NewsNorth AfricaEgypt: Sisi saved by a gas boom

Tue,20Nov2018

Posted on Friday, 26 October 2018 11:30

Egypt: Sisi saved by a gas boom

By John Hamilton
Photo12/Alamy

The government’s gas-fired economic plan was a high-stakes gamble that paid off thanks to the Zohr super-giant discovery, leading to hopes of even larger gas fields

 
The stability and prosperity of the vast and rapidly growing population of the largest Arab state are inseparable from the politics, economics and rapidly changing fortunes of the gas industry. From the beginning of his rule, President Abdel Fattah al-Sisi committed his administration to a strategy of state-led development based on the availability of cheap labour and energy, despite the fact that he took power at the moment when Egypt lurched from being an exporter to an importer of gas.
 
Fast-forward five years to the present day and what appeared at the time to be a speculative gambit is looking increasingly like a solid bet. On 8 September, the Italian major Eni announced that its Zohr super-giant deep offshore gas field had ramped up to 2bn cubic feet per day (bcfpd) one year ahead of schedule, and expected to reach the 2.7bcfpd plateau by mid-2019. 
 
Expectations are high that oil companies may discover more vast gas fields in the waters of the Nile Delta with several highly prospective wells planned in the next 12 months. In mid-August, Eni signed an exploration licence for the Nour prospect, which it expects to drill before the end of this year. Then, on 15 September, the petroleum ministry announced a $1bn exploration deal with Shell and Malyasia’s Petronas for eight wells in the West Nile Delta. 
 
Other major holders of deep offshore exploration concessions are BP, which owns three large blocks to the west and south of the Zohr field, and Edison Norge, a subsidiary of France’s EDF Group, which owns three to the east of Zohr. Meanwhile, on dry land Rockhopper, Kuwait Energy and Dover Corporation signed a $10m deal for exploration in the Western Desert in September.
 
Import-export seesaw
 
According to gas consultant Mohamed Farghaly, more discoveries are likely. However, “even if there is a discovery in the Mediterranean it will not come onstream for at least another two years,” he says. Underlying the optimistic outlook, there is a degree of uncertainty. If wells are drilled and are successful, Egypt may quickly restore its position as a major gas-exporting country. But with demand on the rise, new discoveries are also needed to feed the domestic market. Without them, the country will once again become import-dependent.
 
Bringing the domestic gas industry back to even this point has been far from guaranteed. The military’s controversial overthrow of the government in 2013 took place in parallel with an energy crisis that forced the Cairo government to shut down its liquefied natural gas export terminals, breaching agreements with partners including Shell and Union Fenosa Gas (UFG). These plants are now close to resuming exports. In early September, the International Centre for Settlement of Investment Disputes awarded UFG $2bn in damages against state-owned Egas. It is likely that Egas will pay the damages in gas, allowing liquefaction to resume for the first time in six years. 
 
Back from the brink
 
Amongst other economic cas­ualties of the gas crisis were international oil companies such as Edison and Dana Gas, and dozens of others whose invoices went unpaid. At the end of 2012, when the government’s foreign currency reserves totalled approximately $14bn, the state-owned Egyptian General Petroleum Corporation’s debts amounted to more than $29.5bn, making it the least solvent of all state institutions. 
 
The gas industry was in reverse and the company’s debts were close to crushing the government. This had a knock-on effect on high energy consumers such as petro­chemicals and cement plants, which were forced to close down, and power plants which could not generate electricity. 
 
In early 2019, United Arab Emirates-based Dana Gas hopes to invest $60m in a deep offshore well in the south-eastern corner of the Delta area. However, the investment is conditional. Dana chief executive Patrick Allman-Ward tells The Africa Report: “We have made it clear to the government that Dana Gas will need to be paid what it is owed in order for the company to reinvest that money back into Egypt.” 
 
Soon after taking office, Sisi launched his economic plan, backed by multi-billion preferential loans from his Gulf allies and, eventually, support from the International Monetary Fund. But far from unlinking the economy from gas, Sisi strengthened the connection. 
 
A central pillar of his plan was the construction of a huge fleet of gas-fired power plants that have nearly doubled Egypt’s electricity production capacity. The largest project was the Egyptian Electricity Holding Company’s commitment to purchase 14.4GW of gas turbines from Siemens. The contract was signed in Berlin in June 2015 in the presence of both Sisi and German Chancellor Angela Merkel. Notably, this happened several months before the Saipem drill ship had even left port to drill the well that proved the Zohr discovery. At the time it was conceived, Sisi’s economic plan was dependent on imported energy, with no obvious means to pay for it.
 
Rapid transformation
 
The potential for this turning into yet another financial calamity was large. Yet, three years later, gas production is at an all-time high and the Siemens turbines are fully operational. It has been a transformation of stunning rapidity, the centre-piece of which is a single, highly risky deep offshore well, which happened to strike the centre of a vast and previously unknown gas-rich geological structure. Without Eni’s Zohr and the prospect of much more gas to come, the outlook for Egypt would look drastically different.
 
The pressure is not entirely off. The government is pushing forward with an unpopular programme of subsidy reform. In July, it increased household electricity bills by 21% and those for factories by 42%. At the same time, it is liberalising the gas market with the intention of allowing major industrial gas consumers to import directly. In late 2017, a consortium of businesses named Dolphinus agreed to buy gas from the operator of a pair of large Israeli gas fields. While this may be politically controversial, it is commercially expedient as, even after the recent increases in production, the government cannot guarantee gas supply to major business consumers. The first priority for domestically produced gas is power generation. 
 
Egypt’s future does not lie in a choice between imports and exports. From now on it will do both with the ambition of turning itself into an eastern Mediterranean gas hub through which Cypriot and Israeli gas, and perhaps one day Jordanian and Lebanese gas, might also flow. Talks are ongoing for companies to hook up Cyprus’s Aphrodite field to Egypt’s gas infrastructure, which would greatly strengthen Sisi’s goal of making Egypt a full-service energy hub. 
 
This article first appeared in the October 2018 print edition of The Africa Report magazine
 
 


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