CAIRO: Despite very rapid expansion over the last few years, Egypt s gas sector is showing no signs of saturation: it is still the country s fastest-growing industry. Egypt is now the sixth-largest exporter of liquefied natural gas (LNG) in the world, but positive recent developments, in both supply and demand, mean that it has much further to go, and is going there fast.
On the supply-side, the most significant recent event was the announcement in June by Union Fenosa (of Spain) and Eni (of Italy) that they have signed an agreement with the Egyptian government to build a second LNG train at Damietta, at a cost of $1.5 billion. Egypt currently has three LNG trains: two at Idku, owned by BG, and one at Damietta, owned by Union Fenosa and Eni. The new train is expected to be running in 2009, reaching full capacity by 2011, and will double the amount of LNG being shipped from Damietta. Meanwhile, BG is continuing to move towards building a third terminal at Idku.
These new trains should get plenty to liquefy. Egypt s current proven gas reserves are 67 trillion cubic feet (tcf), and analysts reasonably expect this figure to grow fast; indeed the government s claim that another 100 tcf are waiting to be found is not implausible. New exploration contracts are flying off the government s table: 77 have been signed since 2003, the latest going, in July, to a consortium of Petronas, BG and RWE Dea AG, who will invest $106 million to dig deep in the Mediterranean.
The explorations continue to result in a string of gas finds, the most recent by niche explorer Centurion Energy (of Canada) in early August. Even the deep-water concessions, about which some analysts had doubts, are coming up trumps: Shell announced in July that it was about to start digging three or four wells in its deep Mediterranean concession, expecting to bring up as much as 2 tcf from that concession alone.
The keen suppliers are no fools; the demand-side is also looking up. On the international front, global demand for gas continues to rise in response to the high price of crude. The EU in particular is unlikely to lose its status as the principal market for Egypt s LNG: its demand for natural gas is expected to have risen over 10 percent by 2009. In Spain, number one consumer and chief regasifier of the EU-bound LNG, the picture is even brighter: it is the third-biggest consumer of LNG in the world; demand for gas grew 18 percent last year; and a consortium which includes Union Fenosa is building a new regasification plant in northwest Spain which will take in shipments from Damietta.
There is also demand for gas in its conventional, non-liquefied form. Egypt s north-bound pipeline already supplies Jordan, and the government has plans to extend it up into Syria, Lebanon and Turkey. Officials claim that it could eventually carry 3 billion cubic meters of gas abroad. There are likely to be takers: in August, the Organization of Arab Petroleum Exporting Countries (Oapec) published a study showing that demand in Arab countries for gas has outstripped demand for oil over the last 10 years, and is expected to continue to rise at over 4 percent per year until 2020. There is also demand in the local non-Arab market. Egypt agreed last year to supply Israel with gas from early 2008 through a pipeline currently under construction.
On the home front, domestic demand is expected to continue to shoot up as the economy expands. BG recently estimated that the demand would grow by 9 percent per year for the next few years. The government, aware that its gas supplies are growing much faster than its oil supplies, is behind some of this growth. It is extending the distribution network southwards, expecting it to reach Aswan within six years; it has promoted the increase in the number of gas-fuelled vehicles, assisted by the 35 CNG filling stations being built by Shell CNG; new government housing projects are to be totally fuelled by gas; and all of the (nationally-owned) power stations, which face demand increasing at 7 percent per year, are now run entirely on gas.
But one recent cabinet move has seriously complicated the situation. On July 28, the government drastically reduced the domestic subsidies on gas and diesel, thus raising the prices on both by up to 30 percent overnight. The event was long-anticipated: with the 7-9 percent growth in demand for fuel and rising international prices, the cost of the fuel subsidies was said by Ahmed Nazif, the prime minister, to be set to hit LE 40 billion this year – around 8 percent of GDP and more than total combined spending on health and education. From the macroeconomic point of view, the government had little choice, even though the price increases have been predictably very unpopular and is highly likely to increase support for the Muslim Brotherhood, the Islamist opposition.
The effects for gas companies are harder to predict. On one hand, the price increases will put downward pressure on domestic demand. On the other hand, the resulting reduction in the government s subsidy burden could allow it to offer sweeteners to the companies, by a combination of three different means. First, the government could use some of the newly available cash to pay the companies more for the gas it buys from them. Second, it could take a smaller cut of the companies profits from exports (it currently takes 60 percent of the profits from Idku and 40 percent of the profits from Damietta). Third, it could reduce the quota which companies are forced to allocate to the domestic market, thus allowing them to export more at high international prices. The companies have been hoping for some time that some of these three things will happen; and the majors clubbed together earlier this year to tell the government that they needed exactly these things to happen if they were to be able continue their current high level of investment.
When it comes to a crunch, the country needs the gas companies to continue their frantic exploration and production, and the companies know it. As subsidies continue to get cut, and companies get the benefits, both the government and the population will suffer; but the gas industry will soar on upwards. Noozz
