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Towards liberating the energy market

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The petroleum ministry is in its final stages of sanctioning the importation of natural gas by the private sector of the hydrocarbon industry. Many questions come to mind as to the consequences of such move, considering the absence of information to clarify the mechanisms by which the government is proposing to implement this policy.

Why is the private sector in need of importing natural gas? Is the government’s capacity to do so no longer sufficient? At what price will the private sector sell its imports to the localmarket? Would it be sold to solely to the private sector or would it be marketed to the government as well? If the energy private sector plans to market its imports to government, who would be gaining here? Who would bare the hefty subsidy bill then?

It’s highly unlikely that gas imported by the private sector would be marketed to the government, simply because the only gain here is for the investor, as the government would be paying more than it does if it imports its own. But looking the country’s current energy needs for large-scale industrial investments, maybe allowing the private sector a piece of energy market is not such a bad idea,

Let’s then look at what the state could gain from such endeavour. For starters, it would relief the government of the burdensome task of providing massive amounts of energy for these kinds of enterprises. The state would profit from the use of the national distribution grid to deliver private gas. On a larger scale the idea fits quite well with restructuring the subsidy programme, as the market’s energy demands from the government would gradually shrink.

A point of contention, however, rises when embarking on this new approach to the Egyptian energy market. Considering utilities have always been in the control of the state, allowing the private sector in would create, for the first time, a dualism in the energy prices in Egypt.

Pricing natural gas is one of the most debated issues in Egypt’s energy market. Considering the advancement in technology that allowed for more efficient exploration and development of natural gas, especially in deepwater frontiers, and the high cost of utilising such technologies, the pricing scheme governing the trade of natural gas has become the primary variable relevant to the investor’s Internal Rate of Recovery (IRR).

Industry professionals greatly differ on the scheme by which natural gas should be priced in the future. Some have suggested that pricing should take place post-discovery, especially in deepwater exploration where the approximate cost is more difficult to calculate given extremely costly nature of such operations.
This proposal, however, instigated fears of overpricing the government’s side, which would be encountered post discovery, at which point the government and the investor would be at odds.

Some have suggested the opposite. Giving an estimate appraisal for the cost of exploration and naming the price pre-discovery. Investors recoiled to such proposition as it presented a vague prospect; investing copious sums of money without having a clear idea of the expected rate of return.

Pricing natural gas is an issue that requires a swift and innovative solution since most of our gas prospects lie in the bed of the deep Mediterranean, where the price of conducting exploration and development stands in stark contrast to those operations done on land or closer to the shore.

Resolving this issue would facilitate the induction of the private sector into the energy market and quell the anxiety surrounding pricing natural gas. The private sector’s entry to the energy market is a progressive step towards liberating the utilities sector from public enterprise. Its introduction, however, is a process that requires not only resolving internal differences of market mechanisms, but a comprehensive strategy that would insure the organic growth of the private sector into not only the energy market, but other sectors where big government is total control.

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