Cairo – Decypha: Once an oil-exporting country, Egypt has been experiencing a severe shortage in natural gas since 2011. This shortage has been a major contributor to multiple issues, affecting power generation, foreign currency reserves, and profitability of local factories.
In 2016 alone, Egypt imported 458.7 thousand barrels per day, in comparison to 289.6 thousand barrels in 2014, a jump that represents 58.4%, according to an OPEC annual statistical Bulletin. Similarly, Egypt’s production of natural gas has reached 44,328 cubic meters per day in 2015, falling from 61,260 cubic meters per day in 2011.
Yet, one of the crucial rises remains in the sharp increase in demand.
The Shortage
Egypt has been witnessing a drastic shortage since the revolution of 25 January 2011. The socioeconomic turmoil the country has been dealing with ever since has curbed its efforts to expand its generation capacity to the targeted 30 gigawatts (GW) by 2030, according to a report released by Egypt Oil and Gas.
Despite promising reserves, several factors curbed Egypt from self-sufficiency. The several discoveries of gas fields in the Mediterranean region, such as Zohr, are very expensive to explore and produce from, and usually take years before the come online.
In 2012, Egypt suffered from continuous power outages and Egypt’s Prime Minister Hesham Kandil announced at the time that the state is going through an acute energy crisis. Egypt was producing around 23,000 to 24,000 megawatts (MW) of power, below its capacity of 28,000 MW, according to media reports.
Multiple media report suggested that by the end of May 2015 that the Egyptian gas company was going to cut its supply to 60% of factories with heavy consumption. EGAS and the Egyptian General Petroleum Corporation (EGPC) announced at the time that they will allow private companies to use the grid of state-owned national gas to import and transfer natural gas.
In November 2015, officials at EGAS announced that the heavy industry will be provided with its needs from natural gas. Additionally, Egypt’s president Abdel Fattah Al-Sisi had stated at the time that the shortage of gas for companies will soon be coming to an end, Reuters reported.
The government, as well, raised the price of natural gas sold to factories late 2016 as the country floated its currency against the foreign currencies, as reported by Daily News Egypt.
The Dilemma of Factories
In a report released by the Petroleum Ministry, Egypt was directing 80% of its natural gas supply towards the generation of electricity; this meant that energy intensive factories were receiving far less energy than they needed. The government had decided to cut supplies to factories in order to address the power supply.
In 2015, the majority of reinforcing steel and fertilizer plants in Egypt had to suspend their operation as a result of the natural gas shortage.
The Abu Qir’s Fertilizers Company had to halt one of its three chemical plants and the two remaining were operating on a 60% capacity.
In an interview with the privately owned Egypt Independent, Gamal Al-Garhy, Head of the Metallurgical Industries Division of the Federation of Egyptian Industries said that the shortage of gas has resulted in factories losing millions, stating that his Suez Steel company lost about EGP 200 million monthly.
Citing Al-Garhy, Egypt Oil and Gas reported that in 2016, Steel Company of Solb Misr announced losses of about $64 million.
In the first quarter of 2016, Ezz steel reported a loss that amounted to EGP 137 million. The company stated that the main reason was the insufficient gas supply, Egypt Oil and Gas highlighted in a report.
Citing Mohamed Hanafi, Manager of the Chamber of Metal Industries at the Industrial Development Authority commented to the state-owned Al-Ahram that the cut of natural gas supply to factories led to their loss to hundreds of millions.
Repercussions on Investments
The energy crisis that hit Egypt has had a severe effect on the investments injected into the country.
Energy officials told Reuters that lack of reforms and inadequate fuel subsidy system are pushing private investors away who could boost the gas output.
In September 2015, two Kuwaiti companies suspended their investments that amounted to $ 5 billion after Egypt had suspended its natural gas supply to fertilizers’ factories.
Ahmed Al-Droubi, coordinator of the Egyptians against Coal previously told Al-Aham weekly that cement companies that are mostly owned by foreign investors threatened to withdraw their investments from Egypt due to the shortage of gas supplies.
It continued that no investor would want to pay for electricity generation that is sold for way less that what it actually costs. Al-Garhy stated at the time that the loss occurred due to operating at only 25% of its capacity for eight months in 2015.
Egypt’s New Gas regulatory Authority (GRA)
Late 2015, Egypt’s Minister of Oil, Tarek El Molla, announced that a new authority for natural gas market will be established before the end of 2017, according to Daily News Egypt.
During an economic conference that was held in Cairo, El Molla said that the new gas law and regulations that will allow companies to import gas and this liberalisation process is forecasted to prevent monopolies.
Professor of economics at the Université de Sherbrooke Anastassios Gentzoglaniz said that the liberalizing of the gas sector will aid in its efficiency and competitiveness, according to Daily News Egypt. He further added that the independency of the new regulator will assure the investors that there will be no policy reversal.
The new authority will further be responsible for monitoring tariff use, distribution and storage of gas, as explained in a statement by to EGAS. It will also be in charge of issuing licenses for gas activities and act as arbitrator in disputes that may occur between parties in natural gas market, among several other duties. The new tariff charges are yet to be decided.
As a thoroughly independent authority, the GRA will be neutral party to oversee the private sector in regard to its role to import gas for factories.
Outlook
El Molla stated in May that Egypt is set to achieve self-sufficiency of natural gas by the end of 2018.
The minister went on to say that Egypt will be transformed into a regional trade hub following the issuance of the new liberalization law that will open the sector of natural gas to private investors.
In a recent shift following the discovery of several fields, Eni and BP announced that they will our investments into Egypt more than anywhere else, Bloomberg reported.
During his interview with Daily News Egypt, El Molla seemed optimistic regarding the future of natural gas in Egypt. He said that foreign investments are set to increase after the government had paid them part of the arrears and promised to pay the rest.
El Molla further spoke about the new investments injected in Egypt’s Western Desert to extract oil. He stated that Egypt will achieve a surplus by 2020.
All in all, the liberalization of the gas sector is forecasted to boost the average economic performance, particularly in light of the multiple recent mega discoveries; however, the reality of the burden of factories sorting their own needs of energy and the impact of the cost difference will only be clearly forecasted in the coming year.
By Toqa Ezzeldin
