Egypt looks for new ways to supply natural gas to its industries

Sourcing natural gas is one of the chief obstacles for Egypt’s heavy industries, as shortages have persisted since 2014 (see Energy chapter). Gas is sold through the state-owned Egyptian Natural Gas Holding Company (EGAS), which has prioritised supply to the power sector and residential consumers. This has left industrial buyers facing significant disruption, particularly during peak demand in summer months. To avoid long-term downward pressure on industrial output, the government has sought to make the legislative framework regulating energy use more flexible. Similarly, new reforms will end the public sector monopoly on downstream gas supply, which will open up space for private investment. For now, however, stakeholders have been reporting minimal levels of capacity utilisation.

Demand

Industrial consumers, including petrochemicals and upstream petroleum processors, used 579bn standard cu feet (scf) of gas in FY 2014/15, according to EGAS’s annual report for the period. The petroleum sector accounted for 9% of overall gas use, with non-petroleum industry consuming 23%. That compares with 63% of total consumption by power and 4% used by residential consumers.

Overall gas demand climbed by an annual average of 7% from 2004 to 2013; however, output sank 13.1% in 2014, to a level 22.3% lower than its record high in 2009. The country’s exports of liquefied natural gas (LNG) have also shrunk far below capacity; one of the country’s two facilities is shuttered temporarily, and a return to export markets may not come until 2020.

New Sources

With at least 2bn scf per day (scfd) of new supply expected by 2017, Egypt is expecting to make the gas shortage a thing of the past before the end of the decade. However given the explosive growth in demand in recent years, a number of temporary measures that have been enacted could become permanent features in the country.

One way Egypt is addressing shortages is by importing LNG. Two floating storage and regasification units have been anchored in the Red Sea off Ain Sokhna since 2015 and are supplying Egypt with 1.1bn scfd. Another will arrive in 2017 and is expected to bring capacity to 1.95bn scfd, according to the minister of petroleum and mineral resources, Tarek El Molla.

The state has been buying LNG through a tendering process that began in 2014. According to government sources, seven companies were awarded contacts: Trafigura, Vitol, Noble Group, EDF Trading, Gas Natural Fenosa, PetroChina and Shell, and about 116 deliveries are expected by 2017. In addition, Gazprom agreed in 2015 to send 35 cargoes over a period of five years. While LNG imports have helped ease the shortage, it is widely expected that demand and supply will balance out in 2017, co-head of research of HC Securities & Investment, Ahmed Hafez, told OBG. In addition to new domestic gas production scheduled to come on-line in 2017, in the heavy industries segment, cement has accounted for half of natural gas consumption, so plans to convert to coal will further free up supply.

Investment Wanted

Over the long term Egypt plans to open up the downstream distribution market to private investment, which means industrial buyers will be able to negotiate supply terms with multiple providers. Announced in 2015, EGAS and the Egyptian General Petroleum Corporation will no longer be the sole importers of gas and will open up their network of distribution pipelines to third parties.

To oversee the downstream gas market and license participants along the process, the government created the Gas Regulatory Authority (GRA) in 2015. Distributors will be allowed to sell to customers in the industrial and commercial sectors, but not to residential consumers. Some key details have yet to be finalised, including whether private investors will be able to build new pipelines, perhaps on a build-operate-transfer or concession basis. Transport fees have yet to be set, but likely would be based on an allowed revenue methodology, Amira El Mazni, head of the GRA, told OBG.

 

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The Report: Egypt 2017

Industry & Retail chapter from The Report: Egypt 2017