Egypt dims lights to maximise LNG revenue

By Sherif Tarek
Posted on Friday, 23 September 2022 16:31

A empty street during curfew hours due to the coronavirus outbreak, in Cairo, Egypt on 29 March 2020 (AP Photo/Nariman El-Mofty)

Rising gas demand in the EU countries, which have been imposing sanctions on their main provider, Russia, on the back of the Ukraine war, has prompted Egypt on the other side of the Mediterranean to boost its LNG exports. Yet, its high domestic consumption and possibly insufficient infrastructure remain stumbling blocks.

Egypt’s streets have been poorly-lit at night in recent weeks as the government begins to implement an electricity-rationing strategy, seeking to increase its liquefied natural gas (LNG) exports to make the most of soaring prices, the only silver lining for the North African nation amid the Russian invasion of Ukraine.

Prime Minister Mostafa Madboully said mid-September that the national strategy – which saw fewer street lamp posts turned on, among other measures either already in place or yet to be in the near future – has enabled Egypt to ramp up its LNG exports by two cargoes within a month.

Egypt’s domestic natural gas needs eat up around 90% of its production, leaving little room for exports. Power generation by far constitutes the largest portion of the most populous Arab country’s consumption, standing at 60%.

Based on our forecast for gas prices in the current FY (July 2022-June 2023), as well as our forecast for potential Egyptian LNG exports during the period, we do see Egypt potentially reaching its target of generating around $8.5-10bn in natural gas revenues.

Achievable short-term target

With an aim to slash gas amounts allotted to electricity generation by 15%, Egypt may target to generate up to $10bn in gas revenue by the end of the ongoing fiscal year, a more than 50% year-on-year increase, oil minister Tarek el-Molla told Al Arabiya earlier this month.

“Based on our forecast for gas prices in the current FY (July 2022-June 2023), as well as our forecast for potential Egyptian LNG exports during the period, we do see Egypt potentially reaching its target of generating around $8.5-10bn in natural gas revenues,” Ryhana Rasidi, an analyst at data and analytics firm Kpler, tells The Africa Report.

There are plans to reduce the amount of gas used to generate electricity by 15%.

Egypt’s increasing LNG exports amounted to 8.9 billion cubic metres (bcm) last year, and 4.7 bcm in the first five months of 2022, according to Refinitiv Eikon data cited by Reuters. Global spot prices in recent months have averaged around $40 per million British thermal units (MMBtu).

“There are plans to reduce the amount of gas used to generate electricity by 15%. Thus, if we assume this over the current FY, we could see nearly 6 bcm (or 4.2mt) of natural gas being freed up for Egyptian LNG production from July 2022-June 2023,” says Rasidi.

“In turn, this is likely to raise the country’s monthly LNG exports by an additional 0.18-0.42mt [million tonnes] until the end of the FY, with the output otherwise being limited by LNG export capacity and planned maintenance,” she adds.

Costly infrastructure expansion

Expanding LNG infrastructure might prove a prerequisite for Egypt to achieve its full potential as a gas exporter in the long term. “With the country’s export capacity only at 12mtpa [million tonnes per annum], there would need to be more LNG terminals built to help maximise this resource so that it can become one of the key exporters in the region by 2035,” Rasidi says.

Egypt boasts two LNG export plants: one in Idku, east of Alexandria on the Mediterranean, and the other stands further east in Damietta. El-Molla says more LNG terminals could be built if Egypt’s production at some point in the future exceeded its liquefying abilities.

But such a step seems far-fetched, says Robert Songer, LNG analyst at data intelligence firm ICIS. “While prices are clearly very favourable for exporters, there is a lot of demand and competition for new export capacity and a lot of inflation, so any new export plant would be complicated,” he tells the Africa Report.

“Costs (eg steel, labour, energy) are spiralling and more and more countries will be chasing these assets; there’s a wave of new export projects hitting viability now in the US, Canada, Qatar, among others, so resources will also be tight.”

Covered for now

With Egypt’s current gas export rates, it might not need such a costly infrastructure expansion any time soon.

“Damietta is a 4.9mtpa plant. Over the 12 months to August (inclusive), LNG Edge shows that exports total just over 4mtpa,” Songer says. “Idku is a 7.2mtpa plant. Over the 12 months to August (inclusive), LNG Edge shows that exports total just 2.8mtpa.

“So Idku has the potential, if running at nameplate capacity, to export a lot more LNG than it currently does. Damietta has limited scope to increase too.

“With a combined nameplate export capacity 12.1mtpa (7.2+4.9mtpa) and combined exports over the last year of 6.8mtpa (2.8+4mtpa), it is theoretically possible that Egypt could double exports.”

Renewable energy boost

Egypt, an oil and grain importer that has been suffering war-induced surging commodity prices over the past months, has become a net gas exporter since 2018 thanks to Zohr, the largest gas field in the Mediterranean Sea.

The gigantic offshore field, discovered three years earlier by Italian energy company Eni, accounts for around 40% of Egypt’s overall gas output, or more than 28 bcm per annum.

All the same, the Zohr discovery has not turned the third-largest Arab economy into a major LNG player just yet, when compared to key gas exporters in the region. Algeria’s total gas exports last year, for instance, stood at 54 bcm.

What should give the Egyptian gas exports a greater boost than the current electricity-rationing approach is the government’s longer-term eco-friendly strategy. By 2035, Egypt, which hosts COP27 in November, aims to generate 42% of its power from renewable sources, more than double the current rates.

“Although Egypt doesn’t currently hold the largest natural gas reserves in Africa (the largest being Nigeria), we see Egypt’s shift towards renewable energy for domestic consumption could help free up about 22 bcm/y (or 16mtpa) of gas for LNG exports,” Rasidi says.

European opportunities

Last June, Egypt and Israel inked a memorandum of understanding with the EU to increase their gas exports to Europe, which have been seeking to replace Russian gas imports that amounted to more than 40% of the continent’s needs before the Ukraine war broke out last February.

“We are expecting gas prices, especially in Europe, to remain strong before likely declining from around 2026 as European importers also look towards more renewables in their energy mix to meet climate goals,” Rasidi says.

“Nonetheless, we believe that prices could stay sufficiently above the breakeven price for Egyptian exporters which may encourage Egypt to continue exporting LNG and Israeli gas in the years ahead.”

The gas-hungry EU, under the deal, should encourage energy firms to partake in gas exploration tenders in Egypt, which targets around 40% foreign investment increase in its oil and gas sectors in the current financial year.

“Potentially, there could now be scope to sign long-term agreements with the new wave of LNG buyers, like Germany’s RWE and Uniper, as well as CEZ of Czechia, which has now got capacity at Gate in the Netherlands,” says Songer.

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