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Egypt’s natural gas

Fady Labib

26 Apr 2014 11:41 am

From plenty to scarcity


Come July, Egyptians will have to sustain substantial price rises for electricity and gasoline. There’s no escaping the fact that the country is living through an unforeseen, foreboding energy crisis

. The problem first loomed in the wake of the Arab Spring Revolution in January 2011 with heated debate over low priced natural gas exports to Israel and Jordan. Repeated shortages in petroleum products followed, especially in diesel fuel which is used to power industrial plants and the bottled cooking gas used in most Egyptian households.  The crisis peaked after the Islamist Muslim Brotherhood (MB) came to power in June 2012 because of the smuggling of petroleum products into Islamist Gaza by means of the illegal underground border tunnels.
When the MB regime was overthrown in July 2013, Egyptians expected the energy shortage to come to an end. However, they were stunned to learn that Egypt could no longer achieve the self-sufficiency in natural gas the country enjoyed before the Arab Spring Revolution when Egypt was a major exporter of gas. The crisis has continued uninterrupted, and now news are circulating about the need to import natural gas to meet the rising needs, especially to operate power plants and handle the high loads of electricity used during the summer months.
Gas imports
The London-based Capital Economics, one of the world’s leading independent macro-economic research companies, has stated that all indexes indicate that Egypt will become a major importer of natural gas in the near future owing to the decrease in natural gas production and the rapid increase in local consumption.
Last month, Sharif Ismail, Minister of Petroleum and Mineral Resources told Reuters that Egypt needed additional petroleum imports amounting to USD1 billion and a massive supply of natural gas to face the rising demand during the summer. Dr Ismail and Hisham Mekkawy, regional president of British Petroleum and Ahmed al-Maaz, chief of the Canadian Sea Dragon, have signed three new exploration agreements with the Egyptian Natural Gas Holding Company (EGAS) to explore for natural gas and crude oil in the Mediterranean Sea and the Nile Delta. 
By signing the three agreements, the petroleum sector has completed the signature of 29 new agreements to explore for oil and natural gas at a minimum investment of some USD2 billion and a signature bonus of about USD195 million, with the drilling of 126 wells, giving a boost to production and increasing Egypt’s reserves of crude oil and natural gas.
In the same vein the Minister of Industry, Trade and Investment, Mounir Fakhry Abdel-Nour, announced that Egypt was studying the possibility of importing Liquefied Natural Gas (LNG) from Russia to meet the needs of the local market, and that Russian companies were invited to participate in international bids for the excavation for oil and natural gas in Egypt.
Taken by surprise
The crisis has taken Egyptians by surprise. They had been accustomed to Egypt’s high international ranking of natural gas reserves. The public believed Egypt was sitting on an underground lake of natural gas. Official figures in 2010 placed Egypt’s natural gas reserves at 78 trillion cu. ft, up from 36 trillion cu.ft in 1999. This led the government then to embark on ambitious development plans and to replace the butane gas used by households with natural gas. It is hard to reconcile this with today’s bitter reality of having to import LNG. So where have matters gone wrong? Egyptians ask. Was there some erroneous estimate of Egypt’s gas reserves, or have events taken an unexpected turn?
According to the CIA World Factbook 2014, Egypt ranks 16th in natural gas reserves, up from 20th in 2010. Back then, natural gas was one of the most important energy sources in Egypt. Egypt was a major producer of natural gas, exporting about 30 per cent of its annual production. However, and for some reason, Egypt’s production of natural gas dropped significantly over the few years since the Arab Spring. Watani took the question to Ibrahim Saleh, former CEO of the Egyptian General Petroleum Corporation (EGPC).
Significant drop
“Before 2011,” Mr Saleh said, “Egypt’s daily natural gas production amounted to 6.2 billion cu. ft and met local consumption, whereas reserves were estimated at 78 trillion cu. ft. Some 30 per cent of the domestic production of natural gas was exported to foreign markets, Jordan and Israel, and what remained amply covered local consumption. LNG was also exported to the US and Italy.” Egypt adopted the system of production sharing agreements (PSA) with the multinationals that did the drilling and production work. According to PSA, investors receive 40 per cent of the extracted oil and 50 per cent of the extracted natural gas in return for their investment in exploration and production. PSAs are adopted in Libya, Algeria, countries bordering the North Sea, and some Arab States. 
 “Now our export days are over and we are importing natural gas by buying the shares of the multinationals’ production in Egypt.” He said Egypt is also importing fuel oil to operate power plants. 
“We are in desperate need of energy. It is the main requirement for production and our only hope to increase development,” Mr Saleh pointed out.
