Growth in Egypt's domestic energy generation could be on the way

Egypt continues to strive not just for energy independence, but to return to its status as a regional exporter. With oil and gas fields in the Gulf of Suez, the Mediterranean Sea and the Western Desert, the country has been a site of energy exploration since the early 20th century. This has led not only to substantial oil production, but also to the recent discoveries of major natural gas deposits.

With continued exploration announcements, a low-cost operating environment and the anticipation of steady, even rising, global oil prices, Egypt has its sights set on increased petroleum production to meet growing local energy demand, as well as for export to acquire much-needed foreign currency.

OIL PRICES: The hydrocarbons sector has faced challenging times globally in recent years, as producers adjust to the lower prices that have become the norm. According to financial services firm PwC, oil and gas companies reduced capital expenditure by around 40% worldwide between 2014 and 2016, cancelling or postponing major projects. Brent crude averaged $54.25 per barrel in 2017, up from $43.55 in 2016, but less than half the $115 reached in 2011.

Local factors have compounded the impact of the price fall. The November 2016 currency devaluation, announced as part of the government’s economic reform programme, has been a double-edged sword for producers. While some operational costs have become more competitive, there has been a shortage of the foreign currency required for the import-heavy industry. The impact has not be evenly spread. “International companies in Egypt have been less affected by the drop in oil prices since they usually work on production sharing contracts,” David Chi, vice-president and general manager at hydrocarbons firm Apache, told OBG.

However, there remain reasons for optimism. Significant upstream discoveries have been made, with Reuters reporting President Abdel Fattah El Sisi expects these could save Egypt $3.6bn annually once production begins (see analysis). The country has succeeded in providing power to most of its citizens, with World Bank data indicating that 99.8% of Egyptians have access to electricity. Public and private players continue to make strides in increasing generation from renewable sources as well.

ORGANISATION: The energy sector – from hydrocarbons exploration and extraction to refining and transport operations, and from power generation to consumption – is governed by a number of entities.

The Ministry of Petroleum (MoP) oversees all petroleum exploration, production and distribution of products. The ministry’s efforts are supported by the Egyptian General Petroleum Corporation (EGPC), the Egyptian Natural Gas Holding Company, and South Valley Egyptian Petroleum Holding Company, known as GANOPE. Downstream, the Egyptian Petrochemicals Holding Company oversees the development of a rising number of petrochemicals projects (see Industry chapter). When it comes to electricity provision, the Ministry of Electricity and Renewable Energy is responsible for national strategy and the implementation of projects, including setting tariffs. The state-owned Egyptian Electricity Holding Company comprises 16 subsidiaries that provide generation, transmission and distribution services. The Egyptian Electricity Utility and Consumer Protection Agency is the sector regulator, and grants licences for power generation and transmission initiatives. The New and Renewable Energy Authority (NREA) oversees renewables projects.

GOVERNMENT EFFORTS: With new oil and gas discoveries, energy sector reform has been a priority. Since 2013 Egypt has been working to address the long-standing issue of debts owed to international oil companies (IOCs), which peaked at $6.3bn in June 2012. These efforts have been assisted by the November 2016 issuance of a $12bn IMF loan.

By June 2017 Egypt had reduced the arrears owed to foreign companies to $2.4bn, down by two-thirds since June 2012, according to the MoP. In September 2017 Egypt Oil and Gas reported on government has reiterated its aim to settle all outstanding arrears to foreign oil and gas companies operating. “The low oil prices over the past two years have been particularly difficult and challenging for medium-sized domestic companies, requiring careful and well-structured investments,” Craig Robertson, country manager at Transglobe Energy, told OBG.

As part of an initiative to reform the energy sector, Egypt is working on an initial public offering (IPO) to sell a stake of at least 20% of state-owned Engineering for the Petroleum and Process Industries, which provides engineering and contract management services in the oil and gas, refining and petrochemicals sectors. This represents Egypt’s first IPO of a state-owned company in 12 years. The government is planning to sell stakes of other state-controlled firms in hydrocarbons and chemicals through this IPO programme over the next five years.

