On 4 December, Egypt’s Ministry of Petroleum announced a deal with Algiers that will see Cairo importing six cargoes of Algerian liquefied natural gas (LNG) between April and September in 2015.

The deal is needed to bridge the widening gap between demand for gas in Egypt and the country’s capacity to supply it. The Algerian gas is a short-term fix that will help Cairo reduce the number of power cuts that periodically paralysed Egypt’s capital in 2014.

Sometimes I have one man from BP here on my couch, one calling me on the phone and one waiting outside

Egyptian Natural Gas Holding Company official

A long-term resolution for the country’s growing energy crisis remains uncertain, however. Cairo cannot afford to import large quantities of foreign gas indefinitely and, despite its extensive natural gas reserves, domestic gas production is declining, falling by more than 10.6 per cent since 2009.

Underinvestment sits at the heart of Egypt’s energy crisis. In particular, international oil companies (IOCs) have cut down investment in the country as a result of what they see as the unfairly low prices the government pays to gas producers. IOCs are also uncomfortable at their exposure to large debts that Cairo has built up with them due to non-payment for domestically consumed gas.

This loss of investor confidence has resulted in work stalling on key gas field development projects that have the potential to bring tens of millions of cubic metres of additional gas production onstream.

Increasing optimism

Throughout 2013 and 2014, Cairo has worked hard to win back the trust of companies including the UK’s BP, the UK/Dutch Shell Group, Germany’s RWE and the UAE’s Dana Gas.
As part of this campaign, in October, the government paid $1.5bn in owed money to IOCs, reducing its total debt to overseas firms to $4.9bn. This was quickly followed by a pledge to repay the full sum by May 2015, with 60 per cent paid off before the end of 2014. Egypt’s state-owned oil companies have also attempted to strengthen their relationship with foreign firms through frequent meetings, and have proved open to making compromises.

“I should get a sign that says ‘Official office of BP’ and hang it above my door,” says one senior official from Egyptian Natural Gas Holding Company, commenting on the frequency of his meetings with IOCs. “Sometimes I have one man from BP here on my couch, one calling me on the phone and one waiting outside ready to see me.”

Home stretch

US-based energy company Apache is currently on “the home stretch” of its negotiations with Cairo to try to secure higher gas prices, according to recent statements made to international news outlets. Negotiations over higher prices are also ongoing with Shell Group.

Progress has been slow and the challenges remain significant, but Egypt’s efforts to engage foreign oil companies and find mutually beneficial solutions have led to progress in some areas. Negotiations between the government and RWE in 2013 led to the agreement of a higher price for gas produced at its Disouq concession, which led to increased output over 2014.

“The government is cooperative,” says Maximilian Fellner, RWE’s Egypt general manager. “You can negotiate with them. We have [had] some negotiation success - especially in Disouq.
“We are happy with the improved price, but with better prices we would be happier. Compared with international prices it’s still a very, very low price. It is just enough for us to be able to continue to invest.”

Big promises

More recently, on 9 December, BP’s country manager, Hesham Mekawi, announced that the IOC intended to invest $12bn over the next five years in the giant West Nile Delta (WND) development project.

The project is billed as the country’s biggest ever foreign direct investment, and includes the development of BP’s North Alexandria concession, a scheme that could play a key role in easing the country’s gas crisis.

According to the Egyptian authorities, once work has started on the North Alexandria field, it could potentially boost the country’s gas production by more than 12 million cubic metres a day (cm/d) in under 18 months and by more than 22 million cm/d in five years.

BG deal

In addition, UK energy company BG Group has told MEED it is close to finalising a deal that will allow BP to use some of its existing pipeline infrastructure to evacuate gas from BP concessions. BG Group says the deal could see about 350 million cubic feet a day of gas being routed from fields that are currently undeveloped.

On top of its other plans, in November, BP announced it would invest $250m in two newly awarded exploration blocks, and in the same month, Dana Gas said it would invest $350m to develop new and existing wells, increasing its Egyptian production by 25-30 per cent.

Although many of the details remain unclear in these schemes, the recent announcements have bolstered positive sentiment about future domestic gas production. “The government’s recent efforts to service debt and the commitments of oil and gas companies moving forward make it quite conceivable that production will increase,” says Anthony Skinner, head of the Middle East and North Africa unit at UK-based country risk consultancy Maplecroft.

“The government is taking appropriate action, but this is not a short-term fix. It’s going to take time.”

Payback time

The increase in positive investment announcements from oil companies is closely linked to Egypt’s improving fiscal and economic situation, something IOCs hope will allow the government to pay higher prices to producers in the future.

In November, the Washington-based IMF forecast that Egypt’s budget deficit would drop to 11 per cent of GDP in the 2014/15 fiscal year, down from 14 per cent the previous year, thanks to economic reforms introduced by the current leadership, including cuts to fuel subsidies and initiatives to control the public wage bill.

Even with all the support… from the Gulf, there are multiple urgent demands on the country’s finances

Siamak Adibi, FG Energy

Further improving its economic outlook, the North African country has seen significant financial support from allies in the GCC, with Gulf nations funnelling more than $15bn into supporting the military-backed regime since the 2013 coup.

“The overall picture of investor confidence in Egypt has improved significantly,” says Steffen Dyck, senior analyst and vice-president in US-based Moody’s Sovereign Risk Group, which raised the outlook for Egypt’s sovereign bonds from negative to stable in October.

“If you look at credit default swap prices, they’ve come down dramatically. The domestic banks have been very supportive of the government and have massively increased their exposure to sovereign paper. The picture looks good.”

Surer footing

With its budget deficit shrinking and deliveries of Algerian LNG lined up for the next year, there is no doubt Egypt’s energy security is on a surer footing than it was two years ago, but whether the government’s efforts to reverse declines in local gas production will be effective remains to be seen.

The second half of 2014 has seen several big investment promises from IOCs, but many of these have yet to be backed up with signed contracts or evidence of work on the ground.
Although BP has pledged to invest $12bn in its WND development over the next five years, officially the scheme remains on hold and negotiations are ongoing with the government over contract terms.

Credibility at stake

Cairo has also made a big promise of its own, saying it will pay down its $4.9bn in debt, without clarifying where the funds will come from.

“Even with all the support Egypt has received from the Gulf, there are multiple urgent demands on the country’s finances, including paying for imported LNG,” says Siamak Adibi, senior consultant at UK-headquartered research company FG Energy.

“It’s not going to be easy for Egypt to pay back its debt before the six-month deadline and failure to do so will further damage the government’s credibility with oil companies.”
The gains seen over the past two years could easily slip away over the course of 2015 if some of the big promises made in 2014 are not kept.