11 May, 2013
Madrid, Asharq Al-Awsat—Egypt’s government and international allies are scrambling to avert a summer energy crunch mostly driven by a growing natural gas deficit that, compounded with current economic woes, threatens to increase political instability and social unrest at this critical juncture.
Until recently forecast to be one of the world’s largest sources of gas production growth, Egypt is already experiencing a supply deficit that is forcing it to idle part of its export capacity while diverting industrial supplies to its power sector to meet soaring demand. The country produces more than it consumes, but production growth is insufficient to meet its long-term export contracts and rising domestic demand.
The government is working with neighbors and allies to access credit and import gas more urgently through a planned floating liquefied natural gas (LNG) terminal that it wants running by this summer to offset expected supply shortfalls, although experts doubt it will be able to do so in the short term.
The gas deficit has been a long time coming, a result of population growth and heavily subsidized industrial and electricity prices. The gap widened after Hosni Mubarak was removed from power, as political instability slowed vital private investment in production capacity additions. But while the root of the problem is not political, the consequences are.
Dwindling supplies will inevitably add to the tenuous political and social stability in the country and drain its currency reserves at a critical juncture, in a vicious circle that can only be resolved with time. Most of Egypt’s gas—about 55%—is used in power generation. A gas crunch during the peak summer season will likely fuel unrest as blackouts increase, which in turn will further erode investor appetite and thus worsen the macroeconomic situation and stability, analysts say.
“Egypt will have a shortfall in gas. It’s unavoidable. They pay high prices to import LNG, while their currency reserves are falling. And they are under pressure to reduce subsidies, but they need it to keep people from taking to the street,” said Michael Nayebi, a senior Middle East analyst in the Houston-based geopolitical intelligence firm Stratfor.
The government has already said it plans to phase out subsidies, but it “has to be very careful, because it will touch middle-class Egyptians and that could be an issue. None of these reforms can be implemented in any meaningful way until after parliamentary elections and the chances are that any government would have had no choice but to reform energy sector significantly,” said Yasser El-Shimy, a Cairo-based analyst at the International Crisis Group and former diplomat.
The government is diverting industrial supplies to increase the electricity sector’s needs, but the fact the military is the single biggest industrial player only makes it all the more complicated. “The military is heavily invested in the economy and they receive heavy subsidies for energy, and it’s difficult to curb military subsidies,” Nayebi said.
EGYPT’S GAS RESERVES of 2.2 trillion cubic feet are plentiful—enough to last decades—but the current trends are unsustainable. Production fell in 2012 for a third straight year, albeit only slightly, while demand soared more than 5% over 2011, after rising 10% from 2010 to 2011, according to a combination of Egyptian and international data.
Exports, equal to about a quarter of gas production, rose slightly in 2012, but are expected to fall in 2013 as a result of government decisions to divert supplies to its power sector, which is gradually consuming a greater share of total production. Industrial consumption, equal to nearly 30% in previous years, is also expected to decrease in 2013, while demand in the residential and transportation sectors, which together account for less than 5%, will likely remain constrained.
Several factors explain these trends. To begin with, production expectations were overblown. The global economic crisis also hurt global gas prices and investment, which inevitably affected projections.
Compounding deteriorating global markets and demand, increasing production has been hampered by the depletion of shallow, easy and cheap deposits. Developing the deeper, more complex and expensive reserves requires significantly more investment, which has not been forthcoming under current market conditions.
“Egypt was the big hope that didn’t pan out. The gas plays are not as prolific as expected, and you just have a lot of small investors not able to handle the deeper more complicated deposits,” Nayebi said.
The government’s plan to import LNG from Qatar using a floating terminal is also troublesome. “I’m not sure they have capacity to handle that in the short term. Even with a floating terminal, Egypt’s gas network infrastructure couldn’t fully utilize that,” Nayemi said.
Furthermore, energy issues are just one of the pressing economic problems for Egypt. Foreign reserves are rapidly being depleted to buoy the Egyptian currency and to pay for rising unpaid international debts spread across the economy, including in the gas sector.
“The fact that the Egyptian government has had a liquidity crunch, and has struggled to pay companies in full and in hard currency for gas purchases, has worsened [the situation],” said Shimy. “Not a lot of companies have been thrilled to work in these circumstances.”
Cuts to energy subsidies, which Oil Minister Osama Kamal recently announced would exceed USD 17 billion this year, are inevitable—and the government agrees. But scrapping the subsidies at this time would likely be counterproductive, not only because of political instability, but because economic growth would suffer.
Egypt has for some time been negotiating an International Monetary Fund initial loan of nearly USD 5 billion, but creditors want Egypt to cut pervasive subsidies, not only in energy, but in most sectors of the economy.
Qatar, which is becoming one of the single most important supporters of Egypt, also agreed to inject another USD 3 billion, on top of a previous USD 5 billion, to avert financial meltdown—but that is insufficient to stabilize the Egyptian economy. Gross domestic product growth in the last two years slowed to less than 3% from the more than 6% of each of the previous four years. Unemployment is rising, as is inflation, the latter by nearly 10% annually.
“They would have had this problem even with Mubarak,” Nayemi said. “But the Muslim Brotherhood gained leverage through handouts. Now [that they are] in power, they face the daunting challenge of balancing the economy and keeping people happy.”
“Every protest, slowly chips away the foundations of stability,” Nayebi said, although he predicted that power demand is unlikely to be a tipping point. “People won’t rise up because they have no power, but every protest just adds to this, and investors take notice.”
“It’s a very troublesome scenario. What happens when the Muslim Brotherhood can’t deliver? There is some wiggle room, but if that gas isn’t there to redistribute, do you force the industrial complex to take a hit or do you have rolling blackouts? And would it be enough?” asked Nayemi. “Egypt is in a tough patch for a while.”