By Amanda Figueras

For Egypt, becoming a regional petrochemical and refined product exporter would be a dream come true. If this happens, Cairo would be a heavy-hitting geographic power player, able to lessen the burden on the state budget at a time when refined product imports are less accessible in foreign reserves.

Not all petroleum products –such as gasoline, diesel, and jet fuel– are refined domestically- In an interview recently published by Energyglobal, Egypt’s former Oil Minister, and current Prime Minister, Sherif Ismail stated that Egypt spends over $500m per year on fuel imports. This is the case even after agreements with Gulf countries such as the UAE have been reached in order to provide the country with petroleum products at discounted rates, grants, and credit arrangements.

If those products were refined locally, however, the result would be a significant spending reduction. In fact, in September 2014, the Government announced plans to invest as much as $14.5b in developing the country’s downstream sector over the next five years. According to Ismail Egypt was trying to boost its output of refined petroleum products by 5% to 10% each year, hoping to reduce its dependence on costly imports.

“The total investments that will be implemented over the next five years will be around $14.5b and include $12.5b in the refining sector and $1.9b in the ETHYDCO project,” Ismail told Reuters at the time, referring to a new complex that would produce ethylene and other petrochemicals.

Last year Minister of Petroleum, Tarek El Molla, started to implement the plan to revive what former ministers neglected, specifically the elaboration of the infrastructure required to distribute petroleum substances, in addition to the replacement and renovation of the old refineries.

Declining Output

Currently, Egypt has an oil production problem. Despite having the largest refining capacity on the African continent –amounting to 704,000 b/d according to the Arab Oil & Gas Journal, and 726,250 b/d according to Oil & Gas Journal–, the nation does refine oil to a far lesser degree than that to which it is capable. Consequently, the country is unable to meet the growing domestic demand for petroleum products.

Egypt’s refineries mostly process domestically produced crude oil, and refined products are mostly sold to local markets.

According to BP’s statistical review, while the consumption of crude oil has increased by an average of 3% annually over the past ten years, reaching 770,000 b/d in 2013, Egypt’s refinery output has declined by 29% from 2009 to 2013, dropping to 445,000 b/d according to OPEC. This marks a utilization rate of 63%, far below the average global refining utilization rate, which was set at approximately 80% in 2014.

In a paper titled Egypt: An Energy Supply Crisis Beyond Control? the energy consultancy firm, FACTS, attributes the mentioned decline in production to a national policy which encourages foreign oil producers to export more crude oil as a way to cover Egyptian General Petroleum Corporation’s (EGPC) financial debt. As a result, while Egypt’s petroleum production has declined over the past few years, crude oil exports have remained the same. Oil production, including condensates, dropped from 730,000 b/d in 2009 to 714,000 b/d in 2013. Simultaneously, crude exports remained virtually flat, hovering at 80,000 b/d as of late 2013.

In turn, there is a lower volume of domestic crude oil available for domestic refineries, and Egypt must make up for the difference by importing petroleum products and/or crude oil. This deficit can be attributed to shortage in crude oil supply and technical limitations due to aging refineries. Egypt imported about 145,000 b/d of petroleum products in 2014, according to Global Trade Information Services. Egypt also exported about 60,000 b/d of petroleum products the same year, as reported by the US Energy Information Administration (EIA).

According to Daily News Egypt, the Government’s economic ties to Saudi Arabia, Kuwait, and the UAE permitted it to benefit from certain privileges in paying the value of petroleum substance shipments, easing the financial burdens and paying debts accrued via interest-free installments.

Since President Abdel Fattah Al Sisi took office, the Ministry of Petroleum has paid about $3.6b of the foreign partners’ dues in the petroleum sector. These dues were accumulated since 2009 until 2013. The foreign partners’ dues declined to about $3b by the end of August 2015. By facing its paying obligations, Egypt will be more likely to satisfy the domestic demand keeping at the same time the foreign currencies at home and leading to a stronger balance of trade.

Aging Infrastructure

Another major issue with Egypt’s refining capacities is that, of the nine refineries that exist –mostly located in the country’s northeast, in Cairo, Alexandria, Suez–, nearly all are roughly 50 years old.

While certain investments have been made to upgrade them over the past years, their theoretical capacity is expected to have decreased over time.

