Who Can Meet Egypt’s Energy Needs?

Big 5

As a tumultuous summer grinds to a close, Egypt is still struggling to close the gap meets its daunting energy needs without further strain to its economy or the patience of the general public. Under new leadership, Cairo has looked at home and abroad for some energy relief, but found that political realities often make certain options impossible.

In addition to the unnerving task of meeting the needs of the region’s most populous country, Cairo has struggled to keep energy prices manageable while coping with a sharp decline in foreign investment and domestic production, all while drawing down an unsustainable public subsidy program.

This summer, the notion of addressing energy shortages through a reversal of gas trade agreements with Israel become a possibility with reports of a new agreement. In June, production partners in Israel’s Leviathan offshore gas field has signed a non-binding agreement with the BG Group to export gas from a “floating production, storage and offloading [vessel]” and connected to an LNG facility through a subsea pipeline.

For BG, a link to the field’s estimated 18 trillion cubic feet of gas would help ease pressure from the significant drop in gas output from Egyptian projects that has occurred over the last three years. The letter of intent comes shortly after a similar deal was struck to export 2.5 trillion cubic feet of gas over 15 years from Israel’s Tamar field through the Damietta LNG plant in Egypt, which is operated by Union Fenosa Gas. According to the project planning, much of the gas would likely move on to other markets, though Cairo appeared insistent that some would have to be set aside to address domestic demand.

However, last week it appeared that the new government would nix any possible imports from Israel. According to Egyptian state media, President Abdel Fattah al-Sisi said that Egypt would not pursue any import or export agreements with Israel.

In the three years, the possibility of buying Israeli gas has become a political land mine as critics were quick to cite 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 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, the possibility of a revived trade agreement has been a difficult policy to sell. Earlier this year, Sherif El Diwany, Executive Director of the Egyptian Center for Economic Studies in Cairo suggested that Isreali imports would be especially difficult be that purchasing gas 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.

On the domestic front, Egypt has launched a series of local efforts to recover the decline in production that followed the disruption of the Arab Spring. 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, necessary cooperation from foreign firms has been made difficult by the country’s struggle to draw down its substantial energy sector debt to international importers.

This week, Cairo did receive some positive news with reports that production had begun at the Denise-Karawan offshore gas project, which is operated by Italy’s Eni. According to an Oil and Gas Journal report, the project will include five subsea wells, production systems and marine pipelines towards a peak production of 6.5 million cubic meters a day, which it is expected to reach in early 2015.

Source: Forbes