The Impact of LNG Imports Reduction on Egypt’s BOP

The Impact of LNG Imports Reduction on Egypt’s BOP

By Mahinaz El Baz

Egypt is aiming to become a regional energy hub following the recent discoveries of large offshore gas reserves in the Eastern Mediterranean and the Nile Delta. The country’s goal is essential during the current transitional period as the energy sector, especially the oil and gas industry, remain the major driver of Egypt’s Balance of Payments (BOP).

Economic and petroleum experts believe that the country has a strong potential to become a trading, transit, and exporting natural gas hub in the region. However, achieving this ambitious goal is mainly depending on the country’s ability to cope with geopolitical, economic, security, and legal uncertainties, both locally and regionally.

Moreover, Egypt is planning to have a diversified energy mix to reduce dependence on gas for power generation. It is worth noting that the country’s total natural gas consumption is about six billion cubic feet per day (bcf/d). Out of this six bcf/d, roughly 65% is burned in electricity-generation plants, a government official told Ahram Online. By having a diversified energy, Egypt is willing to sustain the expected natural gas exports, as the Ministry of Petroleum and Mineral Resources is currently working to achieve energy self-sufficiency target, according to the Minister of Petroleum and Mineral Resources, Tarek El Molla.

LNG Changes Egypt’s BOP Performance

Since 2011, sharp macroeconomic deterioration and structural natural resource trends have pushed Egypt’s oil and gas sector into difficulties. The first hit was the decline in offshore Mediterranean gas production as a result of reservoir maturity and stalled investments.

The production of four of Egypt’s major offshore gas fields started to decline in 2012. The second hit was the accumulation of the Egyptian General Petroleum Corporation (EGPC) arrears to upstream investors, peaking at $6.3billion in 2012 and representing around 2% of Egypt’s Gross Domestic Product (GDP) as a result of mounting fiscal deficits and deteriorating external liquidity during the political transition, according to a BNP Paribas’ study on Egypt’s petroleum industry in 2017.

The third hit came from the decline in crude oil prices in the fiscal year (FY) 2014/2015, thereby discouraging foreign investment, especially in high-risk deep-water exploration, the study highlighted. In the same FY, Egypt had to halt Liquefied Natural Gas (LNG) exports and turned into a net natural gas importer in FY 2015/2016, with a hydrocarbon external deficit of $3.6 billion compared with a surplus of $5.1billion in FY 2009/2010, the study noted. During that period, economic experts explained that the current account deficit was largely driven more by the negative hydrocarbon balance than by the decline in tourism, as reported by Daily News Egypt.

Due to the increasing natural gas consumption and decreasing production, Egypt had to import a total of 118 LNG cargos in FY 2016/2017, costing an import bill of about $2.2 billion, according to a press release by the Ministry of Petroleum and Mineral Resources. On the other hand, the government has taken steps towards diversifying its revenue sources, in light of the BOP static structure. The economic reform launched in 2016 aims to reduce the BOP deficit and create more endogenous sources of revenue.

Despite the high LNG import bill, Egypt’s BOP ran an overall surplus of $13.7 billion in FY 2016/2017, of which $12.2 billion were realized in November/June 2016/2017, following the Central Bank of Egypt (CBE)’s decision of the exchange rate liberalization against an overall deficit of $2.8 billion in the previous FY, according to CBE.

“Egypt’s BOP started posting a large surplus since 2017, driven by monetary policy and fiscal reforms, thus reversing the negative trend seen since 2011. The BOP surplus has been mainly driven by portfolio inflows into the public debt market, but I expect greater contribution from merchandise trade balance and labor remittances in 2018-2020,” Youssef Beshay, Senior Banker at BNP Paribas, stated.

According to an announcement from the ministry of petroleum, Egypt intends to stop importing LNG by the end of the current FY 2017/2018. The country will reach its LNG imports halting plans as it speeds up output at newly discovered natural gas fields, the minister Tarek El Molla said, which will enable Egypt to save $250 million per month, as CNBC informed.

“According to our estimates, it [halting LNG imports] should save roughly $1.8 billion in FY 2018/2019, which is equivalent to 0.6% of GDP. Thus, the impact on the current account deficit will be positive on the short term (and accordingly on BOP),” Dr. Pascal Devaux, Senior Economist MENA, BNP Paribas highlighted. “On the medium term, it is difficult to estimate how much can be exported, at best few hundred millions of USD. We do not believe that LNG exports will be a game changer with regard to BOP trends,” he added.

Giving a close estimate to Devaux’s prediction of the financial impacts of halting LNG imports, Allen Sandeep, Director, Research, NAEEM Brokerage, explained that  “On the BOP and Balance of Trade (BOT), overall, when we achieve self-sufficiency in gas, Egypt would stop importing LNG, which in FY2016/2017 cost us around $2.5billion (as imports).” However, taking into account production share of the international oil companies (IOCs) in the new gas fields (Zohr, Nooras, Alex-offshore), “the country should effectively be saving around $1.5 billion per annum on a net basis,” he added.

