Buoyed up by revenues from the expanding export LNG trade, Egypt’s government still faces a daunting challenge as it seeks to further reform the economy while also meeting rising development costs and local demand. Cuts to Egypt’s lavish subsidy regime are expected, but bringing rationality to the domestic fuel sector remains a thorny political issue, writes Nadine Marroushi, recently in Cairo.

First the good news: the irresistible rise of the Egyptian liquefied natural gas trade looks set to continue for the next few years at least, as international oil companies deliver up new and already proven gas reserves to feed expanding LNG plants on the Mediterranean coast.
Ever loquacious Petroleum Minister Sameh Fahmy told last month’s Intergas conference held in Cairo that “we are confident Egypt will build at least two more LNG trains in the next three to four years.”
The recently signed framework agreement between BP Egypt and Italy’s Ente Nazionale Idrocarburi (Eni) is intended to supply a second train at the Damietta complex, fed by significant finds from BP’s Raven field, described by the partners as Egypt’s largest gas find.
BP is operator with 60%; Germany’s RWE Dea holds 40% of the field, which is estimated to have 4trn ft3 of gas reserves, which Egyptian authorities have approved for export. BP says the aim is to deliver natural gas to the plant by 2008.
Securing reserves remains a critical issue, despite the bullish language emanating from Egypt’s LNG community. Wood Mackenzie’s North Africa analyst Ross Millan told African Energy that “for the second LNG train to go ahead they still need to prove they have enough gas to supply the train.”

Expanding existing units

The second train will have capacity to produce around 5m t/yr for 20 years, doubling the Damietta facility’s capacity.
The first 5m-t/yr Damietta train came on stream in 2004, to supply the Spanish market, as a joint venture between Spain’s Unión Fenosa and Eni, who together hold an 80% stake through Spanish Egyptian Gas Company (Segas). State-owned Egyptian Natural Gas Holding Company (Egas) and Egyptian General Petroleum Corporation (EGPC) each hold 10%.
The UK’s BG Group, another big winner in the race to develop LNG capacity in Egypt, is also planning expansion. According to BG Egypt president Ian Hewitt, a third LNG train will be added to the Idku facility by 2010; the company plans to invest an additional $3bn in Egypt by then. The new train is thought to have a capacity for just under 4m t/yr of LNG. The Idku site has space for up to six liquefaction trains.
Idku’s first two trains are owned by Egyptian LNG Holding (ELNGH), in which BG and Malaysia’s Petronas each hold a 35.5% stake, EGPC and Egas have 12% each and Gaz de France (GdF) 5%.
The 3.6m t/yr train one started up in May 2005, exporting under an offtake agreement with GdF. Train two – also 3.6m t/yr – commenced in September 2005, with an offtake agreement with BG Gas Marketing, for sale into the US and Italian markets.
According to BG North America’s head of LNG strategy Andrew Walker, who played an integral role in founding ELNGH, the Egyptian export LNG industry is forecast to grow by 11%/yr in the 2001-2015 period, and during the peak 2010-15 period, the industry will grow by 13%/yr, “due to the emergence of new markets, such as the US and Europe.” He added: “the US has been the largest import market in the last ten years.”

Others want to follow

Other IOCs would like to follow the Damietta and Idku partners’ example, but have so far been stymied by lack of adequate reserves or the contractual need to commit them to domestic projects, which have been rendered unattractive for lack of a genuine market economy (AE 88/5).
Royal Dutch Shell harbours export LNG ambitions – to complement its efforts to get a major scheme off the ground in neighbouring Libya – but remains a domestic supplier. According to WoodMac’s Millan, Shell “could get involved in LNG if they find sufficient volumes of gas in their [North-East Mediterranean Deep Water] Nemed acreage.”
Industry sources told African Energy it was very early days for Shell, since it is estimated to have only found around 1trn-2trn ft3 of gas in Nemed, and would need a lot more to make it commercially viable.
Shell’s country chairman Zainul Rahman says the company’s main objective remains to get over the technological hurdle of drilling offshore in such depths.
Other companies are also focusing on the offshore Nile deep water, as reserves in the Gulf of Suez and Western Desert run down (AE 114/6).

