Home
Loading...
You are here:  Home  >  Opinion  >  Current Article

Egypt looks to secure LNG production and supply

  /   1 Comment   /   1083 Views

Oxford Group

 

With its significant reserves of liquefied natural gas (LNG), Egypt has been a key exporter for regional consumers over the past decade but with growing domestic consumption and a number of fiscal constraints, the country has been looking to secure additional supplies by expanding LNG capacity.

In May the Egyptian government signed a letter of intent with the Norwegian shipping company Höegh LNG for the use of a floating storage regasification unit (FSRU), to be located on the port of Ain Sokhna for a period of five years. FRSUs regasify liquefied natural gas, a key step for expanding Egypt’s capacity to process imports.

It had also lined up LNG shipments from Algeria’s Sonatrach, Russia’s Gazprom, and France’s EDF.

By mid-July, however, the deal with Höegh had stalled, according to Reuters, prompting Egypt to reopen talks with the US-based FSRU operator Excelerate Energy.  Experts say it will take about six months after a deal has been struck for the facility to come onstream, which will likely mean further gas shortages this year.

 

LNG in the spotlight

Hydrocarbons currently account for 91% of Egypt’s power generation, the bulk of which comes from natural gas. Egypt has sizable gas reserves, with 2tn cubic metres as of end-2012, according to BP’s 2014 Statistical Review of World Energy. But a large proportion of annual production has been channelled towards the export market, which in recent years has brought in much-needed revenues.

However, with local natural gas production down and the country unable to meet demand, Egypt has been increasingly in need of resources for domestic consumption. Currently, limited supplies for local generation have resulted in load shedding, with blackouts in some areas lasting up to several hours per day.

As a result, gas output is being shifted away from the export market. According to BP, Egypt’s LNG exports amounted to 3.7bn cubic metres in 2013, down nearly 62% from 9.7bn cubic metres in 2010. Natural gas that was originally meant to feed the country’s two LNG export facilities is now being redirected to the local market.

However, this has created additional complications, leaving facility operators unable to fulfil their LNG delivery commitments. Unión Fenosa Gas (UFG) – a partnership between Italy’s Eni and the Spanish energy company Unión Fenosa, which operates the LNG facility located in Damietta – filed an international arbitration claim against Egypt last year following the cutoff of their natural gas supply.

 

Upstream potential

There has, however, been encouraging news in the upstream segment that may help increase production and allow the supply of natural gas to both LNG facilities and the local market. Both UFG and UK-listed BG Group have been in talks with companies operating out of the recently discovered Israeli Tamar and Leviathan offshore gas fields.

UFG signed a nonbinding letter of intent in May with US-based Noble Energy, the operator of the Tamar gas field, to feed its Damietta LNG facility.  In June, BG signed a similar agreement with the partners operating the Leviathan field.  Both these agreements will need approval from the Egyptian government, which according to local press reports, has said it will consider under certain conditions – namely that a portion of gas be directed towards the local market  and that UFG drop their arbitration claim.

 

Reducing the subsidy bill

The need to address local energy demand does create additional challenges for the state’s balance sheet. LNG exports have helped to strengthen the current accounts and boost export revenues, but these have fallen as output is redirected towards domestic consumption.

Although domestic energy subsidies have been rolled back in recent years, they continue to represent a significant burden on the state’s balance sheets, which means the combination of dropping exports and rising consumption finds the state facing reduced revenues and higher subsidy expenditures.

Indeed, fuel subsidies have skyrocketed from roughly EGP 53bn ($9.6bn) in fiscal year 2008/09 to EGP 130bn ($18.14bn) budgeted in the most recent fiscal period. In an effort to reign in subsidies, the government overhauled energy prices across the board in July. This included price increases of as much as 75% for industrial consumers and an up to 175% increase on natural gas car fuel. Reductions in the subsidy bill in fiscal year 2014/15 are expected to save the government EGP 40bn ($5.58bn), according to a statement made by Finance Minister Hany Kadry Dimian in late June.


You might also like...

Abdulla M. Erfan

Better late than never: how to rebound state fragility in Egypt?

Read More →