EGYPT - The Gas Market.

The local market for natural gas will continue to grow at a rapid pace in the coming years. In 1997, the transport and distribution of gas were opened up to the private sector under Investments and Incentives Law No. 8. In early December 1997, the gas price for domestic industry, including the power plants, was fixed at E[pounds sterling]0.141 per cubic foot (then about US$0.041 - now lower in view of repeated devaluations of the Egyptian pound in recent years). The price was not to be allowed to rise by more than 25% until 2005. Now this is still lower than gas prices for wholesale deliveries to companies supplying households and other users on the local market.

The state-owned Egyptian Natural Gas Holding Co. (Egas), created in 2001, is in charge of this sector. The national grid of pipelines is owned and run by Egyptian Natural Gas Co. (Gasco), established in March 1997 as a JV of EGPC (now Egas - 70%), EGPC contracting affiliate Petroject (15%) and Egypt Gas (15%). In charge of all the gas pipelines and gas processing plants, Gasco sells pipeline gas to its own end-use clients and to private franchises. As Law No. 8 took effect in March 1997 which, among other things allowed private companies to market natural gas, the whole area of Egypt was divided into zones for marketing by such companies. Local and international companies specialised in the field of gas marketing were invited to submit offers to acquire franchises for these zones. Franchise firms were required to develop markets, with each venture to take one of the zones on offer. They were to utilise the most up-to-date technologies to build, operate and maintain gas transmission pipelines and marketing systems - a form of BOT - for a period of 20-25 years. Their total investments were to be repaid by Egas, with no interest, over the first five years of their operations, through 20 equal quarterly installments. In this way, at the end of the payments, ownership of the gas transmission pipelines and any other assets paid for was to be transferred to Egas.

Each franchise was to receive a marketing commission from the collection of its gas sales revenues from industrial, commercial and domestic consumers. The overall formula allows a reasonable and stable rate of return for the companies' investments. Their main incentive is to expand their gas markets to the maximum possible, and thus benefit from the economics of scale (see background in Vol. 58).

Egypt Gas Co. was the first private franchise to operate in Egypt long before Law 8. On March 16, 1997, it acquired 15% in Gasco. It transferred a part of its gas transmission assets to Gasco as payment to cover its equity. At about the same time, Egypt Gas signed a 25-year franchise deal with EGPC to take up the zone of central Nile Delta. This zone includes the major gas markets of the densely populated governorates of Manufiya, Gharbiya, Qaliubiya and Daqahlia, as well as parts of Greater Cairo and Alexandria.

Egypt Gas was formed in 1983 as a JV of EGPC (80%) and William Press (later Amec) of the UK (20%). Its aim was to market gas anywhere in Egypt, beginning with the areas nearer to the onshore Abu Mabi and offshore Abu Qir fields in the Nile Delta. As EGPC divided the country into different marketing zones, Amec sold its 20% stake to the public in February 1997. Thus Egypt Gas became listed on the Cairo Stock Exchange. Now Egypt Gas is owned 80% by Egas and 20% by private interests.

Egypt Gas was the first to introduce CNG for vehicles in 1991, when it installed a CNG refuelling station (Egypt's first) in Cairo, with the help of the Petroleum Ministry which established a state company to convert vehicles into NGVs. With the ministry aiming to convert all public transport vehicles in the Greater Cairo and Giza area into CNG, Egypt Gas now has many NGV refuelling stations in its market.

City Gas Distribution Co., with 20% held by ENI group of Italy (including Snam) as the leader, was the first totally-private franchise to be created under Law No. 8 in March 1997. It signed a 25-year franchise agreement with EGPC for a zone covering the Sinai and western sides of the Suez Canal, the Gulf of Suez and the Red Sea areas. This zone has become the biggest market for natural gas in Egypt. Its consumption exceeds 30 MCM/d. The zone, where industries are growing fast, in 1999 consumed 8 MCM/d and accounted for 14% of Egypt's total gas use. In view of big industries under construction there, its share of Egypt's total gas consumption has risen to 34% in 2004-05. Canal cities include those on the Sinai side of the waterway, where a 1,200 MW power plant has been built at Ayoun Mousa. City Gas is the most profitable among the gas marketing firms. It is headed by Abdel Hamid Abu Bakr, a former EGPC executive. Apart from the 20% equity held by ENI, the 80% is for private Egyptian interests which include the EFG-Hermes finance house and Orascom group of the Coptic Sawiris family. Orascom has a stake in another franchise led by BGI.

