Egypt’s Power Crisis Worsened By Declining Natural Gas Production

Egyptians are girding themselves for a long, hot summer with electricity outages hitting every part of the country. As the temperature goes up, so will usage of millions of air-conditioning units, piling additional pressure on an already stretched power system.

The political turmoil of the past two years has disrupted the expansion of Egypt’s electricity generation capacity, causing it to lag behind rising demand. This year, the power shortfall has been exacerbated by declining natural gas production and a foreign currency crisis which has restricted the government’s ability to pay for fuel, whether imported or produced locally by international oil companies.

 

Some short-term relief is in the offing: Qatar has pledged gas supplies under a swap deal and Libya will provide oil shipments on easy terms. The blackouts, officials say, will not be as severe as they might have been.

But any respite will still be temporary. Oil executives, business, and analysts say Egypt needs a radical rethink of its energy policy, including its hefty fuel subsidies, if it is to be able to face its economic challenges. They also warn that the county’s political and economic woes are casting a shadow over longer-term prospects for finding and bringing on stream natural gas supplies.

“We have to have a 20-year plan, not a three-year one,” says a senior manager of an industrial company which is suffering from damaging shortfalls in natural gas supplies to its fertiliser plant. “How many gas swap deals can Qatar do on our behalf? What about next summer and the one after? If I am an investor coming to look at Egypt, there is no energy plan that I can read.”

Hardly a few years after Egypt emerged as an exporter of piped natural gas and liquefied natural gas, the country now needs to import gas for domestic use. The government has tendered for LNG imports, but results have not come out, and the process is taking longer than originally forecast when it was first announced last year.

Egypt’s natural gas exports have dwindled because of falling production from gasfields as well as soaring local consumption. One LNG facility which supplied the Spanish utility Unión Fenosa has been mothballed because its gas supply has been diverted to domestic use. The country’s other LNG facility operated by BG has faced a drop in feedstock due to technical issues at the company’s offshore gasfield. It is not expected to see an increase in output before 2014.

But Egypt’s huge energy subsidy bill is also a big part of the problem, industry insiders say. In the financial year to end this June, the country will have spent $17.4bn, or more than 20 per cent of state expenditure, on subsidising fuel.

The government has started trimming some subsidies and says it will make further reductions as part of a reform programme to secure a stalled $4.8bn loan from the International Monetary Fund. However, there is still no clarity on the savings or the timetable for implementing the cuts. Observers say that fears of provoking social unrest ahead of elections later this year are likely to limit and delay the price increases.

 

Some electricity prices have gone up and the authorities are charging more for natural gas supplies to energy-intensive industries. Subsidies to industry are to be completely phased out by 2016.

Ahmed Heikal, the chairman of Citadel Capital, a private equity group which is part of a consortium bidding to import and regasify LNG, said the government was “to be commended” for raising the price of gas to industry to $6 per million British Thermal Units.

“When you start importing gas, it will reverberate throughout the system and it will mean higher gas prices and higher electricity prices,” says Mr Heikal.

Egypt’s widening budget deficit at almost 11.5 per cent of gross domestic product, he says, places it in a “race against time” to rein in spending on energy.

The ballooning deficit in addition to dwindling foreign currency reserves have also curtailed the government’s ability to pay international oil companies working in the country. Industry insiders say arrears are in the order of $6bn to $8bn and that some companies have had to accept payment in Egyptian pounds.

Some predict that the backlog of debt coupled with the political uncertainty will dissuade big companies from committing to new long-term programmes of deep water exploration.

“People are inhibited from investing in Egypt because of the political situation, not specifically because of the receivables,” says an international oil executive. “But the receivables are a big element of that [uncertainty].”

Last month Egypt awarded eight licences in an oil and gas bidding round which will require a minimum investment of $1.2bn. The round was “undersubscribed” but “successful”, according to another western oil executive. He described the bids as “relatively modest” compared with previous rounds.

But one positive sign, he said, was the willingness of the government to negotiate higher prices to companies for offshore oil.

“The capital costs on almost anything now have risen so much that companies need to make choices,” he says. “The overall situation [in Egypt] does not help when you talk about expensive and long-term developments, so some big companies can decide to wait it out.”

Financial Times