Egypt, the most populous Arab country is experiencing incredible pressure on its energy resources. We discusses what opportunities lie ahead for investors in the country’s energy sector - both conventional and unconventional – with a prominent Abu Dhabi based investor
Egypt’s energy woes are nothing new. The country’s skyrocketing energy needs are just one portion of its overall development challenges in the coming years.
Here are a few basic facts to help put things in perspective: Egypt is the biggest non-OPEC oil producer in Africa with a daily output of about 700,000 barrels and the continent’s second-largest natural gas producer (2 trillion cubic feet) after Algeria. The country is a heavy user of both oil (41per cent) and gas (53 per cent) but there is now a somewhat energised push for alternative sources of primary energy.
At the much-publicised Egypt Economic Conference in Sharm el Sheikh earlier this year, Energy Minister Sherif Ismail set out four major goals for getting post-revolution Egypt on the road to recovery: Enhance living standards and alleviate poverty; improve public services; increase job opportunities; restore Egypt’s regional and international leading role.
Key to all of this, he explained, is how Egypt must prioritise investments to ensure energy security and meet domestic needs but do so in a way that maximises added value of its natural resources in an efficient way.
Strong investment climate
Egypt is reeling from an ever-widening budgetary gap mainly built on decades of energy subsidies, economic and population growth which have resulted in the Egyptian General Petroleum Corporation (EGPC) struggling to meet its payment obligations to foreign energy operators in the country.
But judging by the level of international interest at the March conference where strong financial commitments from notably the Gulf states were made, there is still much promise and hope Egypt’s economic losses can be reversed. Rather encouragingly some US$12 billion in upstream oil and gas investments were signed over the course of the three-day event.
The country has offered up 18 new exploration blocks in its two latest bid rounds. The blocks consist of eight shallow water plays and 10 onshore blocks spread across the West and East Nile Delta region and south of the Gulf of Suez
“The market is quite buoyant at the moment across the whole energy spectrum. In the upstream oil and gas sector, Egypt has a strategic imperative to increase its production of oil and gas to feed its domestic energy demand, and to bolster the recovery of the economy,” says Nabeel Kassem, managing director of operations for Abu Dhabi based Gulf Capital Private Equity. “This generates significant interest in exploration and production projects which in turn feed activity in oilfield services.”
As if to underline this further, Egypt has, over the past year or so, seen a return by its historic foreign oil and gas partners to its onshore and offshore producing regions. The country has a storied history in oil and gas reaching as far back as 150 years, so, Kassem believes that future investment in the sector is not merely speculative.
“There is good potential everywhere in Egypt; Offshore in the Nile Delta, the Mediterranean and Red Sea and on land in the Eastern and Western Desert,” he says, adding that the country could likely experience growth rates in its upstream sector that are higher than the regional and even international average in the next five years.
“Also, there is increasing activity and interest in developing renewable energy projects, mostly in solar and wind to increase the power production in Egypt and bridge the electricity supply-demand gap,” adds Kassem who also heads up Gulf Capital’s oil and gas practice.
Gulf Capital, which recently signed a debt financing agreement for three mega downstream projects in Ain Al Sokhnaon the Suez Canal is looking at several projects and investment opportunities in all segments of the Egyptian energy sector.
“The projects are at various stages of development, but we are hopeful that some will convert into significant investments that we will announce in due time,” explains Kassem.
However, he makes the point that due to the very limited amount of natural gas for anything but domestic consumption, its use as feedstock for Egypt’s growing petrochemicals industry and export market is currently limiting investor interest in that sector.
“For downstream investments, Egypt has long suffered from lack of investment of its oil and gas processing and refining infrastructure,” he laments. “The upgrade and revamp of oil and gas processing facilities in my opinion presents a great investment opportunity, provided that the government provides easy mechanisms for investors to participate in this sector.”
Asked if Egypt is likely to begin exporting any portion of its sizeable natural gas wealth - which some experts have said could be as early as 2020, Kassem believes that many dates are “bandied around” but in his view any date is not of great significance. “In my opinion any available gas that would be surplus to the domestic energy needs of Egypt should not be sold as raw commodity to the export markets, but converted into value added petrochemicals that are sold more profitably to the domestic market or to the export markets.”
On clean energy
Kassem, a 30-year veteran of the international oil and gas industry, believes the case for Egypt’s energy sector going green is very strong, namely in solar and wind. To him, pursuing these alternative energy sources is not a luxury or a way for Egypt to score environmental prestige points but is borne out of its economic realities.
Echoing Minister Ismail’s declaration for achieving better energy security by diversifying Egypt’s energy supply, Kassem says: “If it does not diversify its energy sources, Egypt has no alternative but to resort to expensive imports which will burden its economy further as it tries to recover and grow,” he warns. “Simply put, Egypt currently has neither the ready production capacity nor the hydrocarbon reserves needed to satisfy its domestic energy consumption needs.”
Like much of the region, Egypt is blessed with a very healthy solar profile and has significant wind corridors that Kassem believes should be exploited to supply at least a significant part of the country’s energy needs.
“We can argue for a long time about how realistic are the declared targets, but that should not be the focus of any of the discussions. The focus should instead be on how to make the targets closer to reality. The fact remains is that what is needed in Egypt is an effective framework to enable and facilitate significant investments in this sector.”
Currently the EGPC’s immediate main priorities apart from diversifying energy supplies are in boosting the overall supply, addressing its historic accumulated debt; reform energy subsidies and modernise the governance model of the sector.
In terms of oil, gas and renewable energy, Egypt remains a vastly unexplored country and with the eventual streamlining of its energy sector the potential of hydrocarbon discoveries and energy development is very good.
Egypt’s strong pedigree of successfully engaging with international private oil and gas investors could positively propel its energy security aspirations many times over well into the future. Additionally with the availability of experienced human resources and an investment-friendly production sharing fiscal regime, the country can prove to be an ecosystem for good investments across its energy sector.