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Petroleum Ministry agrees to pay foreign firms more for gas produced in Egypt

In recent agreements with foreign firms operating in the country, Egypt’s Ministry of Petroleum has agreed to pay higher prices for the natural gas is purchases for the domestic market.

On Monday, the Ministry of Petroleum announced it would increase the price it pays for gas produced in the Disouq concession in the Nile Delta to US$3.50 per million British thermal units (MMBtu), up 40 percent from the previous purchase price of $2.50 per million Btu.

In return, Germany-based DEA Egypt, which operates the Disouq concession, pledged to increase natural gas production rates from 145 million cubic feet per day to 210 million cubic feet per day by this summer, and to 300 million cubic feet per day by summer 2016.

In a separate deal, the domestic off-take price for the West Nile Delta offshore gas project, a long-delayed US$12 billion deal led by UK-based BP have been set at between US$3 to US$4.10 per thousand cubic feet, according to industry publication Platts.

Egypt has priced shale gas expected to be produced by Apache and Shell Egypt at US$5.45 per MMBtu, according to Reuters. The contract, signed in December, was the first deal signed to produce gas by hydraulic fracturing. Meanwhile, prices for offshore developments could go as high as US$6 per MMBtu, up from a previous cap of US$2.65.

Other companies operating in Egypt are also reportedly in negotiating with the Petroleum Ministry for price increases on their concessions.

The price increases at a time when the country is in a major energy crunch. Already facing power cuts due to fuel shortages, Egypt is launching a major push to increase electricity generation. Deals announced at the Egypt Economic Development Conference this month included agreements to build at least 13 gigawatts of new natural-gas driven power plants.

For years, multinationals have argued that the government needs to offer higher purchase prices in order to motivate energy firms to invest in exploration and production increases, particularly for risky and pricey offshore gas fields.

If offering higher prices for domestic gas production succeeds in attracting greater investment in the sector, it could save Egypt money in the long run. 

This depends on whether Egypt pays less for locally produced gas than it would have to pay to import the same amount of energy.

Unlike oil, there is no global commodity price for natural gas, since the difficulty and cost of transporting the fuel depends greatly on whether it can be moved by pipeline, or has to be liquified, shipped in a specially designed vessel, and regassified upon import. 

Import prices for liquified natural gas have historically been kept high by demand from Asia, but prices have slumped in response to lower demand and a general decline in petroleum prices. 

Data from Platts shows that prices paid by liquified natural gas importers in Northeast Asia dropped by almost 60 percent year-on-year, to average US$7.28  per MMBtu for shipments due in April 2015, down from US$18.114 in April 2014.

Meanwhile, in its March 2015 report, the U.S. Energy Information Administration projected that Henry Hub prices, the benchmark for pipeline-based natural gas trades in the United States, will average US$3.07 per MMBtu in 2015 and US$3.48 per MMBtu in 2016.

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