Cairo looks for escape route

18 September 2014

Egypt is struggling to find a way to solve its escalating gas crisis

In 2007, Egypt’s growth rate was running close to 8 per cent. Industry was riding high on cheap energy and natural gas was being exported at a rate of 560 billion cubic feet a year (cf/y).

Now, the situation could not be any more different.

While large gas reserves remain untapped, a lack of investment by international oil companies means production has dropped to the point where Egypt cannot meet domestic demand.

Cairo is suffering constant rolling black-outs and the government has been forced to ask its allies for cut-price rates on energy imports.

The way out of the current shortage will not be easy. Egypt’s industry needs to adapt to the fact that cheap gas is a thing of the past and alternative energy supplies will have to be exploited.

Most importantly, the government needs to work with international oil companies (IOCs) to fast-track projects to develop gas fields and increase production, but the barriers to finding agreements are high.

Firms such as the UK’s BP and BG are demanding to be paid more for their output, while Egypt’s ballooning deficit means state-owned oil company Egyptian General Petroleum Corporation (EGPC) is already struggling to pay for the gas it buys. Its debts to IOCs hit $5.9bn at the end of June.

Key to solving the gas crisis is fixing Egypt’s dysfunctional subsidy system.

In July, Egypt successfully cut subsidies, increasing the price of some fuels by almost 80 per cent. But with petrol being sold in Cairo at less than $0.3 a litre, fuel remains extremely cheap by international standards and further reforms are necessary.

If done right, further increases to the price at the pumps will reduce energy demand at the same time as helping to convince firms such as BP and BG that EGPC can pay on time.

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