Making the most of Egypt’s gas bonanza

Egypt looks set to have a bonanza in natural gas in the coming few years. It must not squander the new production on fuel subsidies for consumers and sweetheart deals for favoured industries as it did during the previous boom in gas supply a decade ago.

The government has yet to follow up Abdel Fattah El Sisi’s bold move in raising energy prices soon after he was elected president last summer, but rather seems to be using the recent fall in international oil prices as an excuse not to risk angering people with more price increases. That would be a mistake. The longer one waits, the bigger the problem gets.

In recent months, the government has been cutting deals to speed up development of huge potential gas reserves. It has settled a backlog of debts to international gas companies and agreed to pay higher prices for the gas they deliver to the local market.

The deals will unlock a vast flow of gas that should in a few years provide enough supplies so that Egypt will no longer have to import even-costlier liquefied natural gas (LNG) from abroad.

Foremost among these is a deal with BP, whose West Nile Delta fields contain an estimated 5 trillion cubic feet of gas.

BP and its Hamburg-based partner Dea had suspended development for several years, but in March agreed to revive the project, which could begin producing 450 million cubic feet per day in 2017, jumping to 1.2 billion cubic feet as the Raven field comes on stream in 2019.

BP and Dea plan to invest an initial $12 billion but think there may be a further 5 to 7 trillion cubic feet to be found, which would increase the amount of investment.

Then in March, BP announced yet another massive discovery, this time in its North Damietta concession off the east Delta, with an estimated potential of more than 5 trillion cubic feet.

At the moment, Egypt can produce 4.7 billion cubic feet a day and needs another 700 million on average to satisfy local consumption, which has been growing relentlessly owing to an expanding population and subsidies that have made the country’s energy prices among the lowest in the world.

To satisfy demand, the government has been forced to lease an expensive floating terminal, which arrived last month, to convert imported LNG into gas. This month the government issued a tender to lease a second.

After the 2011 uprising, a subsidy bill led the cash-short Egyptian government to stop paying for gas that energy companies had discovered in Egypt, leading the firms to suspend much of their local development.

Many companies asserted that the government wasn’t paying enough for new gas to justify the huge investments needed to develop their fields. BP’s West Nile fields had originally been scheduled to come on stream last year rather than 2017.

Since mid-2013, aid from the Arabian Gulf states has allowed Egypt to reduce the debt – which had surged to more than $8bn – to about $3bn and perhaps to eliminate it next year.

The government’s measures are about to unlock a potential torrent of new gas.

Italy’s Eni in March signed a tentative agreement to develop fields with more than 1.3 trillion cubic feet of gas and 200 million barrels of oil over the next four years, much of them offshore north of Port Said. Eni is still negotiating an increase to the $2.65 per million btu it receives from the Egyptian government for the gas, which should unlock $5bn in investment.

Likewise, BG, soon to be part of Shell, has been negotiating to increase the price for gas from its West Delta Deep Marine concession, which it shares with Malaysia’s Petronas, to $5.88 per million btu from $3.95. Once agreed and a remaining backlog of debts paid, BG hopes to forge ahead with a new development phase of the concession.

Under the concession’s current phase, the first of nine new wells came on stream in July last year, temporarily halting a steady decline in BG’s Egypt output, which was about 650 million cubic feet per day in 2013. A deal may unlock as much as US$4bn in new investments, according to the Egyptian side.

By diverting all its gas to the domestic market, the government infuriated BG and Eni. The two firms had invested billions of dollars in the past decade to build gas liquefaction export plants that had to be mothballed, and they all but stopped investing in Egypt.

Last July, the government raised some petrol prices by up to 78 per cent and beginning on June 15, after delays, it is due to begin rolling out a smart card system for subsidised fuel that at least initially will not entail rationing. It had promised further price rises, but now with the fall of international oil prices shaving several billion dollars off the subsidy bill, analysts say the government seems to be putting these on the back burner.

The electricity ministry also promised a gradual increase in prices towards international levels. It remains to be seen if it will carry through on the pledge. The task is politically delicate, but in the end it is the rich who consume the biggest amount of subsidised goods and not the poor.

Patrick Werr has worked as a financial writer in Egypt for 25 years.

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