EGYPT - The Energy Base.
Egypt has become an oil importer once again, with its oilfields being in steady decline (see OMT). The rapid shift to natural gas for domestic consumption, thanks to major gas discoveries in recent years, will be accelerated in view of a big increase in its reserves of this clean source of energy (see Gas Market Trends).
The Domestic Market: Egypt's consumption of energy has risen from less than 22m tons a year of oil equivalent in the early 1980s. But local oil consumption has risen to 575,000 b/d while Egypt's crude oil production has fallen to 570,000 b/d, causing the government to increase the import of clean fuels. At the same time, however, the government is implementing a most ambitious project converting vehicles to use compressed natural gas (CNG), with the country having become the world's sixth largest in this field.
The transportation sector's switch to a source of energy cleaner than oil, with Egypt's proven reserves of natural gas having reached 68 TCF, is helping to improve the environment. The use of leaded gasoline was phased out in Egypt in 1997 in a drive to curb pollution, particularly in Greater Cairo - an area of over 22m people which is one of the most crowded urban centres in the world.
There has been a surplus in the petroleum sector's balance of payments in the past five years, thanks to a series of measures. These include a limiting of oil products imports, rationalisation of the national investment budget for the sector, a reduction of the price being paid by the state for natural gas purchased from foreign operators, and an increase in exports of natural gas and LNG as well as polyethylene and propane.
Gas production in late 2005 averaged 4,870 MCF/d, up from 3,300 MCF/d in 2004, with Mediterranean fields accounting for 60% of the total, the Western Desert for 24%, the Gulf of Suez (GoS) for 10% and the Nile Delta for 6%. In late 2004 Egyptian Petroleum Minister Sameh Fahmi said domestic gas consumption rose from 28 BCM/year in fiscal 2002-03 to the average of 31 BCM/year in fiscal 2003-04, with the power sector accounting for 63% of the total. The figures for fiscal 2004-05 and 2005-06 are increasingly higher.
Fahmi noted in late 2004 that the national gas transmission network by the end of calendar 2004 had totalled 14,300 km, and the number of users then had stood at 2m, including the power sector, industries, households and the transportation sector. CNG is increasingly being utilised by motor vehicles.
Cairo is putting considerable faith in Egypt's unproven gas reserves, which are estimated at about 120 TCF. Gas has been identified as the key to meeting the country's rising demand for electricity. Cairo plans to add about 13,000 MW of electricity generation capacity by 2010 to 23,000 MW, and natural gas is to be the main fuel source. The government also expects gas to become a major source of foreign revenues. Cairo is rapidly developing its gas export capacity, with the construction of a pipeline beyond the one to Jordan, and possibly another to Israel. Further export revenues are expected to come from the export of LNG to Western Europe and the US. The third element of Cairo's gas utilisation plan is the development of a worldscale petrochemicals industry.
Egypt's expanding population, particularly its swelling middle class, has led to a sharp increase in domestic demand for plastics. Some 1.2m tons/year of polyethylene (PE), polyvinyl chloride (PVC), polystyrene and other plastics are consumed by the domestic market. Industry estimates put the value of the local market at about $2,000m a year. However, local supply currently meets less than half of local demand, at about 470,000 tons a year (t/y). Most of the remainder is imported from countries with well-developed petrochemicals industries such as Saudi Arabia, India and South Korea.
Given its abundance of natural gas feedstock, low cost base and proximity to the huge European and Turkish markets, Egypt is punching well below its weight. One major reason for this was the fragmented nature of the local industry. In 2001, Cairo sought to remedy the situation by launching a 20-year strategic masterplan to create a petrochemicals sector which would not only remove Egypt's dependence on imports, but turn the country into a global force for plastics production. The plan, prepared by ChemSystems (now part of the Nexant Group), is to attract private participation in a $10,100m investment programme to have 14 petrochemicals complexes - comprising 24 projects, including three olefin complexes and some 50 production units - built by 2021. By the end of the plan, some 15m t/y of plastics will be produced in Egypt, worth $7,000m per annum to Egypt. The industry will save about $3,000m a year in imports and earn about $4,000m a year in export revenues. Cairo expects about 10,000 jobs to be created by the programme. To deliver the plan, Minister Fahmi established Egyptian Petrochemicals Holding Co. (Echem), which has a brief to encourage and support investors and to set up strategic alliances with local producers, offtakers and international shareholders. The company's first task was to split the investment plan into three, six-year phases (see DT No. 3).