According to Dr. Alaa Idris, the Associate Chair of the Petroleum Engineering Department at the American University in Cairo, mechanical integrity limitations due to aging and technological redundancies result in capacity reductions over time.

Actually, despite Africa’s substantial oil resources, refining capacity on the whole continent remains limited. As such, countries like Angola and Nigeria export crude oil, only to import refined oil at an additional cost. Refining capacity has always been much lower than crude output, but this gap widened significantly. On the other hand, as a report published by KPMG suggested, this points towards a big opportunity for investors to build refineries, buying crude oil domestically and selling it either locally or internationally.

Are Subsidies Slowing Egypt’s Downstream Progress?

In an effort to remedy the issue of its aging infrastructure, Egypt plans to invest $14.5b in its downstream sector. Unfortunately, the investment will not be fully materialized within the five year plan originally announced, due to the limitations caused by subsidized domestic fuel prices, according to BMI Research. A number of expansion and modernization projects will boost refined fuel output, but will fall short of meeting domestic demand.

Their study suggests that over recent years, refined product demand has increased supported by favorable government fuel subsidies aimed at stimulating economic growth and maintaining public content.

In a try to ease the problem, for fiscal year 2014/2015, the Egyptian government cut oil products subsidies costs to $9.2b as part of the subsidy reform, which led to an increase in oil product prices in 2014.

The huge cost of energy subsidies in Egypt has also contributed to the country’s high budget deficit and the struggles the EGPC is facing in payment of its debt to foreign operators.

The corporation owes foreign oil and natural gas operators billions of dollars, which has led them to delay their investments in existing and new oil and natural gas projects.

Projects and Investments

Egypt is adopting a mix of investment strategies in refinery upgrades and construction of new capacity to meet the nation’s target for more high-quality light and middle distillate products and a reduction of transportation fuel imports, Hydrocarbon processing reported.

The government had plans to increase refining capacity by over 600,000 bpd by 2016; however, these plans will not be fully realized.

Approximately $2.7b will be utilized throughout 2015 and 2016 to complete the implementation of the Egyptian Refining Company’s (ERC) project in Mostorod, according to Wael Al-Orabi, the company’s Commercial Director.

Another $1b has already been invested in the project by the Qalaa Holding subsidiary, with total investments estimated at $3.7b Egypt Daily News reported.

In the economic development conference which took place in March 2015 in Sharm El-Sheikh, some new projects were announced, such as a hydrocracking complex at the Assuit Oil Refinery Company at a cost of $2.8b, as well as a new desalination unit in Amreya Oil Refinery Company which could produce 49.6 tons of petroleum products annually at a cost of $250m.

In July 2015, Technip Italy, a world leader in project management for the energy industry, finalized two joint agreements valued at a total of $2.9b with Egypt-based companies for upgrades of two refineries. The investment had an estimated total value of $1.5b, aims at maximizing diesel production, and will introduce the most modern refinery technologies in Upper Egypt to meet the growing local demand for petroleum products.

In another development, Technip Italy and SACE announced the finalization of a joint agreement with Middle East Oil Refinery (Midor) for a project to modernize and expand the Midor refinery near Alexandria, Egypt. The investment has an estimated total value of $1.4b and aims at improving the production quality of the plant, considered the most advanced of the African continent, by increasing its refining capacity from 100,000 to 160,000 b/d.

The Azeri state energy firm SOCAR showed its interest in buying stakes in refineries in Egypt and in participation in the African country’s oil refining sector. Azerbaijan is exporting about one million tons of oil and refined products per year to Egypt.

An EGPC report estimated the needs of the domestic market at 551,155 tons of diesel, 330,693 tons of butane, 165m tons of gasoline, and also 551,155 tons of fuel oil per month.

The annual domestic consumption of gasoline is 6.7m tons, of which gasoline octane 80 takes up nearly half at 2.97m tons, followed by gasoline octane 92 at 2.7m tons, while gasoline octane 95 accounts for about 440,924 tons, according to figures in the closing account of the FY 2014/2015 budget.

The money saved from cheaper imports and recent subsidy cuts that raised the prices of petroleum products by 70% should be used to reinstate Egypt as the main refining hub for the region. All this investments are a hope, only after some years can efforts be proven positive in Egypt’s quest to boost its refining industry.