The sector must tackle increasing local demand while trying to ramp up exports

With some of the largest reserves of natural gas on the continent and a robust long-term upstream outlook, Egypt’s natural gas industry has made a significant turnaround by switching from exporting to importing. In the first decade of this century, Egypt went about exploiting its gas resource with great success, doubling production between 2000 and 2006. However, after a peak production rate of 2.21trn standard cu feet (scf) per annum in 2009, according to the “BP Statistical Review of World Energy 2014”, production began to level off and then showed a slight decline. By 2013, natural gas production had fallen to 1.98trn scf per year, which represented a 7.8% decrease on 2012. This has particularly significant ramifications for the country’s exports, which have also been impacted by rising domestic consumption and uncertainty over the scope of domestic allocations, prompting the government to try to stoke production levels once more.

Export Development

Egypt began dry exports of natural gas in 2003, feeding its product into the Arab Gas Pipeline (AGP), which departs the country at Arish on the Mediterranean coast of the Sinai Peninsula and connects with Aqaba on Jordan’s Red Sea coast, as well as the Syrian cities of Damascus and Banias. The 1200-km-long pipeline was the result of a 2001 memorandum of understanding between Egypt and Jordan which in later years was expanded to include Syria and Lebanon, while a further side deal resulted in the creation of a gas supply to Israel in 2008. The subsequent deals signed by Iraq and Turkey have turned the AGP into a regional project, and one which Egypt’s contribution in terms of gas reached a peak of 647bn scf in 2009, according to the US Energy Information Administration.

The bulk of Egypt’s gas export revenue over the past decade, however, was derived from its adoption of liquefied natural gas (LNG) technology. There are currently three LNG trains in the country, the first of which began operations in 2004. The Spanish Egyptian Gas Company’s (SEGAS) LNG facility is located in Damietta, 60 km west of Port Said, and its development is the result of a joint venture between Spain’s Unión Fenosa, which retains an 80% stake in the operating company, and the Egyptian government via the Egyptian General Petroleum Corporation (EGPC) and Egyptian Natural Gas Company (EGAS), which each hold a 10% stake. The plant is supplied with gas from British Gas’ (BG) West Delta Deep Marine Concession area, and has the capacity to produce 5.5m tonnes of LNG per year using air-cooled refrigeration and fractionation, most of which has been sold to the Spanish market.

Egypt’s largest liquefaction facility, Egyptian LNG, is located at Idku, around 50 km east of Alexandria, and is a two-train plant with a total capacity of 7.2m tonnes per year. As with SEGAS LNG, international capital has played a central role in its development. Designed with future expansion in mind, possibly up to six trains, Egyptian LNG is made up of a number of separate companies. The Egyptian LNG Company owns the site, the utilities and common facilities, while Train 1 is owned by El Behera Natural Gas Liquefaction Company, the shareholders of which are Petroliam Nasional (35.5%), BG (35.5%), the EGPC (12%), EGAS (12%) and Gaz de France (5%). Train 2 is owned by the Idku National Gas Liquefaction Company, which has a similar shareholding structure, without the participation of Gaz de France.

From Exporter To Importer

Egypt’s gas exporting sector, which established outward flows to markets as diverse as Europe, the US and South Korea, as well as its regional neighbours, grew to become a lucrative business. According to Egypt’s Central Agency for Public Mobilisation and Statistics, it contributed 8% to total GDP at factor cost and nearly 56% to the value added in the mining sector over the period 2007 to 2010. However, it has not been an easy road and the country has had to tackle a number of obstacles as it tries to boost levels further. The deteriorating security situation in the Sinai Peninsula has seen the AGP become a target for terrorist attacks, for example, while rising domestic demand has meant that an increasing amount of Egypt’s upstream output is being diverted to local facilities.

Consumption of natural gas within the country has risen at a rapid rate, largely as a result of its increased adoption as a fuel for power stations, rising from an annual 1.05trn scf in 2003 to 1.81trn scf in 2013. This rise has compelled Egypt to import natural gas in order to satisfy domestic demand. In October 2012 the government announced its intention to import gas from Algeria. As of June 2014, the North African country was expected to deliver five gas cargoes of 145,000 cu metres each before the end of the year. Other possible sources include Russia’s Gazprom and Gaz de France. The installation of LNG import infrastructure should also allow the country to bring in large volumes of gas: in May 2014 it announced that Norwegian firm Höegh LNG has been chosen by EGAS to provide a floating storage and regasification unit in the Gulf of Suez.

LNG Dilemma

Egypt’s need to secure a supply of gas for its domestic consumers has also compelled it to divert gas that was destined for export as LNG. As a result, according to press reports, the SEGAS plant at Damietta has not produced LNG since December 2012, while the Idku facility’s production decreased to around a third of its capacity in the same year and remained at a similarly low level throughout 2013. In early 2014 BG Group announced that it had to declare a force majeure on LNG deliveries from the Idku facility, and thereby reduce its 2014 production. In a statement explaining its decision, the company said domestic diversions were currently around the plant’s capacity, close to 1bn scf per day.

The erosion of LNG gas exports has highlighted the importance of managing Egypt’s spiralling demand for domestic gas, which has been exacerbated by the nation’s generous subsidy system. The government has taken a number of steps to address this, including significantly reducing subsidies, but it will likely take several years before domestic demand is more closely managed. In the long term the Ministry of Petroleum (MoP) aims to serve Egypt’s domestic demand through the exploitation of the nation’s considerable reserves, rather than through expensive LNG shipments. Speaking to the press in early 2014 and outlining his ministry’s position on the future of gas supply, Sherif Ismail, head of the MoP, said, “We are also looking at scheduling LNG imports for 2015 and 2016 for a period between three and five years because we believe that Egypt has big proven and potential natural gas reserves. So we will only be needing that imported gas until we bridge the gap between production and consumption.”

Looking Ahead

Maintaining healthy levels of upstream investment is critical to helping close the current gap between domestic demand and supply, although this will remain contingent on reform efforts by the government to both address the pricing mechanism and further reduce subsidies. In the short term an intriguing option for utilising Egypt’s semi-dormant LNG infrastructure has come to light in recent months. The announcement in May 2014 of a letter of intent between the partners in Israel’s Tamar natural gas field and SEGAS raised the prospect of Israel’s gas exports being conducted through Egypt’s LNG facilities.