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Ghorab: Egypt has yet to tap into its wealth of natural resources

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Former Minister of Petroleum, Abdallah Ghorab, talks to Daily News Egypt about the country’s energy problems and the crippling bureaucracy hampering development

Former Minister of Petroleum Abdallah Ghorab talks to Daily News Egypt about the country’s energy problems. (DNE/ Mohamed Omar)

Former Minister of Petroleum Abdallah Ghorab talks to Daily News Egypt about the country’s energy problems. (DNE/ Mohamed Omar)

How grave is Egypt’s energy crisis?

Egypt doesn’t suffer from an energy crisis.

A state is said to have an energy crisis when it is incapable of supplying enough energy to satisfy demand, which is not the case in Egypt. Not producing enough to satisfy demand is not a crisis; otherwise every country that imports energy would have an energy crisis.

An energy crisis means that the end consumer has a demand for energy which the state cannot supply. But we don’t suffer from that. Egypt’s energy production covers 70 to 80 per cent of its consumption and the rest is imported by the state.

Egypt suffers from two problems when it comes to energy; pricing and distribution. Both incur massive losses to the state. When it comes to pricing, the state imports a tonne of propane for $1000 and sells it for EGP 200. The state is required to fill a pricing gap to make it affordable for the average citizen.

Contrary to popular belief, the energy problem in Egypt does not constitute a crisis we should be worried about. We’re suffering from a procedural crisis which magnifies the magnitude of the problem.

What is so difficult about restructuring the subsidy structure?

I believe that the government should expend its efforts and dedicate the largest portion of its resources to securing the basic needs of the poor through subsidisation. But at the same time, I strongly feel that citizens who can afford the real price of these services must be forced to pay them in full.

The problem is the absence of a mechanism to accurately identify and differentiate between those who need subsidies and those who don’t. A large portion of Egypt’s economy is informal; you have factories, farms, housing structures and all kinds of businesses that are not registered. And those who operate in the private sector use the resources provided by the government and since they cannot go to the state for their services, they turn to the black market, which only serves to perpetuate it.

I believe that the government should take the initiative and demand every individual and establishment which generates income to register with the state because otherwise the government has no way of measuring the levels of consumption. It cannot identify the number of consumers, nor can it measure income and therefore cannot provide its services within accurate price brackets which suit the needs of every individual/establishment.

Take propane for instance, its price hasn’t changed in 20 years. Yet, look at the store that sells beans and falafel sandwiches, which consumes propane to produce its product; has the price of that sandwich changed over the past 20 years? It went from three piastres to 100. Yet, if the government declares it will raise the price, businesses start threatening to raise the prices of their products.

The government must raise awareness of the fact that the cost of fuel represents a small portion of overhead and its impact on the price of the end product is not as significant as people believe. This misapprehension alone could easily lead to dramatic price hikes in all kinds of goods and services, especially public transportation. 

Why public transportation in specific?

The developed world contributes a lot of money, research and planning to develop public transportation. In Egypt, we do the complete opposite; we strongly support individual modes of transportation. There are no restrictions on car imports, we have an abundance of car-assembly factories (which I am not necessarily against as long as they don’t curtail the economy), banks that offer a variety of car loans and of course, cheap petrol. Without any development in the transport infrastructure to support the growth of the number of cars on the road, naturally led to today’s traffic problems.

Studies conducted to tackle the traffic crisis in Greater Metropolitan Cairo estimate that it would cost around EGP 12bn to resolve the issue; funds to build two additional subway lines, highways and so forth. The country spends EGP 20bn every year on car petrol subsidies. So the state is spending EGP 20bn on a policy that exacerbates the problem, yet does not attempt to allocate EGP 12bn over a few years to resolve it from the roots. The key is balancing priorities. The same logic could be applied to our problem with electricity consumption.

What is at the core of the electricity problem?

Egypt’s production capacity for electricity is very high, almost 25,000MW. During the peak of the summer, and because the state doesn’t regulate consumption, Egypt’s demand for electricity rose to 27,000MW. How did this happen? During that period, we used devices (generators and conditioners) that consume large amounts of electricity which the government has to record. If the state is unaware of how much energy citizens are expected to consume, how can it satisfy that demand?

