For the past several years Egypt has been trying to boost its natural gas production. Despite having significant natural gas reserves and promising new discoveries Egypt has not been fast or efficient enough to keep up with growing domestic demand.

A year ago, the Egyptian Natural Gas Holding Company (EGAS) was optimistic about Egypt’s gas production and future prospects, citing new exploration projects in the Mediterranean and announcing its first bid round since 2008. “There is normal decline in the reservoir as a result of pressure depletion,” said Mostafa El Bahr, then Vice Chairman for Agreements and Exploration at EGAS. “It’s a normal decline, but we are adding more production from new fields to maintain production levels.”  It turned out this was too little, too late.

By the end of last year, Egypt announced plans to import natural gas to meet growing domestic needs as well as external export obligations. Last November, Oil Minister Osama Kamal said that the country would start importing natural gas by May 2013.

“Given the fact it can take several years to bring a large gas field on stream, Egypt has run out of gas supply options and hence import is required,” Jeroen Regtien, the Country Chair and Managing Director of Royal Dutch Shell told Daily News Egypt at the time.

On December 17, 2012 the Petroleum Ministry made it official and announced that Egypt became a gas-importing country.

At this point Egypt’s industry insiders agree that Egypt now has no choice but to import natural gas, despite the country’s vast natural gas reserves. How did Egypt get here?

Straining to meet expectations
Since late 1970s, Egypt’s natural gas reserves were growing as oil resources were depleting. By 2010, 75.8% of Egypt’s total proven reserves were natural gas, compared to 16.5% in crude oil according to Observatoire Méditerranéen de l’Energie (OME).

In 2010 alone, Egypt’s natural gas production jumped from 646 billion cubic feet (Bcf) in 2000 to 2.2 trillion according to EIA data. The country’s total natural gas reserves were at 77.46 tcf at the end of FY2010/11 according to EGAS’ annual report released in January 2012, making Egypt’s gas reserves the third highest in Africa, after Nigeria and Algeria.
At the end of 2011 Egypt’s total proven reserves remained unchanged compared to a year ago, at 2.2 trillion cubic meters according to the BP Statistical Review of World Energy 2012.

But having a high reserves number is not the only factor that counts. Many of the new natural gas discoveries in the Mediterranean region are in harder-to-reach areas that require larger investments and more specialized technology to recover. Researchers at Paris-based Observatoire Méditerranéen de l’Energie (OME) warned Egypt could become a net importer of gas by 2030 if the country’s production levels and reserves were not improved dramatically through “major new discoveries, technological breakthroughs and massive capital expenditures.”

What they did not account for was the vast political instability unleashed during and after the Arab Spring in Egypt and additional pressures on producers such as increasing labor costs. By 2011, Egypt’s natural gas production had already declined by 0.1% to 61.3 billion cubic meters compared to a year ago, according to BP data. Dana Gas and other leading producers cut production targets, citing “ongoing uncertainty around the political situation in Egypt.” At the same time, consumption jumped by 10% in 2011 to 49.6 billion cubic meters, the largest annual consumption increase in Africa.

“The decline in the supply needs to be stopped,” said Shell’s Jeroen Regtien of Egypt’s energy needs at the January 16 roundtable, organized by Egypt Oil & Gas newspaper. “Egypt can be self-sufficient.”


In October of last year, Egypt was already straining to meet its export obligations. Jordan, which has traditionally relied on Egypt’s natural gas supplies for the bulk of its electricity needs, has moved to readjust its energy policy due to the unreliability of Egypt’s natural gas deliveries.

The list of obstacles facing natural gas exploration in Egypt is similar to oil exploration in many ways: heavy regulations and government’s traditional requirements, ceiling on onshore prices, and lack of certainty.

Addressing these regulations and allowing producers to export a larger portion of recoverable gas at competitive international prices could boost exploration and help remedy the decreasing supply of natural gas resources in Egypt.

Speaking at a roundtable of industry insiders and predominantly international colleagues, Shell’s Regtien cited the government’s inclination towards short-term solutions as an obstacle to long-term planning. He stressed a need for a long-term energy plan that “breaks down those components to develop a blueprint against which sustainable solutions” can be implemented.

According to Regtien, the EGAS tender for an LNG facility was an example of short-term thinking. Last year EGAS issued a tender to establish the LNG terminal “along the coast of either the Mediterranean or Red Sea, depending on feasibility and evaluation criteria.” The priority for issuing the approvals “will be given to the earliest First Delivery Date, starting from May 2013” according to the announcement. The project’s capacity is estimated between 1 billion to 1.5 billion cubic meters of natural gas per day.

In November, Citadel Capital announced plans for a joint venture with Qatari investors managed by QInvest, which will hold a 51% interest. “The joint venture will import LNG, ‘regasify’ it at the floating LNG storage and regasification unit, transmit it through the Egyptian national natural gas grid and market the natural gas to local high-volume end-users,” according to the Citadel Capital’s statement.

“Next summer there will be problems if we do not import,” Ahmed Heikal, Citadel Chairman, told the Financial Times.

It remains to be seen how much this deal will help meet Egypt’s natural gas imbalance as it will likely still face fuel shortages this year despite the urgent push to import gas.
Regardless, the costs to the Egyptian government of importing gas will jump significantly as it will be importing natural gas at international gas prices, which is at least twice the domestic price level. The cost of importing 1 billion cubic feet a day would be $3.65 billion a year, according to Bloomberg data. It will undoubtedly put additional pressure on the devaluation of the Egyptian pound and the country’s foreign currency reserves.

The government officials also stated that in October, Egypt agreed to import gas from Algeria, which could potentially offer better pricing terms for Egypt. Egypt Independent newspaper reported Egypt had signed an agreement with Algeria at a price of $11 per million British thermal units with imports due to start in 2013.

According to energy experts, a market-based pricing model may be the solution to fuel shortages and rising demand for natural gas, diesel and mazut.

The 2011 revolution exacerbated and brought a new set of challenges for the whole energy industry, including political instability and rising labor costs. Most agree on the main points: overregulation, energy subsidies, transparency, and a lack of certainty are straining investor confidence in Egypt’s energy sector. “This is the turning point for the country,” said Jean-Pierre Dolla, managing director of Total E&P Egypt. “Today we need more incentives to invest in Egypt.” In order for these new deep-water wells to be profitable, new incentives are needed, as deep-water drilling carries additional technical challenges and higher costs.

At the same time, more IOCs are growing impatient with the government’s acknowledgement of existing problems, and yet lack of steps to address remaining issues. “There has been a lot of patience, but it’s coming to be crunch time for the investors in this country – if there is no obvious way they’re going to get a return,” said Patrick Allman-Ward, general manager of Dana Gas in Egypt. Dana Gas is the sixth largest natural gas producer in Egypt, with total investments over $1.68 billion.

The fuel shortages issue is also a deeply political one for Egypt, with an added urgency of proper dialogue not just between the government and the industry, but also ensuring these challenges are communicated to the population at large. While most within the industry agree that the era of cheap energy is over, the Egyptian population at large needs more convincing.

Speaking on the sidelines of the roundtable, many international players find the current terms and agreements unsustainable, with no positive signs or progress in terms of accounts receivables from government agencies. If Egypt can’t find a way to pay its debts soon, it will have a hard time convincing foreign investors to stay in Egypt and bring natural gas production back up. 

For now as Egypt strives to meet existing export obligations and meet growing domestic demand, there are no easy or painless solutions left.

By Daria Solovieva


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