Can al-Sisi Fix Egypt’s Energy Mess?

The list of challenges facing Egypt’s new president is seemingly endless, from restoring some sense of political stability to rebuilding an economy that has struggled to stay afloat for the last three years. However, few carry the weight and consequence of addressing the country’s fragile energy situation. Facing billions in debt to foreign oil and gas firms, dwindling local production and an unsustainable rule subsidy system, al-Sisi  has to act fast or risk of having his administration undercut by yet another burst of public frustration. For a country looking to its third national leader in four years, this is a very real possibility.

Egypt has a long history of energy challenges, though they have grown especially daunting over the last three years. With the collapse of the long-standing government of Hosni Mubarak, the country of over 80 million found itself economically isolated, which served to reduce its foreign reserves and with it, the ability to keep up payments to oil and gas importers. Despite official efforts to draw down debts to foreign firms, Cairo still owes about $5.9 billion, with most owed to BG and BP. At the same time, the country’s domestic production has continued to slow, a situation made worse by a series of attacks on eastbound gas pipelines to buyers in Israel and Jordan, further reducing needed energy sector revenue.

All of this would difficult, but likely manageable if not for Egypt’s fuel subsidy program. According to Sherif El Diwany, Executive Director of the Egyptian Center for Economic Studies in Cairo, government subsidies currently make up about one-third of the government’s current budget and 75% of that amount is set aside for energy sector subsidies. Despite calls for reform both domestically and internationally, reducing that support system has been especially difficult.

Cairo has recently taken steps to reverse the energy industry’s fortunes by promoting new exploration efforts. A few days before the new year, the Egyptian government announced plans to auction 22 oil and gas concessions through this month. Promoted by Egypt’s General Petroleum Corporation and Natural Gas Holding Company, the concessions are spread across the country, including opportunities in the “Suez Canal, Egypt’s western desert, the Mediterranean sea and the Nile Delta”. However, just as Cairo promises steps forward for new industry efforts, some foreign firms have suggested that they may be headed for the door. Notably, in January the UK’s BG Group announced that they would be forced to break production contracts with customers and lenders and would enforce force majeure in Egypt due to a reduction in output in the company’s largest area of activity. The reduction, about 15 percent over the last year for the UK’s second largest producer behind BP, was the result of Cairo’s demand that gas output be shifted to meet domestic demand rather than allowing exports.

al-Sisi ’S Turn

With so much at stake, the pressure is on for the al-Sisi  government to act fast and implement reform where others, including former president Mohamed Morsi, failed. However, even after a strong electoral showing, the new administration in Cairo could find actual energy progress hard to come by.

Despite an obvious need to reduce government spending and chip away at the country’s fuel subsidies, actual reform will run up against a host of challenges beginning with public support for a program that affects even the poorest among Egypt’s citizens. Even if al-Sisi  were able to sway public opinion towards the need for such reform, he will then likely face a push-back from distributors and government officials who have long benefited from subsidized fuel sold on the black market.

“If it’s lasted this long, there are likely beneficiaries higher up in the government,” El Diwany said. “It’s not just station owners. They’re very organized and very vocal and if need be, they can create unrest in the streets.”

Despite those challenges, Eric Trager, a Senior Fellow at the Washington Institute for Near East Policy, subsidy reform is not just necessary for reducing spending, but could serve as a way for al-Sisi  to build stronger ties with Egypt’s business sector and ensuring needed stability.

“There’s a growing consensus that energy subsidies are wasteful and drive away investment,” Trager said late last week. “Fuel subsidies are extremely costly and constantly put government foreign reserves under pressure, making it harder to subsidize staple items and avoid an unstable political or economic environment.”

That stability will likely be key to not only retaining public support for new government programs, but also appealing to existing and prospective investors to boost domestic oil and gas production. As for drawing down the country’s nearly $6 billion in energy sector debt, El Diwany suggested that the al-Sisi  government were in a more favorable position than their predecessors thanks to stronger ties to potential lenders in the Gulf, including Saudi Arabia, the United Arab Emirates and Kuwait.

“These guys know that it’s important the Egypt can deliver prosperity for their people so we don’t end up in a mess again,” El Diwany said. Replacing support from Qatar, who had aligned themselves with the Morsi government, these Gulf states have contributed billions in aid over the last several months. Still, Trager warned that it was too early to tell how the al-Sisi  government would be received and which potential donors would actually show up.

“We’re talking about a country where there are a whole lot of wild cards,” Trager said.

Even if al-Sisi  is able to introduce plans to address Egypt’s subsidies, domestic production and energy sector debt, he will still have to deal with the politically prickly issue of purchasing gas the Eastern Mediterranean’s newest energy actor, Israel.

Over the last three years, Israel’s access to significant reserves of offshore natural gas has helped establish the country as a viable producer for much of the region. However, the possibility of buying Israeli gas has become a political land mine as critics are quick to cite recent investigations that allege years of selling Egyptian gas to Israel for far less than market prices. Revealed in the weeks after the collapse of the Mubarak government, the allegations included payments to Mubarak government officials in exchange for low cost gas, including a now-cancelled 20-year agreement.

Coupled with ongoing tension between the governments of the two countries, the recent memory of these agreements and lost revenue that resulted from them, might be too much for al-Sisi to overlook, according to El Diwany, adding that purchasing gas from Israel would likely cost far more than what Egypt had ever charged them.

“In a volatile political situation, its not wise to become dependent on Israel – al-Sisi  will not do it,” he said, suggesting import alternatives from Gulf producers instead.

Source: The Forbes