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A Hard Balancing Act for Egypt’s Gas Market

A Hard Balancing Act for Egypt’s Gas MarketThe new gas market law regulates the entire gas chain and targets liberalizing the gas market by 2022. The Egyptian government has struggled to manage and restructure its energy sector as a result of rapid domestic demand growth, particularly in natural gas

The new gas market law regulates the entire gas chain and targets liberalizing the gas market by 2022. The Egyptian government has struggled to manage and restructure its energy sector as a result of rapid domestic demand growth, particularly in natural gas. The government’s best efforts to reform the natural gas market over the past ten years has seen much-reduced gas demand growth, but nonetheless, subsidized natural gas prices are still pushing demand growth far beyond expectations. As part of a solution, the Egyptian government aimed at maintaining a balanced gas market through initiating a number of reforms both to control gas demand as well as to avoid any unpleasant gas supply deficit cycles in the future.

After the 2011 Revolution, the Egyptian government realized that the country’s natural gas sector would become unbalanced with greater domestic demand and with sharp declines in domestic gas production. Although the government had prioritized bringing in extra gas supplies to the domestic gas market in the short term by importing additional LNG, it realized this initiative would only be a temporary solution. Therefore, to unlock the long-term, dormant domestic production and boost upstream gas development, the government launched a new roadmap.

Following the shift in the Egyptian government’s decision to revitalize domestic gas production, it signed approximately 80 oil and gas production agreements with various companies around the world. To facilitate fact-track gas supplies, in 2015, the government’s initiative paid off when Italian Eni discovered the supergiant Zohr Prospect in the deep waters of the Egyptian offshore Mediterranean. The Zohr field is reported to possibly hold over 30 trillion cubic feet of gas and the field’s maximum production was expected to reach as high as 2.7 billion cubic feet per day.

Other newly found upstream projects, such as the Greater Nooros concession in the West Nile Delta and the Atoll offshore field, are both indicators of the great investor potential of Egypt’s energy sector. The Ministry of Petroleum and Mineral Resources recently announced that in the next five years, another 11 gas projects worth over US$2.7 billion would be implemented. Some of these projects include Salamat, North Tort, Merit, Aten, and Salmon among others. Although details on these projects have not been made public, the Ministry stated that when these projects become operational, a total of 1.3 billion cubic feet of gas would be produced by the end of the 2020’s. And once this happens, Egypt’s natural gas demand could be met while surplus gas supplies could be exported to neighboring countries.

Currently, the Ministry of Energy and the Natural Gas Holding Company (EGAS) are responsible for running and managing the oil and gas industry. These institutions came up with an Oil and Gas Sector Modernization Project in 2017 to design and regulate a new transformative program with the aim of initiating an improved oil and gas sector to boost the Egyptian economy and create a new model for other sectors to follow suit. The program aimed at promoting Egypt as a regional natural gas hub and supported the country’s upstream performance by optimizing capital development and initiating structural reform.

It is too early to analyze the project’s outcome. The modernization project, which is supported by the World Bank and European Bank for Reconstruction and Development, once proven successful, would help Egypt cut its fiscal deficit, attract more global energy investments, and create a well-functioning oil and gas sector that could benefit other similar sectors in the country. Among the major improvements and reform, investors have welcomed a new law to regulate the midstream and downstream gas market. The new gas market law regulates the entire gas chain and targets liberalizing the gas market by 2022. By mimicking other well-advanced gas markets in the West, the Egyptian government would be prepared for a fully functioning gas market, however, given the hardships endured in many fully liberalized gas markets, this process could well be harder than planned.

The critical set of reforms undertaken with the new law would strengthen Egypt’s gas market over the targeted timeframe by attracting more investment and creating a role model for other sectors, but the challenges ahead for a liberalized gas market, especially under a subsidized gas market, promises to be difficult. Back in the 1970’s and the 1980’s, it was much easier and more manageable for the government to subsidize the gas sector since the volumes consumed were much lower than at present. However, with the discovery of new production fields, the demand for natural gas exploded and reached a level that was unsustainable for the government to continue.

Unless plans for a full unbundling and phasing out of gas market subsidies are scheduled, achieving a fully functioning gas market will never be able to go beyond theoretical promises. Therefore, strong and bold action is called for if the state no longer wishes to carry the financial burden of heavy subsidies.The enactment of the new law is a great sign of the government’s desire to remove any impediments to a fully functioning gas market that is able to meet domestic market demand while potentially strengthening the government’s hand in natural gas exports to its neighbors.

Currently, fossil fuels continue to meet approximately 95 percent of Egypt’s primary energy consumption. Demand projections suggest that gas demand will continue to increase in the years ahead. It is clear that fiscal sustainability with a more balanced and fully functioning gas market is of urgent need for Egypt to continue to supply the burgeoning domestic market. New regulations and projects are a sign of progress in meeting the future demands of the domestic market, however, it is only through addressing the complex issues of phasing out subsidies and unbundling the market will Egypt move forward from merely an importer country to a regional hub.

By Ersin Merdan

The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University.

IENE EVENTS Energy & Development 2018

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