Egypt's Energy Problems Worsen

6 MINS READMar 13, 2014 | 09:33 GMT
Egypt's Energy Problems Worsen
An Egyptian man with a sign that reads "No to gas deterioration, stop the export of Egyptian gas" protests in Cairo.

Egypt is expecting severe power outages in upcoming months after suffering rare winter blackouts. According to the Ministry of Petroleum, Egypt needs to import $1 billion worth of natural gas in the next few months to satisfy demand this summer. However, political, financial and infrastructure constraints will likely keep Egypt from achieving this goal. Last summer, as seven-hour-long rolling blackouts affected businesses and consumers throughout the country, the Tamarod movement helped to oust President Mohammed Morsi, a move that illustrated people's outrage over the Muslim Brotherhood's inability to solve Egypt's energy problems. As Egypt's rapidly growing population continues to demand more natural gas, domestic production will soon fail to meet the needs of a nation looking for political stability and economic growth under a new democratic government that is set to be elected in the coming months.

Like Morsi's government, the incoming administration will have limited options, given tensions in the region and its political and economic constraints. Perhaps most important, Cairo will have to decide whether it will decrease domestic natural gas consumption to fulfill its export obligations or pump more gas into a heavily subsidized domestic market to forestall summer outages — and thus curry favor with the public. Both options have significant ramifications on the country's struggling economy.

In 2003, Egypt began producing surplus natural gas that Cairo was able to export, largely to Asia and Europe, providing the country with a substantial source of revenue. But Egypt's population has grown rapidly over the past three decades, thanks to improved health care, increased food production and a lack of family planning. In 2014, domestic natural gas consumption will finally catch up with production, due in part to generous energy subsidies. In fact, from 2009-2012, consumption rose 24 percent while production declined by 3 percent. By July 1, the Petroleum Ministry believes natural gas consumption will surpass production by a rate of 1.74 billion cubic meters per year.

Egypt's Natural Gas Predicament

This has left Egypt looking for import agreements. But regardless of who wins the upcoming elections — Defense Minister Gen. Abdel Fattah al-Sisi is widely expected to win the presidency — the new government will only have a few options to satisfy the public's demand.  

Tensions with Gulf Partners

During the Morsi administration, a cash-strapped Egypt looked for outside help to alleviate its economic problems. One option was a $4.8 billion loan from the International Monetary Fund, but this came with strict conditions, including subsidy reforms. Instead of absorbing the political risk involved in tackling the problem, Morsi sought aid from Egypt's neighbors in the Gulf. Foreign currency, petroleum products and natural gas assistance helped buoy Egypt's economy, but relying on bailouts from the Gulf Cooperation Council is not a sustainable long-term solution.

When Morsi reached out to the Gulf Cooperation Council, Qatar seized a unique opportunity to enhance its regional influence by engaging with the Muslim Brotherhood — the only Gulf state to do so. Qatar sent several liquefied natural gas shipments to Egypt. While Egypt began to divert increasing quantities of its natural gas to the domestic market, cargoes from Qatar were given to British Gas and GDF Suez operating in Egypt so that they could meet their export obligations in Europe and Asia. However, when the Muslim Brotherhood was ousted and designated a terrorist organization by the military-backed interim government, Qatar's relationship with Egypt soured. Qatar stopped sending LNG, and foreign firms lost their ability to meet their export quotas.

Egypt is still receiving petroleum aid from its Arab neighbors, but the halt of LNG shipments from Qatar must be viewed as part of a larger rift among the Gulf Cooperation Council countries. Because Egypt is a pivotal country in the Arab world, the Gulf countries understand that instability in Egypt affects the whole region. Saudi Arabia prefers that Egypt be run with a strong military hand, because Riyadh fears the populist tactics that brought the Muslim Brotherhood to power in Egypt could fuel grassroots Islamism in the Gulf and threaten the stability of the monarchies. But Qatar still stands behind the outlawed Muslim Brotherhood and is the Gulf country in the best position to export natural gas to Egypt.

Kuwait has stepped in to mediate this conflict, because it views regional instability as detrimental to its own internal cohesion. Kuwait's looming internal political and economic strains, as well its significant Shiite minority and geographic proximity to Shiite bastions in Iraq and Iran, prevent it from acting as aggressively as Saudi Arabia. To maintain a careful balance between its neighbors, Kuwait will work to defuse tensions within the Gulf Cooperation Council, but talks are unlikely to provide any immediate natural gas assistance to Egypt, leaving Cairo to search for other solutions to its energy problems.

Import Options

To avoid shortages this summer, the government is trying to import natural gas to cover the expected deficit, but this will be expensive and difficult. Cairo has two options, but neither provides a feasible solution. 

One option is to import natural gas by pipeline from Israel, but this is difficult due to security concerns and would require reversing the pipeline direction. For years, militant groups have targeted the Arab Gas Pipeline that was used to pump Egyptian natural gas across the Sinai Peninsula to Israel, and it already has been attacked five times in 2014. Even if the army could secure the pipeline, it would take time and money to alter the pumping stations so the flow of gas could be reversed back into Egypt. Israel has said it intends to export 40 percent of the natural gas from its Tamar and Leviathan fields, which could provide massive political leverage in the region. If al-Sisi is elected, it would be difficult for him to maintain his nationalist image as a strong military leader if he made Egypt reliant on Israel for its energy. However, energy imperatives might force him to consider this idea more seriously, especially if it can be done in cooperation with Jordan and the Palestinian Territories.

The other option is for the Egyptian government to lease a floating LNG import terminal. Although Egypt has two LNG export plants, it has no import terminal that can regasify imported LNG. To solve this problem, the government issued a tender to lease a floating storage and regasification unit in October 2013. The tender was awarded to Norway's Hoegh LNG in January 2014, but the firm turned down the contract because it doubted the government would be able to pay the $250 million bill. There are a few other units on the market that could be leased, but even if the government could sign an agreement in March, the unit would take six months to a year to install and would not be operational in time for the summer.

Reforming Domestic Energy Markets

While importing gas will be difficult, Egypt's government can work to improve its domestic energy usage and production, but these are not short-term solutions. Regressive energy subsidies, which amount to about 10 percent of Egypt's gross domestic product, have long encouraged excessive consumption, largely by wealthy Egyptians and energy-intensive businesses that can afford to pay higher, unsubsidized prices. Successive governments have tried to reform the subsidy program, but the fear of causing social unrest has prevented the implementation of any reform.

As subsides continue to hurt the economy, the government must attempt to attract foreign investment to bring in the capital and technology necessary to increase natural gas production. Egypt's current fields are aging, and potential new production is becoming more expensive and challenging as producers look to expand to deeper waters. Regardless of success, advanced extraction techniques and exploration in more challenging areas will not alleviate the immediate shortages. It will likely take several years for any new investments to increase production, and the current fields will continue to decline.

Cairo's relationship with foreign energy firms will likely deteriorate further in the coming months, because the government must maintain public support and continue diverting large portions of the foreign firms' export-marked gas for domestic consumption. In January, British Gas was forced to break its contracts when the Egyptian government diverted more than 50 percent of the company's production in Egypt to the domestic market. Further straining the situation is the $6 billion in arrears that Cairo is struggling to pay foreign energy firms. The incoming government may continue to divert larger amounts of natural gas for domestic use to maintain popular support and social stability, but this will further alienate foreign investors and hinder needed extraction technology from coming to Egypt.

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