With so many demands being placed on Egypt's proven reserves of natural gas, many wonder if there will be enough feedstock available for the petrochemicals after meeting the needs of the domestic market and gas export programme. The government has said that one-third of Egypt's proven gas reserves should be kept for export, one-third for domestic consumption and one-third for the future generation. But in this the government is gambling on finding more gas.
Although small in global terms, Egypt's crude oil production has been a crucial element in the local economy for almost 100 years, rivalling Suez Canal revenues, tourism and worker remittances as the most important sources of foreign revenues, bringing in about $3,910 million in fiscal 2003/04. Crude oil and natural gas account for about 7.9% of Egypt's GDP, with oil products accounting for a further 0.7%. But with domestic oil consumption to outpace production in this decade, the emergence of the gas market could not have come a moment too soon for Egypt.
Natural gas has become the star of the economy, with the government pinning hopes on its estimated reserves of 68 TCF. Gas production is forecast to rise from 137.9 MCM/d in late 2005 to about 140 MCM/d by 2008. Egypt became a gas exporter for the first time in 2004, with the sale of gas to Jordan through a pipeline to the Aqaba power plant. An Egyptian consortium is currently extending the pipeline north through Jordan to supply the country's other power stations. The long-term aim is to extend the pipeline northwards taking Egyptian gas to Lebanon and Syria. But Cairo's priority is the development of its LNG exports. Segas' LNG exports from January 2005 were be joined in March and September by exports from the country's other LNG producer, Egyptian Liquefied Natural Gas (ELNG). ELNG is behind the $1,900m development of two 3.6m t/y trains at Idku, which went on stream in March and September - in both case considerably ahead of schedule (see OMT & Gas Market Trends No. 3).
The government's structural reforms will have a major effect on the domestic gas sector. If the economy grows then demand will rise. The World Bank estimates that Egypt's gas demand outpaces GDP growth by about 1%. So gas demand in Egypt is likely to grow at about 5-6% in the coming years. About 60% of Egyptian gas production goes to the power sector, 10% to the cement sector. And another large percentage goes to the fertiliser industry.
A key issue for gas firms selling to the domestic market is subsidy cuts. The government is phasing cuts in gasoline subsidies in the wealthier areas of Cairo but gasoline generally sells for about [pounds sterling]E1/litre, far below the cost price of about [pounds sterling]E1.40/litre. This is the key risk factor, with Cairo paying a lot in energy subsidies. It is also importing many oil products at high world prices and selling them at subsidised rates. So a major concern is that the financial burden on the government from increasing oil prices means it will have less money to spend on infrastructure. It also limits growth in the energy sector, because the subsidies mean there is no incentive to use energy efficiently.
There is no incentive for Egyptians to switch from oil to gas. The wholesale removal of subsidies is a big issue. Cairo's aim now is to sustain the growth in gas production capacity in order to benefit from rising global demand as well as local needs. The two-train Idku LNG complex has enough capacity for six trains and ELNG's main shareholder companies, BG and Petronas of Malaysia are keen for further trains. However, one major obstacle lies in finding gas. Train 3 depends on securing gas supply and also securing a market at the other end.
The industry now is focused on finding new reserves of natural gas. In the coming years a significant rise in gas E&P investment can be expected, with international gas companies such as BG going deeper into the Mediterranean in the search for gas.
The state-owned Egyptian General Petroleum Corp. (EGPC) imports crudes and refined oil products to meet local needs. Oil products imports declined in 2001 as local refineries were able to meet demand for gasoline and distillates. An important part of local demand is being met by the 100,000 b/d Midor export refinery near the Sidi Kerir terminal, which began operations in early 2001 (see DT 2).
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|Publication:||APS Review Downstream Trends|
|Date:||Jan 2, 2006|
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