Without energy Egypt cannot generate electricity or expand in energy-intensive industries such as aluminium, iron and steel, cement or fertilisers. The latest official figures indicate that Egypt’s actual production of natural gas is around five billion cu. ft per day, down from the pre-Arab Spring figure of 6.2 billion cu.ft.
Halt in production  
The Ministry of Petroleum projected last month that for the first time natural gas domestic production would not be able to meet local consumption needs for the coming fiscal year, which starts in July 2014. The Minister of Petroleum and Mineral Resources, Sharif Ismail, also announced that Egypt is negotiating with foreign companies, including the Algerian company Sonatrach, to import the natural gas needed to operate power plants during the summer. Dr Ismail said that the negotiations involved importing 400 million cu. ft daily during the summer, but that Egypt, although it has LNG plants and pipelines, does not have any facilities to regasify LNG in case it imports it. 
The minister pointed out that the shortage of natural gas Egypt is currently facing resulted from the halt in 2010 of natural gas production in the Mediterranean. This was halted because of issues concerning the provisions of international maritime law regarding the exploitation of natural resources on the seabed; and reproduction of natural gas from this field was scheduled for this year. In view of the political turmoil that had the country in its grip since 2011, it is obvious this date cannot be met; and the government is doing its best to bring it back into production by 2018. The losses that the State has incurred from this project amount to USD12 billion. 
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Priorities
“Egypt must develop and secure its sources of energy,” Mr Saleh explained. “Let us look at the Japanese model. Japan is one of the largest industrial countries in the world despite the fact that it is deprived of energy resources, but it is constantly working on securing its energy supply from foreign countries. We must also increase and develop the oil and natural gas fields that exist on our soil by increasing the investment allocated to this sector. Each barrel of oil we produce saves USD90 that would have been used to import the same barrel from abroad; likewise, the production of one thousand cu. ft of natural gas saves USD5. Because the import of energy is very expensive and the process of drilling takes about eight years before it turns into real production, we must find a solution quickly to increase our domestic energy production.” 
Mr Saleh pointed out that the generation of electricity consumes 75 per cent of domestic natural gas production, while the remaining 25 per cent are used for energy-intensive industries such as fertilisers, petrochemicals and cement that require very large amounts of natural gas, in addition to household consumption. “Egypt must set its priorities with respect to energy needs and work on securing them. Natural gas must be directed only to key industries and other sources of energy must be used for less urgent needs,” he added. “Egypt must provide enough natural gas to replace the low-efficiency fuel oil currently used for the generation of electricity. I believe it is a priority to secure the production of electricity which has become the backbone of production and development in Egypt. The remaining natural gas must be allocated to the industries that need it most, such as fertilisers.”
Allow investors in
Mr Saleh sees no problem with the use of coal in cement plants. “Coal is used in some of the most advanced and most environment-conscious countries,” he said. “Germany resorts to the use of coal in some of its industries. Egypt must therefore not exclude any source of energy at hand; the Assiut Cement Company even uses the garbage combustion and agricultural waste as an alternative source of fuel.
The import of fuel from Algeria,” Mr Saleh explained, “will not solve the gas shortage any time soon.” The Egyptian imports will consist mainly of butane gas, not natural gas. For LNG to be used in the industry, Mr Saleh pointed out that it must go through a process of regasification from the liquefied state in which it is transported. “Egypt has two facilities in the ports of Edco and Damietta to liquify natural gas into LNG, but has no facility to work the reverse operation. Importing natural gas in the form of LNG from Algeria or any other country is therefore not a feasible solution at the moment,” he said.
He suggests that the government should allow investors to take part in the construction and operation of power plants. This way, the government would be spared the financial hassle of loans and interest rates and would buy the generated electricity as a final product from the investors.
As for Egypt’s some USD6 billion debt to the multinationals, Mr Saleh explained that the government’s oil sector must pay these debts expeditiously to prevent the multinationals from halting production. USD1.5 billion have already been settled and USD2 billion will be paid in the form of long term instalments. The petroleum sector has enough assets and resources to enable it to manage these debts.”
Watani Interantional
27 April 2014


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