News Column

Egypt Moves On Energy Reform From The Ground Up

July 29, 2014

Forbes



This week, the World Bank announced the approval of a $500 million loan to Egypt to assist in a program that would allow households to switch from costly liquified petroleum gas or propane for home use to a link to a more affordable national gas grid. Meant to allow more access to affordable gas options instead of heavily subsidized propane, the Egypt Household Natural Gas Connection Project is expected to save the government $301.5m annually in subsidies, according to The World Bank.

While only a fraction of the planned $6 billion reduction in the country's energy subsidy bill, the new program is part of a wide ranging effort to finally address the country's energy crisis. The region's most populous country at 85 million has long faced challenges in meeting domestic demand; however, the energy environment has worsened in recent years as local gas production has fallen amid political and economic uncertainty.

Once a natural gas exporter to countries across the world, Egypt has been forced to reserve its reduced output for domestic demand and increasingly seek costly imports. The country's energy sector has racked up $6 billion in debt to foreign energy firms like the United Kingdom'sBG Group, an amount the government has had difficulty paying down. Over the last two years, Cairo has sought out new, more dependable import options, though political and stability obstacles remain. Earlier this week, Egypt held talks with Algeria to import "five cargoes containing 145,000 cubic meters of LNG each before the end of the year", though the price offered by Algiers remains higher than hoped for.

At home, the country's new leadership has spent its first two months in office announcing a series of reforms aimed at drawing down sector debt, while reducing the country's heavy obligation to fuel subsidies. 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.

Earlier this month, President Abdel Fattah Al Sisi announced an increase in fuel prices, aimed at older and industrial vehicles. According to a Wall Street Journal report, the cost for 80-octane gasoline would increase by 78%, diesel by 64% and 92-octane by 40%.

In addition to calling for some shared sacrifice when it came to paying more for fuel and electricity, Cairo has also announced plans to boost domestic gas production by 500 million cubic a day by the end of the year once a series of fields come back online. To achieve this and continue a full production recovery, Cairo will have to work to regain confidence among foreign firms who expressed concern about the country's political stability.

Earlier this year, 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.


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Source: UMCI News


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