By Nataša Kubíková, Salma Essam

Despite the political unrest, Egypt has maintained the highest refining capacity in Africa since 2011. The estimate stands at 726 billion barrels of petroleum products per day from 2011 to 2015, according to OPEC Annual Statistical Bulletin 2016. And Egypt is well equipped and eager to write an even more successful story for the years to come. What is the future of Egypt’s downstream sector?

To date, Egypt has injected a package of investments in the downstream and is expected to witness a promising future in the petrochemical segment of the industry. In line with the new Modernization Program, the Oil Ministry incorporated the downstream section into the overhaul transformation scheme under the 4th Initiative. It aims to purposefully “optimize downstream and petrochemical sourcing, output and mass balancing” on one side, while “driving downstream operations performance transformation” on the other. Egypt is thus presenting an insightful combination to modernize reaching out to industry’s efficiency and self-sustainability.

Exporting Value Added Products

The Egyptian industry leaders are well aware of the need to address the downstream sector’s performance and structuring within an overhaul transformation strategy towards a prosperous decade. This requires strength and determination to see through the process of modernization in light of global standards in downstream performance, structures, and processes. Whereas in previous decades, the oil and gas industry in Egypt was “concerned with exporting raw material, crude oil and gas, today, the sector is rather focusing on value added activities instead,” as these proved more profitable in the long run on two crucial levels, Eng. Mohamed Badr, Chairman and CEO of Oil&Gas Skills (OGS), told Egypt Oil&Gas in an exclusive interview.

Indeed Egypt can record a massive difference in terms of national income from exports of petroleum products in contrast to the revenues from exporting raw crude or gas. On another level, production of petroleum derivatives appears more prosperous domestically as it would guarantee higher savings for the country in lieu of products’ expensive imports paid for in urgently lacking foreign currency, and simultaneously meet immediate domestic needs. As an example, Eng. Badr further revealed, “Asyut’s refinery can cover entire demand within Upper Egypt and help the country reach the goal of self-efficiency within the area of petrol and diesel supplies.”

It is beyond doubt that once ongoing downstream projects are completed within the overhaul scheme, “these will have a significant value added and returns to the sector,” said OGS’ CEO, and necessarily balance domestic supply-demand matrix for decades to come. Zohr project, for instance, is expected to achieve natural gas self-efficiency for the country by 2019, with part of production oriented towards exports.

Developing Downstream Projects

The progress of the downstream development relies primarily on the existing facilities. Egypt’s petroleum sector owns eight large petrochemicals projects with investments worth almost $7 billion and a total capacity of about 4.5 million tons per year of products, according to a September 2016 report by Plastics News Europe website. The projects are located in four regions including Port Said, Suez, Damietta, and Alexandria.

In 2015, Egypt’s Prime Minister, Sherif Ismail, announced that an allocation of $14.5 billion for the five-year plan was approved for the downstream sector in the country. The chief attention was then clearly directed towards the expansion of the existing refineries as out of this investment package around $12.5 billion were allocated to the refining sector alone, and a bulk of $1.9 billion was earmarked as a total investment in the ETHYDCO project only.

Currently, the country sees “a number of ongoing projects in the petrochemical sector with some expansion and development of the existing refineries as well as the construction of several new ones,” Eng. Mohamed Badr explained, including “a project launched with Middle East Oil Refinery (Midor), Hydrocracker in Asyut that is under engineering, a new refinery in Mostorod.” “These are deemed very important as they will monumentally advance the sector in a unique way.”

Hence, in 2016, the Egyptian Ministry of Petroleum adopted a multifaceted strategy to secure Egypt’s oil and natural gas needs. The path towards this goal was to seek further expansion of the petrochemical facilities and thus maximize the added value, which would eventually result in transforming Egypt into a regional center for energy.

In July 2016, the Egyptian Ministry of Petroleum and Mineral Resources sought to invest $1.6 billion in an expansion project for Midor’s refining facilities. It is forecast that this project will increase the refining capacity to produce 160,000b/d worth of products, up from the current 100,000b/d. The expansion is set to be completed during Q1 of 2019, which is an ambitious and major downstream project in line with the emerging government’s modernization strategy.

Furthermore, August 2016 set a new milestone for the Egyptian downstream sector when President Abdel Fattah El Sisi inaugurated the petrochemical complex of Egyptian Ethylene & Derivatives Company (Ethydco) with a total annual production of 480,000 tons of ethylene and at the initially targeted investment of $1.9 billion.

Another expansion project at Misr Fertilizers Production Company (MOPCO) was also initiated in the first half of 2016, with an investment of $1.96 billion, and a total annual production rate of 2 million tons.

Modernizing the Downstream Sector

These projects are a cornerstone of Egypt’s newly inaugurated Modernization Program, as Oil Minister, Tarek El Molla, revealed in his presentation at the US Business Mission Forum in October 2016.

