Subsidies hinder Egyptian oil sector development

24 March 2014

Former Egyptian oil minister says energy pricing reform is key

Egypt’s state energy subsidy programme is holding back the development of the energy sector, according to Osama Kamal, a former Egyptian Minister of Petroleum and Mineral Resources.

“The problem is the misdirection and mis-pricing of resources. It is not the subsidies themselves, but how they are targeted”, Kamal told delegates at the MEED Petrochemicals 2014 conference in Dubai.

The former Petroleum Minister, who held office for just six months from August 2012 until May 2013 before the collapse of the Mohamed Mursi government, concedes that tackling the subsidy problem will take tough but unavoidable decisions.

Kamal estimates that 80 per cent of Egypt’s subsidies, across a range of commodities such as fuel, power and food, a fifth of total budget spending, are mis-directed, benefiting the country’s rich, rather than its poorer population. This is led to soaring domestic consumption, which has now outstripped supplies, making Egypt a net importer.

Egypt produced 60.9 billion cubic metres of natural gas in 2012, compared to consumption of 52.6 billion cubic metres, according to UK energy major, BP.

“The problem is not one of production. Our reserves exceed 70 trillion cubic feet and 4 billion barrels. We are not increasing production, but hope to maintain production by adding new reserves”, said Kamal.

Egypt currently produces around 720,000 barrels a day (b/d) of crude oil along with 5.5 billion cubic feet a day (cf/d) of natural gas. However, just under half of Egypt’s oil and gas production is used as feedstock for power generation.

More than 90 per cent of the country’s power comes from burning oil and gas. “This is not the proper energy mix. We are disregarding things like solar”, said Kamal.

The demands of domestic consumption has forced firms such as the UK’s BG to declare force majeure on supplies from its Egyptian liquefied natural gas (LNG) plant, as gas is diverted to the Egypt’s domestic market. BG is one of the largest natural gas producers in Egypt feeding about 1 billion cf/d of gas into two LNG trains at Idku, east of Alexandria.

The government is now in talks to import around 400 million cf/d of LNG from Algeria, according to local press reports citing Oil Minister Sherif Ismail. Egypt has launched three bid rounds in the last two years to build floating gas import facilities, but has so far failed to attract interest.

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