Explorers See Promise in Egypt Energy When Subsidies Eased

Explorers in Egypt expect constraints on domestic energy prices to loosen, prompting new investment in oil and natural gas fields.

Companies including Citadel Capital SAE, Circle Oil Plc and Petroceltic International Plc expect President Abdel-Fattah El-Sisi to make good on promises to reduce subsidies of more than $20 billion a year and ease demands that producers sell fuel on the domestic market well below international prices, they said at a conference in London on June 27.

The changes would allow the government to cut the budget deficit and pay suppliers money owed for fuel, said Mohamed Shoeib, a managing director at Cairo-based Citadel. It’s a necessary first step if Egypt wants to lure back investors driven from the country by recent turmoil as it tries to both increase exports and meet surging domestic energy demand.

The government “should tackle the problem and not escape it,” Shoeib, whose company has about $10 billion invested, mostly in Egyptian energy projects, said in an interview. “It should happen very soon.”

Egypt is poised to become a net fuel importer as authorities divert gas from export projects to meet local demand, sometimes failing to pay the suppliers. The practice prevented the U.K.’s BG Group Plc from meeting contracted liquefied natural gas shipments this year. The company has been in talks with the government about guarantees for future exports, with receivables for gas still owed by Egypt doubling in the year to March 31.

Oil Minister

Egypt plans to pay at least $1.5 billion to energy suppliers before the end of the year, or about a quarter of its debt as of April, Reuters reported June 26, citing Oil Minister Sherif Ismail. The government is examining plans to reduce petroleum-product subsidies by at least 25 billion Egyptian pounds ($3.5 billion) in the new budget, the state-run Al-Ahram newspaper reported yesterday, citing an unidentified oil-industry official.

Egyptian General Petroleum Corp., the state energy company, “is doing the best it can” to pay off the debt, said Chris Green, CEO at Circle Oil. “The key thing is reducing subsidy.”

Sea Dragon Energy Inc. plans to acquire additional assets in the country, said CEO Paul Welch. “The time is great now to get involved in Egypt.”

Oil producers receive international prices for their products in Egypt, while gas suppliers are paid only a fraction of what they could earn from exports when they sell on the domestic market, Stephane Foucaud, a London-based analyst at FirstEnergy Capital Corp., said in an interview at the conference.

New Supply

“We would like to spend more” in Egypt, said Randy Neely, chief financial officer at Transglobe Energy Corp. But until there are further payments for fuel supplies, “we will be probably spending more outside of Egypt.”

Noble Energy Inc. and partners have started talks with BG about possible gas supplies from Israel’s Leviathan gas field, the largest in the Eastern Mediterranean Sea, to make LNG in Egypt. At the same time, Oil Minister Ismail expects to import the first LNG before September.

“The gas price simply has to increase” and that will “unlock exploration” because some fields are not economic to drill at the current tariff, said David Thomas, chief operating officer at Petroceltic. “The country is full of opportunity. My question is, when the race will start?”

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