Delay in natural gas price hikes cost government millions

Theodore May
4 Min Read

CAIRO: The Ministry of Petroleum this week implemented a hike in the price of natural gas, making official a measure that was approved on May 5 of this year.

The two-month delay between approval and implementation, largely blamed on bureaucratic inefficiency, reportedly resulted in a LE 263 million revenue loss for the government.

This loss came at a time when the government had decided to increase energy costs across the board in an effort to fund the wage increases it approved in May.

The May 5 announcement mandated a price increase from $1.8/mBTU to $2.8/mBTU, a rise of 56 percent. This measure was part of a broader move by the government to maneuver the Egyptian economy through turbulent times.

“I think this was a plan already in place, said Reham El-Dessouki, senior economist at Beltone Financial, in reference to the price increase.

Indeed, to the companies that use natural gas, this price hike did not come as a surprise. The Ministry had announced in September 2007 its intention to raise the prices over a three-year period.

“For the energy-intensive companies operating using natural gas, noted El-Dessouki, “this is old news.

But a roller-coaster economy may have been what spurred the government to move up its plans. Price increases were reportedly set for September 2008 and September 2009 before being moved up to July 2008 and January 2009, respectively.

This week’s price increase marks the third time in five years that the government has moved to raise prices. With a 17 percent increase in 2004 and a 25 percent increase in 2006, the Ministry of Petroleum has become more aggressive in its efforts to restructure energy subsidies and close the gap between production costs and sales revenues.

Furthermore, as energy prices around the globe continue to rise, the government may have seen this as an opportunity to capitalize on one of its most abundant natural resources.

“The need to do this, El-Dessouki commented, “was compounded by the fact that international energy prices are going up.

“It’s technically the best time this could have come out because the companies are at their strongest, she added, commenting on many of the companies that are reliant on natural gas.

Natural gas has become a critical commodity for oil-poor Egypt, whose reserves are estimated to exceed 58 trillion cubic feet, or about 1 percent of the world’s supply. The early 1990s marked the beginning of large-scale exploration for natural gas, and the industry exploded around the turn of thecentury with 220 percent industry growth from 1999 to 2004.

Though domestic demand for natural gas remains high, Egypt has pursued a vigorous campaign to export, beginning with the completion of an underwater pipeline to Jordan in 2003.

Natural gas again made headlines in recent months because of an agreement with Israel to supply that country with natural gas at bargain prices. Protests by many in Egypt have spurred the government to call for a review of the agreement.

The Ministry of Petroleum has declared it will sign no more contracts for exporting natural gas until 2010. Market volatility, it says, was behind the move.

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