ANALYSIS: Egypt Poised to Become New Regional Hotspot for Energy

How far does government policy encourage development of the energy sector?

Egypt is now one of Africa’s largest oil and gas producers: the fifth-largest oil producer behind Nigeria, Algeria, Angola and Libya, and the largest crude oil refining capacity in Africa. Maintaining the highest rate of energy consumption in the continent, the country remains highly dependent on oil and gas resources in both downstream and upstream sources of production, leading to the emergence of interest from the government and the private sector to invest in opportunities to meet energy demands domestically and develop prospects for exports.

Challenges in the sector have arisen over the past few years, encouraging reforms in the petroleum and electricity sectors to create administrative and legislative restructuring to support a healthy marketplace for energy investments. Consequently, Egypt is eagerly trying to increase energy production with 36 new concession agreements during 2013/2014, seeking new variations in the energy mix, and rationalizing energy consumption to optimize available energy resources. Accordingly, the new recent resource discoveries have developed international interest from the private sector to invest in bridging the energy deficit in the region, making Egypt the new regional hotspot for investments in the industry.

Similar to several countries in the MENA region, Egypt deployed relatively high energy subsidies for decades, rationalizing low-cost energy services for low- and middle-income households. In 2013/2014 combined energy subsidies amounted to about $21 billion, or 8.5% of total GDP, according to a 2017 World Bank report. The subsidies proved inefficient, resulting in excess consumption, flat quality and defective services as well as placing an enormous burden on public resources. The current government inherited a system that accumulated significantly alarming public debt for decades and a bureaucracy that has made fiscal transformation a difficult process.

Currently, the country’s optimum fuel mix of all primary resources stands at 53% for gas, 41% in oil, 1% for renewable energy, 2% of coal, and 3% of hydroelectric energy.
Egypt has been importing liquefied natural gas (LNG) for years but has been unable to meet domestic demand. In partnership with the IMF, the government began implementing a comprehensive economic and financial reform program in 2014 to support inclusive growth and development through the reduction of costly subsidies for petroleum, gas and electricity. Ever since, Egypt has focused its efforts to utilize the newfound resources to contribute significantly to growing demand in both domestic and regional markets.



New Discoveries

Zohr Gas Field was found in 2015 by Italian Energy Group Eni, and has since been labelled the largest gas discovery ever made in Egypt and the Mediterranean Sea. The field is expected to have a major impact on the economic prosperity of the country, potentially offering Europe an alternative to energy resources and powering Egypt’s economic recovery. The field has already helped to reduce LNG imports by 30%. Eni is currently working to get the field into production following ample encouragement from the Egyptian government. Eni confirmed the site constituted a depth of 1,450 meters, and covers an area of about 100 square kilometers which may hold approximately 30 trillion cubic feet of gas. Recent reforms have now liberalized the international market, allowing the export of natural gas that was previously earmarked exclusively for local consumption.

The West Nile Delta development, which includes five gas fields across North Alexandria and West Mediterranean Deepwater offshore concession blocks, are being developed by British Petroleum—one of the largest foreign investors in the country. Gas production began in May 2017 and is expected to become fully on-stream in 2019, reaching up to almost 1.5 billion cubic feet a day (bcf/d), which is equivalent to about 30% of Egypt’s current gas production. The gas produced will be fed into the national gas grid.

BP also discovered Damietta’s offshore gas field, Atoll, upon which BP collaborated with the Egyptian Natural Gas Holding Company (EGAS) in 2016. The early production scheme is expected to bring up to 300 million cubic feet a day (mmscfd) gross of gas to the Egyptian domestic gas market starting in the first half of 2018.

These three discoveries alone are expected to raise Egypt’s natural gas output by 50% in 2018 and 100% in 2020. In addition, there is existing infrastructure from the Suez Canal to the liquefied natural gas plants in Damietta and Port Said, the refineries on the Red Sea and North Coast to the Sumed pipeline. The big three gas developments—Zohr, BP’s West Nile Delta, Atoll—will potentially produce more than 5.5 billion cubic feet per day, representing more than $30 billion worth of investments. Considering this, there is a general assumption that supply should exceed domestic demand and allow for surplus of resources for exports. This is seemingly a lucrative indication for European countries along the Mediterranean like Cyprus and Israel.

Legislative Reform

For decades Egypt has had to import energy, its production lagging behind consumption. Its legacy of subsidies has contributed to the government’s increase in debt, leading to a struggle to pay foreign energy producers. Legislative reform has made the energy marketplace more investor-friendly in recent years, especially for the gas industry. The reform strategy will aim to reduce local consumption and manage demand through lower subsidies. Since 2014, the government began to formalize the development strategy of the energy sector introducing governance reform to encourage private sector participation, improvements in energy efficiency, and restructuring organizational economic pillars.



Law 203 of 2014: Renewable Energy Law

- This law was passed to formulate authoritative structures of new projects in the renewable energy sector; and to regulate tender projects approved by the Cabinet of Ministers to encourage building, operating and transferring renewable energy in the market.