When the prime minister called on citizens to rationalise their use of electricity, people criticised him, as if he was calling for their punishment. Why is he asking for that? Because the government will spend billions to supply those additional 2,000MW, billions which could be channelled in other areas that aren’t as optional as reducing electricity consumption, be it healthcare or education, or any of the other sectors.

This is only an example, but it is symptomatic of a much greater problem…Trust. There is no trust between the citizen and the government. If the citizen believes that these billions are going to be used in funding other critical sectors, he would proactively reduce the use of electricity. And here lies the core of the problem; citizens need to understand that the government is spending their money. 

If we were to look for one blessing in hindsight, is that we can start from where others have ended. For instance, developed nations have spent years of research and development to attain new energy solutions. Why not benefit from this knowledge? For the longest time we’ve been talking about the huge potential of solar energy in Egypt. What is really stopping us? The technology is there, it’s not as expensive it used to be a few years ago. Why doesn’t the government announce international bids for the rights of building solar parks? I’m sure you will have companies with excellent experience and track records in that field queuing up to snatch these kinds of projects. Why are we always looking to reinvent the wheel instead of seeking the most efficient and optimum solutions and benefit from the technological achievements of others?

Do you see the current agreements model fit for the coming period?

The Production Sharing Agreement is a flexible model. In the Egyptian petroleum industry, the government deals with both large and smaller companies. But in such a competitive industry, large businesses naturally get the biggest portion of the cake because they’re capable of enduring the costly nature of the business. The government, 90 per cent of time, deals with such big companies. In the previous fiscal year, the government spent $8bn on exploration and production. Egypt’s production rate of crude oil rose from four to five per cent, and natural gas production remained more or less the same, which means that you’ve made successful investments despite these difficult times. We don’t have a problem in the agreements system, but we do have problems with the mechanisms by which we apply the system.

We need to understand that for investors, oil and gas exploration and development, like any other project, is profit driven. The investor wins a bid for a block to explore for hydrocarbon. He then invests in this endeavour and when hydrocarbon is found, he starts recovering the cost of exploration and also makes a profit, which amounts of 40 per cent of production, which is a fairly balanced system, since it saves the state the burden of assuming the financial risks of exploration.

What is your take on sanctioning the importation of natural gas by the private sector?

I am against allowing the private sector to import natural gas, simply because the government is capable of fulfilling that role. Let me rephrase, I am for the investor to import natural gas so long as he uses the same standards used by the government. If the investor has a certain project and wants to import gas, I’m not against that. But to allow the investor to trade gas in the market as a commodity is unnecessary, because the government is capable of doing that. The only difference is the private sector would profit from that trade and the government incurs losses, and we’ve had enough of that during the old regime.

As I mentioned earlier, the investor is here to make a profit. If he is importing gas, he won’t be doing it just to satisfy his own demand, but also to market it to other industries, a role that the government is capable of doing. The investor will import gas, essentially to market it at a profitable rate as well as benefitting from its consumption at the cheapest price possible. Why should the investor profit instead of the government?

The state is more than capable of importing gas and selling it at its actual (unsubsidised) price. But if the government offers to sell gas to industries at the same rate the private sector was to offer, the former will be criticised for crippling the industrial sector. And that is exactly what is happening today.

What is the status of our energy resources?

Egypt has yet to produce oil and gas. This is not my opinion as the former petroleum minister, but as a petroleum engineer who’s aware of this country’s copious resources.

Let’s look at the map of Egypt, which areas have we seen production from thus far? From the Gulf of Suez, the Nile Delta, recently from the western desert and the shallow Mediterranean sea (up to 10km from shore). Egypt’s economic waters extend to over 300km, stretching out into the deepwater of the Mediterranean. Egypt’s potential resources of natural gas in this area are estimated, according to our studies that concur with those of the United States Geological Survey, to be 230 trillion cubic feet of natural gas.

