Natural gas sold to Spain at five times domestic prices

Waleed Khalil Rasromani
5 Min Read

Executive says exports necessary to attract investment and exploration

CAIRO: Egyptian Natural Gas Holding Company (EGAS) Chairman Sherif Ismail announced that the price of liquefied natural gas (LNG) sold to Spain was, on average, five times the price afforded to domestic consumers in the last fiscal year ending Jun. 2006.

The state-owned EGAS has a 10 percent stake in the liquefaction facility in Damietta, with 80 percent of the balance owned by Spanish energy company Union Fenosa and 10 percent owned by the Egyptian General Petroleum Company.

Despite its minority stake, EGAS controls approximately 40 percent of the facility s total annual throughput of 7.56 billion cubic meters of LNG.

EGAS makes use of its share of the throughput in the Damietta facility by way of agreements with British Petroleum and British Gas to supply gas from their fields. The two multinationals are also responsible for lifting and exporting EGAS s share of the LNG output, which they supply to their international network of buyers.

Union Fenosa sells its share to Spain and elsewhere in Europe, and as a result Egyptian gas now powers 6 percent of Spain s electricity consumption.

Since international LNG prices are linked to crude oil prices, the government benefits from rising oil prices as a result of its stake in the Damietta LNG facility.

However, the precise details of the revenue sharing arrangements between EGAS and multinational energy companies are unknown.

In Egypt, these matters are considered secrets, [resembling] secrets of war, says economist Magdy Sobhy of Al-Ahram Center for Political and Strategic Studies.

In addition to the LNG facility in Damietta, there is another in Idku near Alexandria owned primarily by British Gas and the Malaysian energy company Petronas.

The output of the Idku plant is sold to Gaz de France, which it in turn supplies to its customers in Europe. Egyptian gas makes up a 10 percent of the French energy company s total supplies.

Ismail says that the participation of international companies in Egypt s natural gas industry is crucial because it encourages exploration and increases the country s proven reserves.

These benefits cannot be achieved by a domestic industry alone, and in part justify the government s strategy of natural gas consumption.

There is a plan for natural gas usage based on the formula that one-third of gas should go towards exports, one-third should be used for domestic consumption and one-third are reserves for future generations, says Sobhy.

Over 60 percent of domestic consumption is used to produce electricity, according to Ismail, and natural gas is provided to local buyers at preferential prices that are well below the international market.

Nevertheless, Sobhy rejects the suggestion that the preferential pricing for domestic consumers represents a subsidy by the government.

There is no subsidy, in the sense that the domestic price of natural gas is not below the cost of production, says Sobhy. This is a public asset . [and its usage] is a social and political issue.

Meanwhile, restricting the proportion of domestic usage to one-third is appropriate because of the limited demand in Egypt and the potential for increased reserves and production with the ongoing exploration by international companies.

Egypt doesn t have many alternatives [to exporting natural gas], because reserves have increased substantially in the last 10 years, says Sobhy.

The remaining one-third of natural gas that is not exported nor sold domestically is kept as a reserve for future generations. This approach is distinct from that of several other countries including Kuwait, which produces a maximum amount of oil and invests the proceeds in financial instruments intended to benefit future generations.

The plan [in Egypt] is based on the expectation that consumption of natural gas will increase, because it is the preferred source for energy, and its price is also expected to rise, says Sobhy.

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