This month’s review features the Commercial International Bank’s (CIB) most recent report on the “Natural Gas Sector in Egypt”
The report begins with a global market brief revealing that the share of natural gas in world energy supply and demand is growing substantially. Natural gas accounts for 24% of world demand and in terms of supply, production is shown to have a growth rate of 28%.
While oil still dominates global energy demand with figures reaching 37%, gas has steadily climbed the demand ladder. Several factors have contributed to the rise of global natural gas demand including increasing oil prices and consumers’ desire for an environmentally-friendly source of energy.
When broken down regionally, Europe/Eurasia is the number one consumer of natural gas accounting for 41% of world consumption. This is undoubtedly due to their decreasing local production which reached a staggering 95% in 2004, leading other regions such as Africa and the Middle East to improve their positions as producers.
Within the Middle East, Egypt has answered the world’s call to increase natural gas demand. The CIB report offers a description of the natural gas sector in Egypt, highlighting the fact that as of 2004 it reported high proven reserves of 67 tcf and 120 tcf of probable reserves. In terms of domestic consumption, Egypt consumes just 1% of the world’s natural gas with consumption divided among several sectors. The sector utilizing the most natural gas in Egypt is power generation, recording 62% of total local consumption, followed by industry, and petroleum sector, each using 10%.
In Egypt, oil and gas rank as the fifth-largest contributor to total GDP. The country enjoys abundant gas resources and rising production levels. According to the report, overall investment in natural gas as of FY2003/2004 accounted for an estimated LE 4.5 billion. In fact, natural gas constitutes 6.1% of overall investment in economic activity. The significance of natural gas was further accentuated with the completion of the first phase of the Arab Gas Pipeline in 2003. More recently, Liquefied Natural Gas (LNG) exports were emphasized with the launch of SEGAS’s first LNG train in Damietta; the inaugural shipment took place in January 2005.
The report delves deeper into the inner workings of the natural gas industry in Egypt, which is regulated entirely by the Ministry of Petroleum. Natural gas is specifically controlled through four holding companies: the Egyptian General Petroleum Company (EGPC), the Egyptian Natural Gas Holding Company (EGAS), the Egyptian Petrochemicals Holding Company (ECHEM), and Ganoub El-Wadi Holding Company (Ganope).
The CIB analysis also examines growth drivers in the industry. It points out that the main reasons behind the increase in natural gas production are recent government policies which favor natural gas exploitation and consumption due to declining oil production and the need to utilize environmentally-friendly energy sources.
Regarding exports, the report discusses the launch of the first LNG shipments to the international market which took place in 2005. These exports were preceded by the launch of the first fully-operational LNG facility in the last quarter of 2004. Egypt’s second LNG facility, sold the export capacity of its first train to Gaz de France. The long-term deal, brokered with Gaz de France, is for a total of 20 years and carried a price tag of $1.1 billion.
The report then moves onto industry expansion, offering a brief history of Egypt’s activities in the sector. The first gas exploration efforts in Egypt commenced in 1963 with the signing of two agreements: one with the International Oil Company, and the second with Philips. The first discovery was in the Delta region in 1967, and discoveries have become more frequent with the advent of improved technology. In fact, from the period 1990-2004 more than 159 discoveries have been made.
With the rise of natural gas discoveries and, consequently, production, the Egyptian government sought to utilize the energy source for domestic as well as export purposes. To increase local consumption, a transmission and distribution infrastructure was developed. As of 2005, the National Gas Grid reached a length of 14,300 km to feed over 90% of electricity stations.
According to the report, in order to expand domestic consumption, Egypt began to commercialize natural gas as an alternative fuel for vehicles. This was done with the establishment of the Natural Gas Vehicles Company (NGVC) in September 1995.
The CIB report also addresses the legal developments that have been undertaken by the government of Egypt in order to facilitate and expand the exploration and production of natural gas in the country. Such measures include concession agreements which auction off concessions in bid rounds. For example, 2004 witnessed two bid rounds by EGPC and EGAS.
Another legal development is Production-Sharing Agreements (PSAs), which gives companies with natural gas discoveries development leases with a maximum period of 35 years. For example, the company forms a joint-venture with EGPC or EGAS and gives the holding company a share of production.
Custom exemptions are also another legal development created to facilitate gas discoveries and production. Parties of a concession agreement are exempted from custom duties for the equipment of contractors and subcontractors called upon for the operation.
The report then offers an industry assessment of the natural gas sector. The expansion of the sector is seen as inevitable. Utilizing a standard Strength, Weakness, Opportunities, and Threats (SWOT) analysis of the sector, the overall outlook for coming years is optimistic.
The strength of the sector is seen in the fact that there is a growing output which equates to an annual growth of 11% for reserves and 16% for production. There is rising consumption estimated as an annual growth rate of 15%. The report indicates that the increased involvement of international companies in the sector makes Egypt a great opportunity for foreign investment.
However, there are problems facing the sector as well. The price at which EGPC and EGAS purchase their gas has decreased; a most unwelcome move from the perspective of foreign companies. Also, at times, payment for gas purchased by EGPC and EGAS is delayed, once again, making foreign companies uncomfortable. And finally, the bureaucracy and red tape of the Egyptian government still inhibits future investment.
On the other hand, there are several opportunities in the sector including the country’s relative political stability, its increasing reserves, rising global demand for natural gas, and potential investment opportunities. According to the report, the threats facing the industry are three-fold: 1) A highly-competitive regional market; 2) the fear of unsustainable reserves to provide for both domestic consumption and export; and 3) the government’s over-commitment of natural gas reserves for export.
The report concludes by offering an outlook for the future of the natural gas sector in Egypt. It suggests that natural gas is the future of Egypt and, as the number one source of energy, the report places high hopes on the industry. Exploration agreements for natural gas reached 25 in 2004 and are estimated at 42 in 2005. As for domestic consumption, the government’s initiative to increase utilization foresees demand growing by 11% annually. The natural gas share in the total energy consumption is expected to reach 56% by FY2006/2007.
However, such increase in consumption and production can have serious consequences if not managed properly. Egypt must utilize its natural gas appropriately. It must balance its domestic consumption with its desire to export and not sacrifice the former for the latter. In essence, if proper management is implemented throughout the industry it will undoubtedly serve towards the development of the country at large.
By Sarah Broberg