Egypt – a return to a balanced gas market?

Egypt is the second largest African economy and one of the largest economies in the Middle East and North Africa (MENA) region. It is also one of the biggest energy markets in the Africa and MENA regions with a relatively extensive energy infrastructure, especially for natural gas.
In 2015, Egypt became a net gas importer after being a key North African gas exporter for a period of ten years. This unfortunate, but not unexpected, situation was the result of a decline in Egypt’s indigenous natural gas production combined with a rapidly rising domestic gas demand driven mainly by large energy price subsidies.
Major changes are presently taking place on the gas supply side which are significantly impacting on the country’s natural gas balance and the economy in general. Given the dominant position of natural gas in Egypt’s energy scene, the government needed to take urgent and drastic action to unlock Egypt’s gas supply potential.
In 2013/2014, it started implementing a more favourable upstream development policy to reverse the country’s declining gas supply profile. New policy measures helped bring about the discovery of the Zohr field in 2015 and its fast-track development, and other gas discoveries (West Nile Delta, Greater Nooros, and Atoll) were made in recent years. Future supplies from all the newly discovered fields are expected to produce the equivalent of Egypt’s present natural gas output.
On the gas demand side, Egypt is still facing the same structural difficulties. The financially constrained power sector continues to account for about two thirds of total domestic gas use. The other large gas users (industry), however, are now facing commercial challenges under the current higher gas price regime that will affect their gas demand. Among the key drivers of gas demand growth, in addition to economic growth prospects, are; the future movement of domestic gas prices, especially for the power sector, and adequate availability of natural gas infrastructure capacity to meet existing and potential expansion of gas demand in new areas/regions.
Alternative energy sources for electricity generation are expected to take longer than ten years to have a significant effect on the reduction of gas-fired generation and, therefore, on the total gas demand. Overall, the review of gas demand by sector of use shows that Egypt’s natural gas demand will continue to grow, but at a slower pace compared to the last two decades’ growth rate. A new gas market law and its executive regulations were issued in August 2017 and February 2018, respectively, to reform Egypt’s domestic gas market. The full implementation and the liberalization of the market will take a long time to achieve, but this new gas law is an important positive step forward.
However, several important implementation issues remain to be clarified. It is expected that the new executive regulations and related new rules and directives that will be issued by the new gas market regulatory authority will address such issues. Meeting the needs of the domestic gas market is one of the key objectives and priorities of the Egyptian government. Drawing on presently available public data and information, this target is about to be achieved and a balanced market could possibly be sustained until at least the early 2020s. Egypt will also resume natural gas exports, but it is unlikely to regain its past natural gas export position. The export window could last far less than ten years and export levels could decline quickly, again this is based on publicly available supply and demand data and information.
Nevertheless, there are key policy questions that need to be addressed. How will the government wish to continue to monetize its gas resources? Subject to existing contractual gas export commitments, should the state capture additional rent through further domestic gas monetization (gas use in petrochemicals and industries) or mainly through exports or a through a combination of the two? Under a commercially viable domestic energy pricing structure, such questions would be easier to address. However, it is difficult to justify the continuation of energy price subsidies to domestic gas monetization projects both economically and financially.
There is a need to focus not only on the yet-to-find gas resources to prove up additional gas reserves in order to increase gas supplies to balance the market and sustain exports over a longer period but also, critically, to address the country’s energy demand-side challenges. Without the implementation of consistent and integrated energy demand-side management measures, of which price reform is a key one, Egypt could be exposed again to an unpleasant gas supply surplus/deficit cycle. The Egyptian government has already initiated courageous energy price reform measures with some positive results. But it will continue to face challenges with regard to the price subsidy and payment problems of the gas-to-power chain. Fully addressing these issues and liberalizing the country’s energy market will, inevitably, take some time, possibly beyond 2030, as this will involve a complex combination of sensitive social, economic and political factors.
The quick answer to the question ‘Egypt – a return to a balanced gas market?’ could be: yes, but not for long. However, this short statement would not do justice to the considerable efforts deployed by all the relevant stakeholders in relaunching Egypt’s hydrocarbon segment and bringing on-stream, in a record time, several new gas supply projects. It would also ignore the fact that the answer is only based on current publicly available data and information on both the supply and demand sides. Egypt holds a central position in East Mediterranean gas developments. It is aiming to become a regional gas export ‘hub’ to monetize its own natural gas resources and to re-export gas from existing and potential sources of gas supply in neighbouring East Mediterranean countries. In order to achieve this objective, Egypt and its neighbours will have to surmount not only geopolitical and territorial disputes, but also commercial, contractual and inter-governmental agreement challenges in increasingly competitive international gas markets.
Finally, by the end of the next decade and most probably beyond 2030, Egypt’s energy portfolio could be transformed with non-hydrocarbon sources of energy capturing an increasing share of the country’s electricity generation mix. This could potentially release some additional supplies of natural gas for export but, by then, Egypt will be facing international gas export markets that could be radically different from today’s, especially in Europe under a decarbonization agenda.

Source: Oxford Institute for Energy Studies