Economy in a week: Little progress on energy crisis
Courtesy: Courtesy of Nicholas Simcik-Arese

Despite the government’s growing energy concerns to provide for electricity and industries, which may bring about another looming blackout while impeding industries’ capacity to spur economic growth, Egyptians remain among the most optimistic globally about the economic future of their country.

The recurrent winter electricity blackouts have been raising concerns over the government’s capacity to provide enough natural gas to power stations to generate electricity.

Over the past three years, alternating governments have tackled the energy shortage in various ways. In 2012, the Egyptian General Petroleum Company (EGPC) redirected energy sources otherwise intended for export to the international market to the local market, and so decreased its share of exports to Jordan, Israel and other countries.

The lost revenue from decreased exports, in addition to the need to subsidize increased imports, had worsened EGPC’s struggle to pay foreign drilling companies.

EGPC’s inability to pay off debt owed to international oil companies made matters worse, due to the state’s worsening debt problem and growing conflict between EGPC and the Ministry of Electricity as the latter has proved unable to pay its dues.

Through 2012 and 2013, the Egyptian government has worked to re-schedule much of the debt owed to oil companies.

In 2013, growing local demand outstripped the share allocated to government exports, and so EGPC tapped into the export share appropriated for international oil companies. The oil companies, under contractual agreement with EGPC, are allocated a share of the resources they excavate. The topic made headlines when British Gas recently declared a force majeure to its stakeholders, alerting that the government has seized much of its export capacity, of which Egypt provides about 18 percent.

This left oil companies in a precarious situation: Not only was the government incapable to pay off financial accruals immediately, but it was also tapping into their contractual share of gas.

In December 2013, Petroleum Minister Sherif Ismail said that dues owed to international oil companies amounted to US$6.2 billion. Later that month, the Central Bank of Egypt (CBE) Governor Hisham Ramez announced the bank would transfer US$1 billion to the Petroleum Ministry to pay arrears.

The remaining amount would be reimbursed through monthly payments of US$500,000, EGPC Chairperson Tareq al-Molla told Reuters, scheduled in monthly instalments until the end of 2017.

Realizing that dependence on oil companies’ export share would prove troublesome and taint foreign investor relations and much needed FDI, the government decided to import natural gas to power its electricity generators.

However, given the government’s lack of infrastructural facilities to import gas, it tendered for a floating storage and regasification unit (FSRU) in 2012 when the energy crisis surfaced. Last October, when talks of the initiative resurfaced, an official said that they planned to have the terminal ready by April 2014.

But the government’s plan was impeded when Hoegh LNG, the Norwegian firm that was awarded the tender, rejected the commercial terms of the project offered by Egyptian Natural Gas Holding Company (EGAS), according to a recent report by Reuters.

“[Hoegh LNG] won the tender, but the conditions offered by the counterparts in terms of commercial and financial guarantees were not good enough,” a source told Reuters.

But that statement contracted recent remarks by Petroleum Minister Sherif Ismail, who said that Egypt is set to receive the LNG cargo before summer, as the LNG terminal takes up to six month to be constructed following a contract award.

Talks between Hoegh LNG and the Egyptian government are still on the table according to a statement from the company’s spokesperson.

The pressure on Egypt’s energy could be eased with further aid from the Gulf. Sami Khallaf, adviser to the finance minister, said the government would receive the remaining portion of the US$5 billion financial aid from Saudi Arabia, worth US$3 billion mostly in the form petroleum products.

Industrial areas and energy problems

The energy shortage has also trickled its effects into the industrial sector. Last week at a meeting with members of the Chamber of Building Materials, chamber head Ahmed Abdel Hamid said the main problems facing the industrial sector were energy shortages, insufficient equipped industrial lands and lack of skilled labour.

While the Ministry of Industry will tackle one of the problems by developing 35 industrial areas in 22 governorates by end of June this year, the energy problem won’t ease before 2016, according to Minister of Trade and Industry Mounir Fakhry Abdel Nour, who attended the meeting.

Abdel Nour said that until local energy production meets consumption, the available option is importing natural gas to feed the growing needs of industries.

In January, EGAS reduced gas supplies by 50 percent to cement factories. The year before, gas supplies were cut by nearly 25 percent. The effect was a major slump in the factories production.

Stuck between a choice of providing subsidized natural gas to the industrial sector or to electricity-generating facilities, the government chose the latter. The popularity-courting choice costs the government LE800 million daily. Former Petroleum Minister Osama Kamal said last week at a conference on renewable energy that the government injects LE1 billion daily into the electricity sector to support energy subsidies, which is sold for LE200 million.

However, the government attempted to alleviate industry problems by opening up channels for the factories to import gas at international prices through the Ministry Of Petroleum’s network, though the scheme has not been put to action due to lack of details on matters such as a transit fee that the importing factory would incur.

Critics of the notion, including former Petroleum Minister Hamy al-Banby, say the government lacks the necessary infrastructure to re-gasify natural gas, or turn it from its liquid form to gas, said the privately owned Al-Mal newspaper.

Further, pricing gas at two levels — a subsidized price and an international market price — is unrealistic for factories that use both stocks. Some experts advised to redraft contractual agreements with the factories and renegotiate the price of natural gas, as opposed to the double-pricing mechanism.

Yet investor confidence and optimism remain

The EGX30 index’s recent surpassing of the 8,000 mark for the first time since 2008 shows that investor confidence in the market remains strong. The index closed 1.47 percent higher on Sunday at 8,008 points, bringing the yield-to-date in just over seven weeks to 18 percent.

Nielsen’s recent report in Egypt, the Global Survey of Consumer Confidence, yielded the same optimism from its respondents.  The survey showed that though 86 percent of Egyptian respondents believed that their country was in an economic recession in the fourth quarter of 2013 — the ninth highest level of recessionary sentiment worldwide — they were also among the most optimistic across the 60 countries surveyed in the report. Those surveyed believed their country would be out of economic stagnation within a year.

The same optimistic respondents were the most concerned in the world about political stability, with 21 percent of the sample worried about terrorism, making Egypt the world’s most concerned country of the effects of terrorism.

Sherif Zaazaa 

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