By Tamer Mahfouz
Natural gas was the most recently discovered source of fossil fuel in Egypt, and it was left up to the discretion of the government to direct it towards the channels that would best serve the country. Due to the almost non-existent conversion costs, the government chose to use natural gas in power stations. A major reason behind the reliance on the product is that it is the cleanest fossil fuel and, therefore, the most efficient as more of it burns in the combustion chamber, generating more energy than oil. Additionally, recent discoveries of natural gas fields, like Zohr, the largest gas field in the Mediterranean, and a new law allowing the private sector to trade the product are enhancing the status of natural gas as the fuel of choice for power generation in Egypt.
Natural gas can be up to 40% more efficient than oil, according to Power Scorecard, an online tool that ranks the types of fuels used to generate electricity. This efficiency means that power stations do not need much investment in filters and catalytic converters to purify the exhaust from burning it. As an added benefit, switching from using steam or oil to natural gas does not require significant changes to the power plant. Accordingly, at the turn of the century, the main allure of using natural gas to generate electricity was that it would relieve pressure on oil derivatives, such as mazut and diesel, whose reserves and investments were decreasing, hurting public transport, land, and sea freight.
By June 2017, approximately 75% of Egypt’s electricity was generated by natural gas, according to OME. The remaining 25% was powered by mazut, which amounted to approximately 27,000 tons of the product, according to an anonymous source talking to Al Masry Al Youm. Between 2006 and 2016, around 52% of Egypt’s natural gas was used to generate electricity, while the rest went to households and factories, according to a CI Capital report published in 2017. This went up to 71% on average in 2017, an anonymous source working in the Ministry of Electricity told Youm7. During the height of the summer season in August, power stations were consuming between 3.9 and 4 bcf/d of natural gas. This is compared to an almost stable 3.5 bcf/d during the same period since 2014. Furthermore, it is around 80% of Egypt’s local production at the time (5.1 bcf/d), according to the anonymous source.
This reliance on natural gas amid Egypt’s declining foreign currency reserves between 2012 and 2014 resulted in frequent power cuts for both households and factories during peak demand periods in the summer to keep the power stations for households running as long as possible. With Ramadan in August and July, demand rose further, creating constant rolling blackouts.
In 2014, imported natural gas solved the problem of powering households during the summer. Factories, however, continued to suffer from more frequent blackouts than ever before. Cement and fertilizer factories, for instance, saw their natural gas quota drop from 940 million cubic feet per day (mcf/d) day to 350 mcf/d during summer 2014. At the time, overall fuel shortages ranged from 20% to 50%, as reported by Mada Masr in April 2017, and natural gas was powering around 80% of Egypt’s power stations. Nowadays, imports continue to increase to meet local demand. By August 2017, the sector consumed as much as 6 bcf/d, of which around one bcf/d was imported.
Rising consumption of natural gas and the devalued pound resulted in higher natural gas bills during the first six months of the year, which increased by EGP 1.5 billion to reach EGP 7 billion, according to the Minister of Petroleum and Mineral Resources, Tarek el Molla, who talked to the press in September. Experts and the government hope to see natural gas consumption decline during the next six months by around 5% as winter approaches, and people stop using air conditioners at home, according to Molla.
Due to the high consumption, two alternative measures can be taken to alter long term demand patterns of natural gas: the use of coal, and allowing the private sector to supply the national grid. The coal legislation was introduced in 2013, allowing the importation of coal for industrial purposes for the first time. The move aimed at supplementing natural gas supply to factories where the saved natural gas would be diverted to fuel power stations. The first shipment was imported in 2014, and by 2015, all cement factories had made the conversion from natural gas to coal. Additionally, an amendment in 2015 allowed the construction of coal-powered power stations. However, after the float and subsequent devaluation of the pound, coal became too expensive, and news reports were saying that factories are reverting back to natural gas, which would effectively cost them nothing since the infrastructure is already there.
Two years after the introduction of coal, the feed-in tariff was introduced to allow private energy investors to supply the national grid with electricity from renewable sources, aiming at ultimately reducing Egypt’s reliance on fossil fuel to generate electricity. The first benchmark is for renewable energy to account for 20% of electricity generation by 2022, a percentage significantly larger than the current 5%.
For the time being, to meet increasing electricity demands, new natural gas powered station investments by government and private sector are being fast-tracked to meet the forecasted increase in demand. The West Assuit power station, for instance, will be getting an upgrade in its natural gas pipeline to deliver more gas to the station, an expansion that was approved in August and should take under a year to be completed. It will require 1,400 km of pipe work, and a circumference of around 20 meters, dug 20 meters under the ground.
A month earlier, in July, General Electric (GE) completed its upgrade of the Nubaria power plant, which will increase its production by 6.7%, up from 750 MW while reducing natural gas consumption by 3%. The upgrade turned Nubaria power station into one of the few units in the world and the first in the Middle East and North Africa to use GE’s latest natural gas turbine, the 9FA GE.
Al Korymat power station, in Upper Egypt, has also been getting a GE-upgrade since last March, and is set to use the same generator. The station’s output will increase to 270 MW from 250 MW per turbine, with a natural gas consumption improvement of 2.8%. The overall up-rated output will reach 750 MW, and its clients will mainly be cities in Upper Egypt. Revenue is expected to increase by $5.3 million, according to a news report in Al Dostor. Siemens is also currently in the middle of its upgrade of other parts of the Korymat complex, which will increase its production by 50 MW.
Damietta natural gas firing power station is also set to get an upgrade by the end of the year, according to the Ministry of Electricity’s spokesman, Ayman Hamza, who talked to Youm7 in January. The station’s output will increase by 250 MW as a result of a partial replacement of the generators in the complex. It will also be connected to the national grid for the first time. This upgrade is estimated to cost EGP 3 billion financed by EBRD, a Saudi development fund, and the station’s owners, state-owned East Delta Electricity Production Company.
