gas potential.” Oxford Business Group, 12 November 2013.
iv. “The Coal war.” Mada Masr, 07 November 2013.