Meanwhile, Beshay believes that “the transformation of Egypt’s gas balance would save Egypt’s trade balance $1-2 billion per annum from FY2018/2019 onwards.” It is worth noting that LNG imports peaked at $ 2.4 billion in FY2016/2017.

New Gas Discoveries

Increasing natural gas production at existing fields and fast-tracked development of new fields will bring online significant amounts of gas through 2020, according to the American Chamber in of Commerce in Egypt’s industry insights from December 2017. Given the promising production of Zohr and other deep-water fields such as Atoll, Nooros, Taurus, and Libra fields, the Ministry of Petroleum and Mineral Resources is aiming at importing only 80 cargos throughout FY 2017/2018, reducing 32% of  Egypt’s current import bill of $200 million per month, Petroleum Minister Tarek El Molla told Reuters.

“Egypt will be able to export gas again. It is exporting gas already with much lower volumes than before but after becoming self-sufficient in gas,  by the second half of 2018, more volumes will be directed to LNG as there will be surplus of gas, and exports should be back,” Amr Zaher, Reservoir Engineer at Shell, said. “There is Zohr ramping up and adding new phases, and other fields are coming on stream during 2018. That’s why by the second half of 2018, we should expect a surplus,” he noted. .

Output from Zohr field currently saves Egypt more than $60 million monthly in natural gas imports. This sum is expected to increase to $250 million per month by the end of 2018, according to Ahram Online. “After discovery of Zohr gas field, which is considered the largest ever natural gas field in the Mediterranean Sea, with its huge production capacity reach to 30 trillion cubic feet, Egypt no longer needs to import gas again even on increasing energy demand,” Dr. Abdelaziz El Hoshoudy, a Researcher at the Egyptian Petroleum Research Institute, stated.  “In the upcoming days, Zohr field will almost double Egypt’s gas reserves, so the global gas market will be concentrated through Egypt, which will change the fuel strategy in the Arab region,” he added.

It is worth noting that Egypt’s production of natural gas increased by around 14.11% year-on-year (Y.o.Y), rising to 3.12 million tons (mt) in November 2017, compared to 2.734 mt in November 2016, according to the Central Agency for Public Mobilization and Statistics (CAPMAS). On the other hand, consumption of natural gas increased around 10.4% Y.o.Y to 3.472 million tons in November 2017 from 3.144 mt the previous November, CAPMAS report stated.  “The Egyptian market should have flexible configuration to import LNG seasonally, notably in 3Q to accommodate peaks in household and industrial consumption,” Beshay commented.

Given the figures, local natural gas supply is expected to narrow the current supply-demand gap; as CI Capital expects consumption levels to increase to 6.37 bcf/d, a close estimate to the planned production level of 6.2 bcf/d, by the end of 2018. This narrowing of the gap will reduce the import bill to around $40 million monthly.

“The total imports of refined petroleum and gas should drop by 20% by FY2018/2019, as Egypt should effectively save around $2 billion starting 2019, due to the absence of LNG imports,” according to Naeem Brokerage report on the Egyptian economy, December 2017.

Future Scenarios

There is an ongoing debate between economic and petroleum experts about the future of LNG market dynamics in Egypt, in light of the increasing production and consumption. “On the supply side, there is 40 mt of new LNG supply that has to be absorbed in 2018 (in addition to 30 mt that came online in 2017). Whether this added supply gets catered to by the largest new importers (including China and India) is a tough question to be answered,” Sandeep stated.

Zaher explained that “if you look at the supply and demand, Egypt should be self-sufficient till 2023-2024, but there are many efforts from the Egyptian government to open new plays and add new acreage for exploration that companies can explore and add more volumes and more supply.”

On the contrary, economic experts believe that the government should think of the best energy mix when planning for natural gas exports sustainability, as demand is growing faster than production rates.

“Egypt will certainly export gas in the next few years. However, the question of gas exportation on the medium term depends on the pace of power mix diversification. In other words, the faster Egypt on boards new renewable power generation capacity in 2019-2022, the greater gas surplus would be available for export via existing LNG terminals in Idku and Damietta. LNG exports will contribute positively to trade balance, but I expect contribution to be far lesser than the LNG export boom of early 2000s due to higher demographic pressure stemming from new power connections,” Beshay noted.

He further explained that “the real game changer for Egypt’s trade balance rather be LNG exports via Idku and Damietta due to lower political risk and technical readiness of the terminals versus alternative export routes.”

Both economic and petroleum experts agreed on the positive impact of reducing LNG exports on Egypt’s BOP on the short and medium runs. Yet, increasing natural gas consumption is a main independent variable affecting the equation of LNG imports and exports on the long run.

Dr. Mahinaz El-Baz 318 Posts

Mahinaz El Baz received her PhD degree in International Economics from Helwan University in 2022. She has +10 years of experience in journalism and economic analysis. She received the "Best Economic Article Award" in 2016 from CFA Society Egypt.

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