ENI has built a part of the Trans-Sinai pipeline, an important system completed in 2001. This was to be the first step towards the export of Egyptian gas to the Palestinian Authority's Gaza Strip and Israel - but the project has been stalled in recent years due to a war between Ariel Sharon's government and the Palestinians (see Vol. 58).

National Gas Co. (Natgas) in late 1997 became the second private firm to be formed for a zone covering the west of the Nile Delta, including al-Buhaira governorate, Borg al-Arab industrial city, and districts of Cairo/Giza and Alexandria which were not yet served by the Gasco grid. Natgas pledged to build gas transmission and distribution facilities in this zone. It got its franchise on March 16, 1998. Its first phase was to connect 93,000 households to the grid in the West Delta towns of Kafr el-Dawar and Demanhour. It has branched into the CNG refuelling business in its zone. In January 2001, Shell bought the 18% stake in Natgas from majority shareholder Egypt Kuwait Holding Co. (EKHC) as EGPC insisted that the franchise must have an international gas marketer among its partners.

Natgas' zone is adjacent to Shell's franchise in al-Fayum. EKHC includes Mohammed Abdulmohsin Kharafi & Sons of Kuwait and Egyptian Kuwaiti Investment Co. (set up in early 1997 by Kharafi, Commercial International Bank of Egypt, Commercial International Investment Co. of Egypt and Wafra Int'l Investment of Kuwait).

Nile Valley Gas Co. (NVGC) got its 25-year franchise on April 18, 1998 and was formed as a JV led by British Gas (BGI), 37.5% and including Edison of Italy (37.5%), Orascom (Egypt) of the Sawiris clan (20%), and Middle East Gas Association (5%). Edison has since sold most of its Egypt assets to Petronas of Malaysia.

NGVC's huge zone begins at el-Wasta south of Cairo and extends through the Upper Egypt governorates of Beni Suef, el-Minya, Asyut, Sohag, Qana, Luxor and Aswan, including the New Valley and Toshka projects of massive agricultural and agro-industrial settlements. This has been an almost virgin zone, where industries are yet to convert to gas and new gas-based industries are yet to be built. NVGC's gas pipeline length in the final phase will be 1,200 km and its ultimate marketing capacity is targeted to be 6,000 MCF/d. Its main line will have 34-inch and 70 psi pressure. BGI is to become one of the biggest gas producers in Egypt (see Gas Market Trends No. 2). It is the biggest exporter of Egyptian LNG.

In November 1998, NVGC set up a local unit called Gas Powered Vehicles Co. (GPVC). To operate within NVGC's zone as well as in other parts of Egypt, GPVC has since built a network of CNG refuelling stations for NGVs. Now GPVC is concentrating on the northern and central parts of Egypt. The partners in GPVC are the same as those in NVGC.

Shell, a leading gas producer in Egypt which markets oil products along the Alexandria-Cairo highway, in March 2001 got its 20+5-year franchise for the Fayum governorate (south of Cairo) and nearby areas, and now owns 96% of Fayum Gas Co. (FGC) This zone includes Qom Oshim, a huge industrial free area on the outskirts of Fayum city. FGC has a 70-km telescopic pipeline built from the Greater Cairo's 6th October City to Qom Oshim. One of FGC's five main customers, Pharaohs Ceramics Factory, consumes more than 3.5 MCM/month of gas which has replaced LPG and is 40% cheaper than the latter. Fayum city has a population of more than 1m. Several of the existing industries in Egypt plan to relocate at Qom Oshim, because the free zone there offers better incentives - with the state making a special effort to develop the new free area. This is why Shell has chosen the Fayum zone.

Among the various Shell firms across its value chain in Egyptian gas are Gas Express and Shell CNG. The latter's first of 35 CNG filling stations was inaugurated in June 2003 in the Cairo suburb of Giza. Shell CNG is to have 11 car conversion centres by 2006. At the inauguration ceremony, Petroleum Minister Fahmi said the number of vehicles in Egypt run on CNG had reached more than 45,000. He said the number will increase rapidly.

The Sharkiya Franchise: The gas marketing zone of the Sharkiya governorate (also known as Sharqiya) was in March 1999 awarded to a new private franchise venture led by Magdi Rasekh. He is one of Egypt's big business tycoons with top political connections.