By Lorena Rios
The industry often gets a glimpse of how the state views the it, its challenges and its future; however, rarely does the government present a completely unified outlook of how the industry is viewed and how it plans to deal with challenges in the future. During an event organized by the British Egyptian Business Association (BEBA) Sherif Ismail, Minister of Petroleum and Mineral Resources presented the state’s view of the current challenges the industry faces, as well as the steps necessary to unlock Egypt’s energy potential.
The Egyptian people are emerging from a tumultuous period in history, as the government of newly elected President Abdel Fattah El-Sisi revives the economy through the implementation of fiscal reforms, and parliamentary elections are scheduled to take place within the next few months. While the Egyptian government continues to suppress dissent and restore security in a country that has seen bloody changes in power in the short period of four years, the ministry of petroleum, in accordance with the government´s holistic effort to attract foreign investment, is assuring its stakeholders that the country´s potential is ready to be developed.
The ministry´s goals are aligned with the aspirations of the Egyptian people to enhance living standards and alleviate poverty, increase job opportunities, improve public services, restore Egypt’s regional and international leading role, and realize a significant growth rate, explained Ismail. To meet these goals, the ministry has drafted a plan that will allow Egypt to meet local energy demand within reasonable and economical prices, fuel sustainable economic development, and succeed in providing Egyptians with a better life.
The road to achieve sustainable growth must be paved with a strategy that maximizes the added value of Egypt´s natural resources through the highest level of efficiency, Ismail explained. First, Egypt must overcome the wide gap between supply and demand, an unbalanced energy mix, and energy subsidies.
The Gap Between Supply and Demand
Egypt´s supply and demand deficit stands at 700 mcf/d, mostly a result of the decrease in development and exploration activities in the years between 2010 to 2013, mature and aging fields, aging infrastructure—ports, refineries, pipelines, grids—the deferral of Northern Alexandria field development, and setbacks in the investment environment, such as low gas prices and debts to IOCs. The ministry began to take clear actions to address these impediments by establishing dialogue with IOCs, amending gas pricing, and paying back its debt.
Unbalanced Energy Mix
The primary source of Egypt´s energy mix is oil and gas, with 96% of all energy generated from fossil fuels and natural gas, a disproportionally high number taking into account that oil and gas makes up only 61% of the global energy mix. The fields of hydropower and coal account for 3% and 1% respectively. Egypt has to follow the lead of the international community to rebalance its energy sources.
The power generation mix is highly dependent on oil and gas, 91%, compared to the 27% shown by the global energy. However, Egypt expects to offset these numbers by investing more heavily on renewable energy and coal, which at the moment account for 9% of the total.
Energy subsidies consume a large portion of the state budget, which in FY 2012-2013 was 51 times higher than the social security budget, five times higher than food subsidies, five times higher than health budgets, and two times higher than the budget for education. Fuel subsidies made up 22% of the budget and 7% of GDP. However, President Sisi has introduced reform to cut oil subsidies and new taxes which will alleviate Egypt´s deficit and combat mounting domestic debt, which has reached $261b due to its heavy reliance on bank borrowing. Last summer, the government raised the price of fuel by 78% and has designed a smart card system that is awaiting implementation. According to the finance minister, the fuel subsidy bill fell by 30% in March.
Strategies and Policy Decisions
The government´s strategy is one that prioritizes energy sustainability, which can only be achieved through a financially sustainable sector, backed up by a well-balanced energy pricing policy that preserves affordability for individual customers and competitiveness for business, said Ismail.
Governance must also play a key role in bettering Egypt´s relationship with foreign investors, which has been strained by years of political instability. As a result, the ministry of petroleum is striving to create an energy sector in which the roles of all public and private actors are defined and are complementary to creating an enabling environment that supports private investment.
Ismail discussed a specific set of policies the ministry is currently implementing; the most significant of which is to encourage new exploration and development in its areas of responsibility. A symbolic deal in the downstream field in Egypt is BP´s recent deal to supply Egypt with LNG from its North Sea concessions. EGAS’s Khaled Abdel Badie stated earlier this year that BP will supply 16 cargoes of LNG through 2015-2016. 56 new upstream exploration agreements have been signed already, with a $12b minimum commitment.
Arrears owed to IOCs have played a major role in affecting new exploration activities; hence the ministry’s clear direction during the past year to fully repay its debt. According to Ismail the ministry managed to reduce the amount owed to IOCs by 45%; from $5.9b in June 2014 to $3.28b in March 2015. However, according to sources at EGPC the amount due increased by 6.1% by the beginning of the current fiscal year, raising the amount due to $3.5b. Ismail had promised to reduce the debt to $2.9b by the end of August, with a plan to pay the rest by the end of 2016. The ministry initially promised full payment of arrears by the beginning of 2016, a deadline that was postponed twice; and is now planned for the end of 2016.
Other key policies the ministry will use to narrow the natural gas supply gap include accelerating existing gas field development, as well as securing LNG imports as a short-term—however immediate—solution. It is worth noting that the government has so far imported LNG worth $3.55b (according to EGPC officials) to eliminate power outages, which it successfully managed to achieve. A second Floating Regasification Storage Unit (FRSU) was contracted in August and has a capacity of 500 mscf/d. It will be located in Ain Sokhna where a 6.5 km pipeline has been constructed to connect the new FRSU to the national gas grid.
The ministry signed 56 new exploration agreements worth $12.2b between June 2014 and March 2015. The ministry also opened new upstream opportunities by offering 18 new exploration blocks through Ganope and EGAS. Egypt Oil & Gas sources have also learned about a soon-to-be-announced bid round by EGPC where 15 new blocks will be made available.
Egypt’s richest gas fields are commonly found in deepwater areas. These are a golden opportunity for a country struggling with maintaining natural gas levels; however, due to the elevated cost of production from such operations, the regular Production Sharing Agreement (PSA) model renders such ventures unattractive to IOCs. Mega concessions such as the North Alexandria and the West Mediterranean, which are expected to produce a total of 1.2 bcf/d, equivalent to 25% of Egypt’s current gas production, and represent the possibility of ending the current gas supply gap, as well as easing the economic burden LNG imports are adding to the country’s budget, require a different approach. To encourage IOCs to invest in such concessions the ministry changed the agreement model for those two concessions, where 100% of the profits, after deducting costs and taxes, will go to the operator and the partner, and the EGPC will purchase all production at fixed price formula, which in the North Alexandria concession case was estimated at $4.1 per million Btu to be amended every five years. The key factor here is to work with contractors to encourage speedy and adequate production of new concessions, as well as existing ones.
Shifting to the petrochemical Industry, and in an effort to reduce the country’s dependency on imports of petroleum derivatives. The government is currently working on developing its petrochemical industry by investing millions in new projects, such as Sidi Kerir Petrochemical Company´s $670m to increase its butane production capacity and production of ethylene and its derivatives. The new Suez Canal annex is planned to host several refineries to boost the country’s output.
A key reforming policy the ministry is currently working towards is the liberalization of the Egyptian gas market, a direction it is working towards by allowing factories to use the country’s national gas grid to import their energy needs.
Finally the ministry is working towards making Egypt an energy hub, by utilizing the Suez Canal, SUMED, existing infrastructure, LNG facilities, and local refineries.