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Facing rumors of money troubles, Egypt denies tension with foreign oil, gas firms
 
 
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Reports of unpaid bills and friction with foreign oil and gas companies are once again dogging Egypt’s petroleum authorities.

Privately owned Al Watan newspaper reported Wednesday that, according to an anonymous government source, four foreign oil companies are threatening to withdraw investments and stop production if Egypt’s government doesn’t make a dent in the US$3 billion it has racked up in overdue bills.

Petroleum Ministry spokesperson Hamdy Abdel Aziz denied these reports in a Wednesday press statement, saying the claims had “no basis in truth” and pointing to an expected US$7 billion in investments from international oil and gas companies as a sign of positive prospects for the sector and good relations between Egypt and petroleum companies. Abdel Aziz also emphasized that the current US$3 billion in outstanding oil and gas receivables is less than 50 percent of the 2013 peak of more than US$6.3 billion in overdue bills, and stressed the ministry’s ongoing commitment to paying them down.

Wednesday’s controversy echoes events earlier this month, when a tanker of liquefied natural gas (LNG) headed to Egypt turned around after weeks of waiting off the coast to deliver its cargo, fueling rumors that Egypt’s energy authorities are once again running into money trouble.

Anonymous sources told The Wall Street Journal that the LNG tanker British Sapphire, operated by UK-based BP was turned around due to missed payments by EGAS, the Egyptian state-owned gas company.

This followed earlier reports by Reuters news agency — also based on anonymous sources — indicating that Egypt had begun canceling LNG orders and asking for payment term to be extended to 90 days from the usual 15.

In a January 24 statement, the Petroleum Ministry denounced reports of missed payments as “false,” saying it has had no problems in its dealings with any of nine international firms supplying the country with natural gas, or any complaints about receipt of payment in its long history of petroleum imports. According to the ministry, delivery of the LNG cargo in question was postponed until August — when local energy demand peaks — upon mutual agreement with BP. BP Egypt confirmed this in a statement to Reuters.

Despite these official denials, there are clear indications that Egypt’s state owned oil and gas companies are having trouble paying their bills, even as global petroleum prices have plummeted. In fact, while low oil prices are reducing Egypt’s import bills, they have resulted in a lean year for petroleum companies, making them more averse to investing in exploration and perhaps also less willing to continue floating billions of dollars in overdue payments.

On January 3, Petroleum Minister Tarek al-Molla said that Egypt’s overdue payments to foreign oil companies, termed arrears, increased to US$3 billion at the end of December 2015 – up from US$2.7 billion at the end of October. In September, the government’s stated target was to decrease arrears to US$2.5 billion by the end of 2015. Egypt has already missed several other targets, including a 2014 pledge to eliminate arrears completely by May 2015.

A cycle of dysfunction

Egypt’s current energy struggles are closely tied to the government’s foreign currency crisis and struggling economy, challenges that have been building for the past five years.

For decades, Egypt was a net exporter of gas. Through the 2000s, Egypt’s domestic demand for energy grew rapidly, surpassing production around 2011. The revolution, and subsequent decrease in tourism and investment dollars, led to a series of difficult decisions for the Egyptian government, which was often forced to choose between cutting power to homes or to factories, and between burdening its citizens or stiffing the foreign firms who it relies on to prospect for oil locally.

After the 2011 revolution, amid increasing domestic energy demand, the government diverted the domestic market gas that was contractually allocated for export, and delayed repayments to international partners – setting Egypt on a cycle of accumulating arrears.

This strained the government’s relationship with many international energy firms. As a result, new investment in Egyptian energy fields stalled, leading to declining production. Prospecting did pick up again in 2014, when the government made major efforts to clear its arrears, but news like Wednesday’s report in Al-Watan indicate that trend could be reversing.

Shortages of domestically produced fuel led to imports, rationing and electricity outages. In April 2015, after years of negotiations over renting a floating import terminal,  Egypt began importing liquefied natural gas to meet domestic demand. According to the Petroleum Ministry, these imports cost of US$1.4 billion from April to December 2015. Imports of LNG, which have to be paid for in increasingly-scarce US dollars, have further strained the government budget.

In 2015, still facing energy shortages, the government made the decision to substantially cut energy to many industries, rather then leaving the general population to suffer through the daily blackouts that marked the previous summers. The electricity sector gets “100 percent of its needs and then we give the rest to factories,” EGAS Chairman Khaled Abdel Badie told Bloomberg in July 2015.

While perhaps a politically astute decision, cutting industrial energy supplies has economic consequences. High-consuming industries such as steel, cement and manufacturing have been especially harmed. Ezz Steel announced severe losses in 2015, “principally due to constant disruption of utilities and lack of natural gas,” a company statement said. Suez Cement, which infamously began burning coal in late 2014 due to gas shortages, reported an 81 percent decline in year-on-year profits in November 2015.

These shortages have contributed to Egypt’s larger economic struggles. Capital Economics, a London-based consultancy, estimated that manufacturing output contracted by up to 30 percent between June 2014 and June 2015, in large part due to energy availability and currency shortages. Egypt’s GDP growth was 4.3 percent in 2015, but is expected to slow in the coming year. In a January report, the World Bank cut growth projections for Egypt to a modest 3.8 percent for 2016, down 0.7 percent from the bank’s June projections. Energy shortages have been a large part of Egypt’s economic decline over the past five years.

In sum, declining energy production has led to declining economic production. This has led to declining exports, which has led to declining foreign reserves. Declining foreign reserves have led to a decreased ability to repay energy firms, which again leads to decreased domestic energy production, shortages of gas for industry and increased government debt. Increased government debt has put downward pressure on the Egyptian pound, making imported inputs more expensive for manufacturers, while disrupted energy has harmed production, making exports more difficult. All of these factors harm Egypt’s overall economic production, and thus foreign reserves.

 

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Robert Barron