In the Gulf of Suez, we use mostly conventional methods of production. Our production from the western desert has mainly been from the shallow layers. A few years ago we started producing hydrocarbon from deeper layers in the western desert and we had some relative success, producing 4,000 to 5,000 barrels from these layers. Yet, production from deeper layers is more costly. And he who makes price his main concern in this industry, never moves forward.

In the Gulf of Suez, what’s been produced so far only represents 30 to 40 per cent of what truly exists in the basins. The rest can be extracted via a method known as Tertiary or Thermal Enhanced Oil Recovery, but again, the cost of this method of production is hefty. It can cost around $20 to produce one barrel, which is regarded as unacceptable, despite the fact that purchasing that barrel would cost $120.

This is a circumstance where amending the agreements system is necessary, as carrying it out wouldn’t be cost-effective for the investor under the current model. When venturing into uncharted territory, the rules of the game must change to suit new challenges. Through this method, we can produce as much as we already have from the same basins.

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 Those who ruled us before, found that cost is a burden on the state, given how much is spent on subsidies, and decided that these ventures were not worth it. Instead of presenting the public with the reality that the cost of production is rising and we must all share that burden, the government decided to leave the citizens in the dark, living under the assumption that the government is financially able to cover the cost.

The role of the Ministry of Petroleum is to firstly secure the country’s future needs of hydrocarbon. Secondly, to find investments and provide technology to produce, which entails issuing bid rounds and offering incentives for the investors to make your position competitive among regional nations. Thirdly, understanding that we must deal with the rise in prices no matter how high they get. If we make our criteria the price, there would be no investment and therefore no further development.

Egypt has an abundance of natural resources, human capital and every other prerequisite for sustainable development. We are holding ourselves back, our mentality in dealing with one another and with the state, our presumption that everyone is a crook and given the slightest opportunity will steal. We MUST change this mindset in order to move forward.

This mentality is a product of the system with which we’ve been ruled for the past half a century, the domination of the ruling elite over state resources and institutions. We must ensure that every individual is capable of inventing or producing something with no hindrances.

How would you evaluate the government’s method in supervision and oversight?

The government’s approach to the concept of oversight tends to lend more emphasis to the procedure rather than the end result. Not just in the energy sector but in general. Everyone assumes that the other is stealing and thus every link in the chain wants to make sure their name is in the clear. It’s one of the major impediments to economic development in Egypt.

The revenue Egypt stands to gain from honest businesses, most of which are currently knee-deep in a bureaucratic mire, is sufficient to make up for what has been stolen in the past and more. The role of government oversight should be profound; it should focus on whether a company has achieved its stated target or not, for instance. In the end, that’s what brings in revenue and stimulates the economy. But when a business dedicates most of its energy towards fulfilling the government’s tedious requirements and doesn’t achieve its stated target, no one really benefits.

All of these matters are tied to one thing: a clear vision. The government needs to work collaboratively on a detailed vision and formulate a roadmap delineating how to implement that vision. Our perception of the government and ministers needs to change. We need to develop a sense of trust but before we do so, we need to choose our officials wisely.

We’ve made wrong choices in the past but that doesn’t mean that we can’t make the right ones today. The government needs to adopt a new mindset when appointing high-ranking officials. Merit and reputation should be the basis on which these choices are made. We need to revolutionise the philosophy of our procedures. Give these officials real authority and freedom to implement their plans, remove the bureaucratic obstacles and loosen the traditional oversight that instils indecisiveness and fear of failure from their way, so they’re able to take bold steps and make tough decisions. Afterwards, the government can hold them accountable for the results, if necessary, that is the way to practice constructive and practical oversight.

If we choose carefully and wisely, we will not have the kind of “Yes men” who believe they can just wing it, because if they’re given authority and freedom, only they would be held accountable. Contrarily, we will have the type of officials who would only accept a task after meticulous studying, who would tell you what can and can’t be done, simply because they can bear the brunt when things go wrong. I am not saying that admiration should let everyone run wild with their plans without any supervision, but we must allow them certain freedoms to enable the sucessful fulfilment of their tasks.

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