Decree No. 1947 of 2014: Feed-in-Tariff

- Under this law, the government intended to encourage renewable energy investments in the country. However, this law seemed relatively unsuccessful due to several unresolved articles in the law regarding international disputes and the requirement that foreign investors must fund between 70 to 85% of the energy projects (solar and wind). This made it more difficult for companies to invest in the field, to meet the financial agreements listed in the legislation.

Law 81 of 2015: The New Electricity Law

- This law was passed to organize responsibilities under the Egyptian Electricity Utility and Consumer Protection Agency (EEUCPA). The legislation provided them with a more active role in monitoring and regulating all issues related to electric power including production, transmission, distribution and consumption to guarantee its availability and continuation. The law also empowered the EEUCPA to provide various types of requirements and business activities at the most reasonable prices and in an environmentally friendly manner.

- A licensing system is outlined within this law to regulate investor relations; investors planning production, distribution or sale of electricity may obtain licenses from the EERA (valid for 25 years) and establish a joint stock company to receive permits for primary implementation of work for a project.

- The law developed a competitive market within the regulation of the government. The competitive market allowed companies to choose suppliers and negotiate private agreements directly without the interference of governmental structures. Unqualified consumers on the other hand, are required to purchase electricity from government-authorized suppliers with a fixed tariff approved by the EEUCPA.

Decree No. 2532 of 2016: Feed-in-Tariff

- To resolve the problems of the previous law in 2014, the government introduced this decree upon which international offshore dispute areas can be resolved as well as a decrease in the foreign financing percentage allowing for improved investor relations.

The New Gas Law

- Under this law, a free competitive market is created upon which EGAS and EGPC are no longer primary and independent owners of the gas industry. This liberalization sets a foundation for the private sector to increase participation in the transmission and distribution of gas activities.

- The consumer is allowed to choose his own gas supplier due to its conformity with the standards established under the provisions of this law and the stages of the approved plan for the liberalization of the market.

With Egypt’s Vision 2030 set as a cornerstone of the strategic roadmap for energy reform, how far has the government encouraged progress in the energy sector to date?

The strategic objectives outlined for Energy up until 2030 have become a cornerstone of the energy equation in Egypt, with efforts to maximize the efficient use of various traditional and renewable resources. The government aims to use these objectives to encourage economic growth, competitiveness as an innovative domestic and international resource management leader, and to preserve the environment in the process. The government measures the industry of energy’s contribution to GDP at 13.1%, and aims to increase it to 25% by 2030. With this in mind, there is a clear key performance goal to reach 33 years worth of natural gas reserves by 2030; proving the future ability to meet the needs of domestic natural gas production.

Challenges in the sector remain integrated in the energy equation, but have significantly improved over the past few years. Legislation continues to be a recurring challenge that stalls the process of decision-making relative to implementation of business activities in the sector. The government has attempted to develop corrective measures to achieve desired investor relationships through necessary legislation, by eliminating monopolization of the industry, and encouraging liberalization of importing and exporting energy solutions (or petroleum products).

However, it is unclear if implementation will lead to the country becoming a hub for international energy exports in the near future, as there is limited transparency on the status of public debt or delays in financial payments outstanding to sovereign entities in the industry. The lack of accurate data and information in the sector from government entities is compensated by the private sector’s contributions, nevertheless, it remains a challenge to increase investor confidence.

On a different front, the previous absence of a specialized agency to monitor and regulate market transactions has been solved with the creation of EEUCPA, which has solved recurring challenges at various stages of value chain, production and trade. This answered the calls for liberalization of the industry, where the government is no longer the sole regulator, investor and operator causing institutional management problem areas in the sector. With current liberalization in the industry and the private sector’s contribution, there is a positive outlook toward improving exploration among newly discovered sites. Consequently, there is confidence in developing strong infrastructure used to import or export petroleum products, extended and renovate oil pipelines, exploration with modern technology, and building re-gasification of LNG processing facilities.

To diversify the energy mix and reduce dependence on oil and gas, the government has turned to nuclear energy investments in establishing the Dab’aa production. The program includes the establishment of four reactors by Egyptian scientists and engineers to develop a production capacity of 4800 MG. The program is currently under construction, and the government has already proceeded with plans to develop the city’s residential housing and services to ensure a smooth production process for all stakeholders.

The effort of the government to confront these challenges and reduce problem areas to encourage progress in the energy sector reflects the positive achievements in the industry thus far. Over the past decade, legislative change seemed to have been far-fetched in Egypt.

Now, however, Egypt seems to have made leaps and strides to dramatically improve long-promised licensing that has made the region more confident in the possibility of Egypt becoming an energy hub for production. EGAS is planning to issue global tenders for the new Red Sea and western Mediterranean concessions, and discussions have already begun to take place between Israel and Egypt to govern gas imports. It has become clear that the prospects of energy exports from Egypt are continuously increasing, and it can become the region’s hotspot linking western and eastern markets.