Part of the downstream section under the Modernization umbrella is the country’s second private refinery after Midor, the Egyptian Refining Company (ERC), a subsidiary to El Qalaa Holding Company. It is set to start production in 2017 with an investment of $3.7 billion and a production capacity of 4.2 million tons. This would make ERC the largest petchem facility in Egypt. The firm is set to meet domestic consumption by producing 2.3 million tons of diesel, 800,000 tons of high-octane gasoline, and 60,000 tons of jet fuel, in addition to unspecified amounts of butane gas and other products.

These pioneering action plans reflect on the government’s efforts to address the increased demand of refined oil products in the local markets and further curb net annual imports to the country.

Understandably, these goals cannot be reached without an overhaul re-assessment of the status of the downstream infrastructure, which is a necessity to draw a precise picture of the most efficient ways to develop the sector with concrete individual steps.

The Modernization Program therefore looks at the ways how to improve infrastructure in place and enhance its capacities, while capitalizing on the present units. The Oil Ministry plans investments of almost $500 million for receiving, transfer, and trading of petroleum products in Egypt. The new program is searching to answer questions such as ‘How to best utilize the existing infrastructure to maximize the potential on the implementation level.’

Part of this investment package in the amount of $22 million was dedicated to a new 87km pipeline from Petroshahd’s charging area to crude oil receiving station at Qarun Company’s fields, including Dahshour, which was opened in late November 2016. The pipeline carries 19,000 b/d of oil and the Minister of Petroleum and Mineral Resources, Tarek El Molla, launched the project to establish an additional unit. In return, this improvement is expected to boost the efficiency of the main refinery belonging to Qarun Petroleum Company.

The Egyptian oil and gas sector visibly aims to secure local needs of petroleum products and hydrocarbon demand. Developing Egypt’s refineries through as many as eight projects comes at a total cost of around $8.6b, stated Minister El Molla during his meeting with Canada-Egypt Business Council (CEBC) and the Egyptian Council for Sustainable Development (ECSD) held in Cairo in December 2016.

The core of the Modernization Agenda in the downstream sector thus seeks to optimize the existing cycle of refining processes based on the actual market supply-demand dynamics.

Downstream’s Ambitions

The Modernization Program provides a useful framework for these ambitions as it establishes grounds for an effective approach that can bear significant results in an intended timeframe. Hence, efficiency is a key principle that permeates the overall industry efforts and runs through the entire downstream segment as well.

The Oil Ministry is currently undertaking assessments based on preliminary diagnostic analyses to “streamline the existing platforms with an outlook for the next five to ten years,” noted to Egypt Oil&Gas, Osama El-Saadawy, Marketing Manager at Oil&Gas Skills (OGS).

The Egyptian industry thus talks about the optimization process that would help use the full capacity of the eight state-run and two private refineries in an efficient manner that will imply introduction of new technology transfer across the sector and evaluation of cost impacts.

No one would be surprised to find out that the industry’s utmost objective is profitability. This can be easily achieved when the downstream players would aim for the highest production standards according to international parameters defined by various entities such as the American Petroleum Institute.

“The flavor of modernization,” as Osama El-Saadawy put it, thus “seeks to maximize potential of the refineries, some of which need a complete rejuvenation, in order to create a healthy environment.” Such conditions are more difficult to establish if the factories are destined to rely on old technologies, outdated equipments, low production capacity, and insufficient quality of products. Nonetheless, the Oil Ministry insists that it will break the spell and build up stand-alone profitable and self-sustainable units. Foreign investors will thus soon see the performance of the downstream sector improving in leaps.

But “this scheme and technology bear their own costs that contributors may want to share with the government through public and/or private funds or through general stockholders’ equity from the stock market,” El-Saadawy added. This would undeniably contribute to a faster implementation of the modernization agenda.

Moreover, another factor may further help to gear up the ambitious process ahead. The Modernization Program teams are looking for ways to sustain the ongoing progress in the downstream sector in the next three to five years. Therefore, one way to hit success and turn it into a sustainable formula is to develop regular reports on market supply and demand and effectively communicate these findings to the investors, noted Program Team Member, Osama El-Saadawy in an exclusive interview with Egypt Oil&Gas. He emphasized this point saying that “these analyses should be communicated to the investors to show how the market is changing in a real time.”

Furthermore, the Modernization Program stresses the importance of delivering reports on the refineries’ cycles and petrochemical products to all the foreign partners. This implies that the government would need to guarantee a unified platform to store this type of information and allow an access to these data for all current and potential investors in order to smooth out the bidding process for their fresh capital. Communication between the government and foreign IOCs in Egypt remains a priority.

“Petchem factories provide value added and they supply factories with raw materials in addition to the exportation of refined products that bring return on investment for the country that can contribute to further development. The oil and gas sector will thus continuously have a significant impact on the country’s progress,” stated Eng. Badr, and its downstream sector is a core part of success. With the new Modernization Program, government’s adherence to investing $14.5 billion and beyond in refining and petrochemical sectors promises that the country will realize its downstream industry potential, which is a good news for all involved actors.