Meanwhile, the Hurghada and Sharm el Sheikh natural gas powered stations are expected to be linked to the national grid, as announced by Gaber el Desouky, the head of the Egyptian Electricity Holding Company, early August. The cost of this connection will be EGP 57 million for Hurghada plant and EGP 53.897 million for the one in Sharm el Sheikh. Each station generates 288 MW from natural gas. The connection should be completed before the 2018 summer season.
General Electric is also going to invest $250 million in Egypt to build four natural-gas power stations, as reported by several media outlets in September. The financiers are German bank AG and British HSBC. The agreement was first signed in mid-2016, but GE has only submitted its financial closure for all four projects in September 2017. The power plants will be located in the investment zone in New Cairo, Beni Suef, Dakahlia, and East Port Said. The first station to be completed will be the New Cairo one. All four are expected to be up and running in 2018 and will ultimately produce a total of 7 GW.
Moreover, Siemens has already finished the first phase of its mega power plant, which will ultimately produce 14,400 MW, with investment totaling EUR 6 billion. The completed phase was up and running in March, producing 4800 MW connected to the national grid. Its main aim is to power the New Administrative Capital. The remaining phases should be completed by the first quarter of 2018, according to local Siemens officials, who talked to media during the announcement of phase one. The other power plants will be located in Beni Suef and Borolos districts.
A main driver for this massive growth in natural gas investments has been an unprecedented wave of new, large-scale natural gas discoveries that, after the devaluation, are now cheaper in dollar terms. There is also a slight wave of relief among international gas firms after the government affirmed its commitment to repaying its debt, dropping them by $2.2 billion from $4.5 billion in 2017. This compares to an all-time high of $6.5 billion in 2015.
The biggest gas discovery in Egypt is the Zohr natural gas field. Italy’s Eni discovered the supergiant Zohr field in late 2015, which is the biggest natural gas reservoir in the Mediterranean and one of the biggest in the world. Its reserves are estimated at 30 trillion cubic feet, over 47% of current Egyptian reserves. Projected investments will top $15.6 billion by the time the project is completed, according to the Minister of Petroleum, Tarek El Molla. Baker Hughes is one of the high-profile companies contracted to perform services at the site by Petrobel, the joint venture between Eni and the Egyptian General Petroleum Corporation (EGPC), tasked with attracting investments to the field. “This project has the potential to meet Egypt’s growing gas demand and save the country billions of dollars that would otherwise be spent on importing gas,” Lorenzo Simonelli, the President and CEO of Baker Hughes, disclosed in a statement in September. There are currently seven confirmed wells at the site, and, by the end of 2017, Zohr’s production should top 900 million cubic feet of natural gas, according to the Egyptian Natural Gas Holding Company (EGAS). By 2020, it will add 2.7 bcf/d to Egypt’s domestic production. This will be equal to 34.5% of Egypt’s 2020 forecasted production capacity, according to CI Capital’s report.
The government is pinning its hopes on Zohr, expecting it to help the country reach self-sufficiency in natural gas between the end of 2018 and the beginning of 2019, and allow it to start exporting natural gas once again by 2020, El Molla noted in May at a press event. Furthermore, natural gas production is expected to increase to over 5.1 billion cubic feet by the end of 2017, El Molla told the media in September.
Besides Zohr, there were other main gas discoveries in Egypt in 2016. BP, for instance, found gas reserves in its offshore concession in north Damietta and in its Baltim South Development Lease in the Nile Delta. Royal Dutch Shell also discovered 500 billion cubic feet of natural gas in the Western Desert. In the last three years, there were around 21 natural gas excavations, El Molla also highlighted in May, as reported by Egyptian Streets. The three discoveries previously mentioned should increase Egypt’s current natural gas production by 50% in 2018 and 100% by 2020, according to El Molla.
Meanwhile, nine more projects are expected to come online by 2019. These discoveries have already prompted the Egyptian government to start cancelling orders for natural gas deliveries, according to a Reuters article published last May.
With this rise in supply, the Ministry of Electricity announced that the Ministry of Petroleum has openly agreed to power all fossil fuel power stations that were using mazut, since natural gas will be able to cover the demand, a news report by Al Masry Al Youm published in June suggested.
Involving the Private Sector
Another huge push for electricity-generation investors to build natural gas powered stations was recent legislative reforms that were approved by the parliament and later ratified by the president. The Natural Gas Act became an implemented law in August, and its main point is to allow the private sector to trade natural gas for itself.
The government has, traditionally, been the main buyer and seller of natural gas in Egypt. However, with the forecasted increase in supply, it is not a surprise that the government has opened the doors to the private sector. Under the Act, a new regulatory authority will be created to oversee transactions, license private firms, and set plans to develop the sector. It will also exercise some control over pricing to prevent monopolies, other forms of unfair competition, or market manipulation.
With many companies able to trade natural gas across the borders, the reforms are meant to prevent natural gas shortages and long power outages during peak times. “This law effectively relieves the government from the burden of providing for the rapidly growing natural-gas consumption and turns it into a regulator,” Radwa El-Swaify, head of research at Cairo-based Pharos Holding, told Bloomberg last August. “It’s all part of the same direction of having freer markets in Egypt,” she added.
As Egypt’s economy continues to expand –as the World Bank estimated a growth of 3.9% in the GDP by the end of fiscal year 2016/2017– and Egypt builds its new administrative capital, the country will face increasing electricity demands. Driven by the recent natural gas discoveries and investor-friendly reforms, natural gas is likely to continue to maintain its prominent position in Egypt’s electricity generation if increasing production can keep pace with rising domestic demand.