Egypt’s Thirst for Cheap Gas Threatens Export Prospects: Energy

Egypt’s natural-gas shipments are set to drop by about half this year, undermining the military led-government’s attempts to stabilize the largest economy in North Africa.

Eni SpA (ENI) and BG Group Plc (BG/), international oil companies with investments in Egyptian export terminals, said a policy that encourages gas consumption at home, caps prices and has left the state owing $6 billion to producers is holding back investment in new fields. Egypt is set to fall behind Equatorial Guinea to fourth place among Africa’s gas exporters this year, according to data compiled by Bloomberg.

The dilemma for Egypt’s new leaders is that the nation’s thirst for cheap gas leaves little scope to pare back subsidies that cost 7.3 percent of gross domestic product. While the state is starting to repay the debt owed to gas producers, the country will find it hard to win new investment into its country’s largest export industry until price limits are raised, Eni Chief Executive Officer Paolo Scaroni said.

“Certainly if gas prices were higher in Egypt, we could exploit some discoveries we made in the Mediterranean,” Scaroni said in an interview. The government has promised to start repaying this year some of the $800 million to $900 million it owes the Rome-based company, the largest energy producer in Egypt, he said.

While Egypt’s benchmark stock index has climbed about 19 percent since Mohamed Mursi’s government was overthrown by the army in July, the economy remains in crises with both unemployment and the budget deficit near records after three years of political unrest.

Consider Imports

Egypt’s gas production fell 8.5 percent to an average of 5.4 billion cubic feet a day in the first nine months of the year compared with last year, according to Egyptian Natural Gas Holding Co. Chairman Taher Abdel Rehim. The slump has even forced Egypt to consider importing gas from outside the country to meet energy demand during peak summer months and was in talks with Qatar about fuel supplies.

There are signs the government is trying to address the challenges of energy policy. A pledge to start paying back the cash owed to gas producers is a positive step, said Martijn Murphy, an analyst at Wood Mackenzie Ltd., an energy consultant in Edinburgh.

Still, cutting the debt will be easier than paring back subsidies that hold down energy costs for consumers even though exporting gas can be five times more profitable than selling it in Egypt, according to Christine Tiscareno, an equity analyst at Standard & Poor’s in London.

“Our priority is the supply of natural gas to the Egyptian local market,” Egypt’s new oil minister, Sherif Ismail, said in phone interview. “Any change in the subsidy system should be put up for societal discussion.”

Political Turmoil

BG, which produced 20 percent of its oil and gas in Egypt last year, more than in any other country, said in July that the nation’s political turmoil had delayed the $1.5 billion expansion of its West Delta Deep Marine project.

BG CEO Chris Finlayson said he needs to see assurances that Egypt will manage its domestic demand for gas and start paying the $1.4 billion the government owes the company.

Egypt is “converting more of their power generation capacity into dual-fuel or oil burning which will allow them to change that primary fuel mix next summer,” he said Oct. 31.

Apache Corp., which agreed to sell a third of its Egyptian assets to China Petrochemical Corp. for $3.1 billion, sees the country as an oil play even though it has plentiful gas reserves, according to CEO Steven Farris. The third-largest producer in Egypt made only 11 percent of its Egyptian net revenue from selling gas last year, according a September presentation.

Damietta Plant

“Clearly Egypt is becoming more gas deficient,” said Tom Hickey, the CEO at Petroceltic International Plc, an explorer that gets more than 50 percent of its cash flow from Egypt. “It’s true there’s more upside in oil because your price isn’t capped.”

The Damietta LNG plant, operated by a venture between Eni and Spain’s Gas Natural SDG SA (GAS), hasn’t shipped a single cargo from Egypt this year, according to Bloomberg data. The larger Egyptian LNG plant, a venture between BG, Egyptian General Petroleum Corp., EGAS, Petroliam Nasional Bhd. and GDF Suez SA, halved its shipments to 19 cargoes. The two plants shipped 39 cargoes between them last year.

EGAS is exporting about 400 million cubic feet of gas a day with as much as 900 million diverted from the plant to the domestic market, Oil Minister Ismail said.

Oil Production

Still, most companies’ oil and gas production hasn’t been affected by the civil unrest in the North African state because most fields are situated in remote areas. Some companies had to temporarily close Cairo offices amid outbreaks of violence.

“At the moment business as usual for us,” Peter Voser, the CEO of Royal Dutch Shell Plc (RDSA) said.

Some new fields are still coming on stream. German utility RWE AG has started gas production from the Disouq field in the Nile Delta in September, the latest project brought on stream in Egypt, after winning the concession in 2004.

BP Plc CEO Bob Dudley this month said Europe’s second-largest oil company needs to control costs to make profits from its West Nile Delta project at its contract gas price. The London-based producer’s concession has more “flexibility” than some other production sharing agreements in Egypt, GlobalData said in a report this month.

To contact the reporter on this story: Eduard Gismatullin in London at egismatullin@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.