Wood Mackenzie: Egypt Needs to Offer Stability to Upstream Sector
In an independent assessment of Egypt’s gas sector, Wood Mackenzie highlights the challenges Egypt faces in addressing its supply shortfall as a result of soaring domestic demand and a flat production outlook. In an environment of falling exploration success, rising development costs and low gas prices available to upstream operators, Wood Mackenzie says the government will need to offer a stable upstream sector and bring Egypt’s growing subsidy bill under control, without derailing industrial output or passing through large price rises to the population.
Wood Mackenzie’s research report, titled ‘Egypt’s Gas Transformation’ forecasts that Egypt’s gas production will remain around 6 billion cubic feet per day and is unlikely to increase significantly through the remainder of the decade. “In the late 1990s and early 2000s, international oil companies made a number of giant discoveries in the offshore Nile Delta, providing feedstock for gas intensive industries and promoting several gas export projects. But since 2005, discovery sizes have fallen, and the economics of new deep water fields are marginal, as a result of high development costs and low domestic gas prices,” says Martijn Murphy, North Africa Upstream Research Analyst for Wood Mackenzie.
Murphy expands, “There has been a sharp drop in deep water exploration and development activity since the revolution in 2011. With the exception of North Alexandria, few large fields are expected to come onstream. Uncontracted gas reserves are located in smaller, remote fields which are marginal without fiscal incentives or higher gas prices. In addition to better terms, a return to political stability and timely payments to operators will also be required to revive development activity in the region.”
In November last year, Egypt issued its first tender to import LNG, clearly acknowledging the need to diversify gas supply beyond indigenous production. However the country has set itself an ambitious target for receiving the first gas imports by the end of 2013. Giles Farrer, Senior LNG and Global Gas Analyst for Wood Mackenzie says, “Acknowledging the requirement to import expensive LNG might set a new benchmark of higher prices to Mediterranean explorers that could incentivise domestic exploration and production, and allow smaller offshore projects to be economical. But this will inevitably require a review of the subsidy structure to ensure financial sustainability.”
The report says that Egypt’s gas exports have gradually declined over the last five years and are expected to continue declining as the government diverts further volumes to domestic market. Mr Farrer adds, “Egypt will be wary of ceasing exports totally: It is contractually bound and defaulting on these contracts would reduce its ability to attract investment in the future.”
While Egypt prepares for LNG imports, it has been looking at ways to manage its export obligations as Farrer explains, “If Egypt is able to conclude an LNG supply deal with Qatar, up to 500 million cubic feet per day (mmcfd) of gas could be freed up for the domestic market, providing some short term relief. However, the financial terms of the deal are still being negotiated and will be key to determining whether it succeeds.”
The report articulates the dilemma posed by soaring domestic demand, as Mr Murray Douglas, Lead Energy Markets Analyst for Wood Mackenzie explains, “Egyptian gas demand has grown strongly over the past 20 years, supported by robust economic growth and an expanding population. The pace of growth has been driven by fuel subsidies, which underpin industrial expansion and provided consumers with access to low cost energy. As a result, gas has surpassed oil in Egypt’s energy mix, with demand rising from just 0.9 bcfd in 1990 to 6 bcfd in 2012.
“Removing subsidies presents a number of challenges for the government: It undermines the competitiveness of the industrial sector by exposing it to international competition, and passing through higher prices to smaller domestic consumers will prove to be very unpopular. But subsidy removal will not necessarily prevent gas demand increasing in the power sector. Coal, nuclear and renewables could all provide diversification options for the long-term, but not necessarily at a lower cost than imported gas,” Douglas continues.
“Reducing industrial demand is also an option for Egypt, but this will be a difficult balancing act for the government as it could discourage new industries and lead to the mothballing of existing facilities if prices rise too quickly,” Douglas concludes.