By Suzan Nour

To every storm there is an eye, a core to the problem. And for Egypt, the core is natural gas. The Egyptian energy mix is heavily skewed towards natural gas, which is used for electricity generation, feedstock for factories, processing petroleum products, transportation and for residential and commercial venues.

While needed for several industries, the country is experiencing a significant shortage, and imports a large portion of its needs. To help ease the burden on the state budget, the Egyptian Natural Gas Holding Company (EGAS) alongside the Egyptian General Petroleum Corporation (EGPC) announced during the month of May the decision to allow private companies to use the state-owned national gas grid to import and transfer natural gas to their facilities.

Egypt Oil & Gas sat with the Vice Chairman for Gas Regulatory Affairs, Eng. Amira Al Mazni, to get a better understanding of the new regulatory system and the potential it represents for the Egyptian economy.

Al Mazni began by explaining that the purpose of the new gas regulatory body is to provide Egypt with a new legal and regulatory framework, in order to promote competition and facilitate additional gas supplies which are needed to sustain Egypt’s growing demand. “Under the new design of the gas market, conditions for a level playing field are established and eligible consumers can freely choose their own supplier,” says Al Mazni.

The status of eligible consumers will be determined on the basis of criteria set and updated by the Government, she explained. Eligible consumers can spontaneously agree on prices, and quantities with licensed suppliers.

On the other hand, EGAS and EGPC will no longer be the only gas supplier operating in the country, as other players will have the possibility to sell directly to eligible consumers the gas which is produced in Egypt or imported from abroad, using the national gas grid, in exchange for tariffs.

Structure

The main purpose of ensuring an effective gas market in Egypt is to boost the available supply of natural gas, thus enhancing the performance of different sectors. The gas regulatory authority (GRA) is a key factor to ensure the achievement of this goal.

“The GRA is vested with the mission of regulating, monitoring and ensuring the competitive and transparent functioning of the gas market,” states Al Mazni. Some of its functions include setting methodologies for calculation of tariffs for different services (i.e. transmission, distribution, storage, etc), issuing of licenses, settlement of disputes, consumer protection, and establishment of restrictions on the combination of activities by gas market participants.

When asked about the model the regulatory authority was structured on, Al Mazni explained that the draft law developed is an umbrella law focused on downstream activities, and is based on international practices. “The draft law covers all aspects that are essential for providing the best chances for the development of a gas market in Egypt,” Al Mazni said.

The draft law clearly defines market participants, such as the transmission system operators, distribution network operators, shipping companies, suppliers, consumers (both eligible and non-eligible). The draft law also states the rights of and duties from every participant.

Licensing

“A licensing regime is set up for gas downstream activities, administered by the GRA with a view of separating regulated activities from market activities,” explains Al Mazni.

There are four types of licenses to be issued, Transmission System Operator (TSO) license, Distribution Network Operator license, shipper (direct user of the grid) license, and supplier license. According to Al Mazni, in the future if the Egyptian gas market requires it, specific licenses for storage and LNG activities could also be developed.

“A full set of license templates, as well as a set of rules concerning requirements, compatibility and the license fees to be paid to the GRA have been prepared by a working group in charge of preparatory work for Regulator establishment,” says Al Mazni.

When asked about the expected commencement of the private gas import activity, Al Mazni explained that since the announcement last May, any company or factory can officially apply for import approvals; however, only 4 private entities have shown real interest, and have filed the needed forms.

Tariffs

One of the key functional aspects for the GRA are tariff calculations. When discussing the tariffs, Al Mazni explained that the adoption of a transparent, and cost-reflective methodology for the calculation of tariffs for usage of Egyptian gas infrastructure was required. She added that after careful analysis of the Egyptian transmission grid, the working group has developed a model for the calculation of a gas transmission tariff, based on the so-called “allowed revenue methodology,” which comprises the consideration of the relevant regulatory asset base (i.e. pipelines, compression stations, and other instrumental assets), depreciation, operational expenditure, and adequate rate of return.

“A preliminary postage stamp tariff – as in equal for all territories, and not distance related¬– has been adopted. This model, which is the simplest solution to calculate, is easily understood by stakeholders, and is intended to be applied for the first years of market opening of the transitional period,” notes Al Mazni.

Network Codes

Network codes are sets of technical, and commercial rules that govern the relationship between operators, and users of the grids, in addition to ensuring the smooth functioning of the gas transmission systems and facilities.

“The working group, in strict coordination with the relevant operators, has prepared a full-scale draft Transmission Network Code and a Model Distribution Network Code. The former is being reviewed by the designated transmission system operator (TSO), and is expected to be approved by the Regulator, while the latter will be the reference model for all distribution network operators, who can introduce variations to the model if justified by the specific characteristics of their distribution low pressure grids,” Al Mazni notes.

The codes are expected to be used in communication between parties, parties’ liabilities, capacity booking and transfer, nominations, measurement, physical and commercial balancing, invoicing, and emergency procedures.

Role of the Transmission System Operator

The TSO is the entity responsible for the transmission of gas, operation, maintenance, and development of the transmission system. The role of the TSO is to ensure that transparency and nondiscrimination exists between users of the grid.

When the regulation is fully operational, the TSO will be a separate entity from any other undertaking, and will carry out activities related to gas supply, whether the origin of the gas is local or through import.

If the TSO carries out non-regulated gas activities, such as gas processing, petrochemical processes or equipment engineering or inspection, a clear accounting separation is implemented in order to guarantee a correct calculation of the transmission tariff.

In conclusion, Al Mazni noted that the Ministry of Petroleum will continue to coordinate with the government on a number of issues, including defining and updating criteria for eligible consumers, market opening steps and timeline, setting prices for non-eligible consumers, and designating the supplier or suppliers for non-eligible consumers.