Mixed signals

Market analysts canvassed by African Energy had mixed views on the question of whether Egypt’s export plans were sustainable, given expected reserves levels and the difficulty of supplying the local market.
Shell’s Rahman said that, at current production levels, meeting local consumption was “tight”.
However, WoodMac’s Millan remains confident. “Egas won’t sanction export projects until the domestic demand has been met,” he said: “Since all LNG projects are long-term contracts of around 20 years they must have the gas reserves in place to get the project off the ground. So there is no threat from gas supply in the short term.”
OMV’s regional exploration manager John Austin told African Energy: “Egypt certainly has the gas reserves to meet local demand, even with gas reserves already discovered. The issue is getting it to the right place at the right time, which is key to gas development.”
BP Egypt’s chairman Hesham Mekawi told the annual Intergas conference, organised by CWC Associates, “Egypt’s LNG success will not only lie in having the supplies, but in the pace and efficiency at which it is developed.”
According to Egas, gas production is running at around 6bn ft3/day, while known reserves are just under 70trn ft3. Millan said that Wood Mackenzie’s estimate of Egypt’s reserves was “not far off” this number.
Cairo-based investment bank EFG Hermes’ economy and energy analyst Amal Enan was more cautious in her outlook. She told African Energy: “the tightness in supplying the local market is because Egypt has entered into long-term export contracts. Egypt is increasing production, but most of it is going to external markets, and very little is catering for local demand.” She added: “future gas supply is dependent on new discoveries.”

The thorny question of pricing

Gas pricing remains one of the most sensitive topics, and critical variables, in Egypt’s energy sector – hence the above-average attention paid to a new gas price agreement between RWE, BP and EGPC (AE 114/16).
During research conducted in Egypt, Europe and Washington, African Energy canvassed a range of senior industry and policy-making sources; there was consensus on the view that something must be done, but quite what and at what pace remains an imponderable.
Egyptian authorities agree with IOCs that gas prices need to be raised, and fuel subsidies cut, to meet rising development costs. However, viewed from the long, often silent corridors of the Egyptian bureaucracy, this would need to be done on a gradual basis, since shocking the economy with a major price hike would only worsen inflation.
According to EFG, “although two rounds of price hikes since 2004 represent a significant jump in the prices of most energy products, we believe the sale price of these items is still significantly below cost price, especially for gasoline and natural gas. Estimates of the price rises needed to achieve break-even are approximately 100% for gasoline and 25% for natural gas.”
From an IOC perspective, RWE Dea’s exploration manager Eric Karlstrom told African Energy: “the idea for increasing gas prices is accepted by everyone. Since costs for development are rising, due to inflation, operators need a higher price to make a return on their investment.” He added: “the new gas price agreement will allow things to move faster.”
Most Egyptians are less concerned with gas development costs, and more concerned with daily living requirements. According to one acute local observer: “the government has been removing subsidies almost by stealth, and usually keeping a cheaper alternative, which disappears after a while. They would be reluctant to shock people with a big rise in prices.”
State-owned daily newspaper Al-Ahram’s economy correspondent Salwa Mohammed observed that “rising costs are frustrating a lot of people… salaries here are not that big, and every time salaries are increased this is eaten away by equivalent increases in food prices and petrol.”
Within the industry, BP’s new gas price agreement was broadly seen as a positive step that could encourage further offshore development. But industry sources said that EGPC and Egas would need to be careful how they moved forward with price agreements, since other companies would be pushing for the same deal.
An energy consultant who declined to be named said that “any contracts that are already on stream certainly won’t get changed, but if you’ve got gas which hasn’t been developed yet, then you’re in a stronger position to ask for a higher price.”
BP’s new gas price agreement with EGPC is awaiting parliament’s final seal of approval. This was due at the end of May, but nothing had been voted as African Energy went to press.
The energy consultant said: “it may take some time for the BP price agreement to get the final approval as it goes through government bureaucracy, but there is no danger of it not happening.”

EGYPT: Natural gas industry development and major IOCs’ projects

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