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Saturday, December 29, 2012
Turning to gas imports will weigh on Egyptian budget

Turning to gas imports will weigh on Egypt’s budget
Sherif Zaazaa Egypt Independent Thu, 27/12/2012 - 21:21

Egypt will start importing natural gas for the first time due to rising
local demand that is now outstripping supply, and the shift is expected to
further burden an already strained budget deficit.

In an unprecedented move, the Petroleum Ministry announced in the Official
Gazette that Egypt has changed from a gas-exporting to a gas-importing
country, effective 17 December.

Oil Minister Osama Kamal had said on 26 November that the country would
start importing gas by May 2013 via a liquefied natural gas (LNG) terminal.
The capacity of the project is to supply from 1 billion to 1.5 billion cubic
meters of natural gas daily.

Egypt’s gas supply deficit is expected to reach 3.7 billion cubic feet by
2018, as daily consumption is predicted to jump to 25 million cubic feet by

The Egyptian Gas Holding Company (EGAS) recently issued a tender offer to
establish the LNG terminal along the coast of either the Mediterranean or
Red Sea, depending on feasibility and evaluation criteria. The cost of the
project is yet to be announced.

Egyptian private equity firm Citadel Capital has shown interest in tendering
for the project through a joint venture with Qatari investors managed by
investment bank QInvest, which will hold a 51 percent interest.

“The joint venture will import LNG, regasify it at the FSRU [floating LNG
storage and regasification unit], transmit it through the Egyptian national
natural gas grid and market the natural gas to local high-volume end-users,”
Citadel Capital said in a statement.

The shift in Egypt’s gas trade is expected to increase the nation’s
financial defecit, experts say, at a time when replenishing foreign reserves
is critical.

To meet its export obligation, Egypt will look to imports from Algeria,
according to Prime Minister Hesham Qandil.

Petroleum expert Medhat Youssef previously told Al-Masry Al-Youm that Egypt
would also import gas from international companies in Qatar, not the Qatari
government. The import price is expected to reach US$14 per 1 million
thermal units, whereas the government sells gas to factories for no more
than $4.

Royal Dutch Shell, the world’s biggest provider of LNG, has begun studying
how to supply Egypt, Bloomberg reported.

Egypt and Algeria have reportedly signed a contract at a price of $11 per
million British thermal units (mbtu), and imports should commence at the
start of the year, according to a source in the energy sector who spoke on
condition of anonymity.

Based on figures from Bloomberg, the cost of importing 1 billion cubic feet
a day would amount to $3.65 billion annually.

Economists consider the drastic change in Egypt’s natural gas trade policy
alarming, since the country used to export one quarter of its local gas
production. The lack of export earnings will weigh on the country’s swiftly
depleting foreign reserves, and in turn further impinge on the Egyptian

Since the onset of the 25 January uprising, the pound has dropped more than
5.4 percent, recently hitting eight year lows — the lowest level since
floating the currency in 2003. In that time, reserves have slid to just
above $15 billion, from $36 billion in 2010.

Rising local demand

Exports of natural gas rose 2.9 percent to $1.96 billion in the fiscal year
ending in June, reported Bloomberg citing central bank data.

But in October, Egypt was forced to limit LNG exports to Jordan and Spain as
it prioritized local distribution for gas consumption to avoid reoccurring
power cuts throughout the country, which were most frequent in the summer

Egypt currently pumps only 70 million cubic feet of gas per day to Jordan,
less than a third of the 240 million cubic feet per day specified in a 2004
agreement. The anonymous source says the governments are in talks to
renegotiate the contract.

Foreign gas companies operating in Egypt have faced similar problems,
pursuing alternative sources to fulfill their LNG delivery contracts.

Mark Todd, external communications manager at BG Group, explained in an
email that production would be less in 2013 from its West Delta Deep Marina
project in comparison to the previous year.

However, he said, "BG Group has a flexible global LNG portfolio with
multiple sources of supply [if needed]. Our focus is on further development
phases of West Delta Deep Marine and exploration opportunities."

Egypt is one of BG group's largest gas producers.

Dana Gas reported a fall in a production in a press release last month,
while Apache Corp. refused to comment on the matter.

The real financial strain on the Egyptian government will come from the new
LNG import contracts, according to Omar Hosny, an advisor on renewable
energy and energy efficiency.

"International drilling companies allocate half of their extraction for free
to the Ministry of Petroleum, while the other half is sold to the government
in a range of $3-5 per mbtu," he said.

LNG imports will stand above $10 per mbtu, almost doubling the fiscal strain
on the Ministry of Finance to subsidize local demand for energy.

While both the petroleum and electricity ministries have been bearing the
subsidy on their records, the price hike in natural gas created a conflict
as to which will bear the additional expense, Hosny said.

"With the ongoing conflict between government entities, the financial losses
incurred by Egyptian General Petroleum Corporation (EGPC) and Ministry of
Electricity, and lack of an adequate power grid … we should anticipate far
worse blackouts the coming year. The old mechanisms are no longer
sustainable," he adds.

Egypt has been under pressure to curb energy subsidies for years, but more
so recently in the process of negotiating for a $4.8 billion International
Monetary Fund loan. It has already lifted subsidies on 95-octane gasoline.
It is also considering alternative distribution methods for butane
cylinders, and may link the butane subsidy to ration cards.

Demand side management

Egyptian households consume most of energy sector subsidies, as the country
utilizes 55 percent of its natural gas to generate electricity.

The price is subsidized twice, once when sold from the Ministry of Petroleum
to the Ministry of Electricity at $1 per mbtu, and later — depending on
consumption quota — when sold to the end user.

The Ministry of Finance expends the majority of its subsidies on energy.
However, experts believe the subsidy system can no longer be maintained,
especially if the government is no longer self-sufficient in its energy

Earlier this week, the Egyptian Electricity Regulatory Agency received
approval to implement a Net Metering System, used for integrating solar
panel energy with the electrical grid of households, where the amount of
energy generated is deducted from electricity consumption.

"The solution to minimize the effects of power cuts is demand side
management, and pushing for alternative energy sources as a way to reduce
the burden of energy subsidies,” Hosny says.

"It's called converting bad subsidies to good subsidies. Wind energy is very
feasible in Egypt, the resource is free and doesn't rely on international
prices of commodities. But the government needs to project a different
attitude in utilizing its resources.”

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