SUPPLY & DEMAND: Reduced production of oil and gas in recent years, coupled with rapidly growing domestic energy demand, has been at the core of the supply-demand challenge the government faces. This is particularly acute given that over 70% of the country’s electricity production is fuelled by natural gas, according to the International Energy Agency.

According to BP, at the end of 2016 Egypt had 3.5bn barrels of proven oil reserves, and production over the year averaged 691,000 barrels per day (bpd). Natural gas reserves stood at 65.2trn cu feet, and gas production totalled 1.48trn cu feet in 2016. The minister of petroleum and mineral resources, Tarek El Molla, predicts that gas production will rise to 6.7bn cu feet per day by June 2018, allowing Egypt to meet domestic needs by the end of the year. Use of primary energy fuels has risen steadily, with a 4.7% increase in consumption in 2016 and an annual average growth rate of 3.4% in 2000-15, according to BP. Diesel use hit 1.178m tonnes in May 2017, largely within the transportation sector and electricity-generating power plants.

GENERATION TARGET: The Ministry of Electricity and Renewable Energy estimates that Egypt will need to install 6 GW annually up to 2022 to meet growing demand, adding to its existing installed capacity of 35 GW. This commitment has moved the country away from the recurring blackouts of 2014, caused by demand exceeding supply by 20%.

“On the electricity side, what Egypt has done in the last three years has not been accomplished anywhere else globally,” Basil El Baz, chairman and CEO of Carbon Holdings, told OBG. “Power production capacity has been effectively doubled in two years.”

In March 2017 German conglomerate Siemens, along with local partners Orascom Construction and Elsewedy Electric, inaugurated the first phase of a project at Beni Suef, adding 4.8 GW of capacity ahead of schedule. When complete, the scheme’s three plants at Beni Suef, New Capital and Burullus will have a combined capacity of 14.4 GW, and are expected to meet Egypt’s power needs until 2022 by raising the country’s generation capacity by 45%.

In addition, Saudi Arabia’s ACWA Power continued to discuss plans for a 2250-MW combined-cycle power plant in Luxor valued at up to $2.5bn, pending land rights. Construction of the three 750-MW units is expected to be completed in partnership with local company Hassan Allam Holding, which will contribute 25% of the cost.

In addition to new projects, Anhar Hegazi, former director of the Sustainable Development and Productivity Division at the UN Economic and Social Commission for Western Asia, told OBG, “The efficiency of the system has been increased by upgrading existing generation, converting single-cycle power plants to combined-cycle plants.”

DOWNSTREAM: As noted by the US International Trade Administration, Egypt has the largest refining capacity in Africa at 760,000 bpd. However, it has been operating well below capacity, with output of 501,000 bpd in FY 2016/17. In 2016 production capacity was sufficient to cover 65% of local demand, requiring $7bn worth of petroleum product imports during the first nine months of FY 2016/17. The import bill represents an increase of 13% from $6.2bn in the same period of 2015/16.

Efforts are under way to make fuller use of existing capacity, with the MoP announcing an $8bn investment to upgrade oil refineries. Furthermore, with payments to IOCs coming through and the promise of a revitalised upstream industry, the scene is being set to attract further private investment. As noted by Egypt Oil and Gas, IOCs increased their investments to $8.1bn during FY 2016/17, up 23% from $6.6bn in the previous 12 months.

In December 2017 Egyptian investment company Qalaa Holdings reported the completion of 96% of the works in Egyptian Refining Company’s $3.7bn oil refinery project, one of the country’s largest to date. Owned by Qalaa (20%), other investors and the EGPC, the refinery will process heavy fuel into diesel for local consumption, and once operating at full capacity could meet up to 50% of domestic demand.

Egypt is looking to reduce imports across sectors, but this is particularly critical when it comes to fuel. The MoP hopes to cut fuel imports from 30% to 10% of total consumption. Some of the remaining imports will come from Kuwait, which signed a three-year, $4bn deal to supply 2m barrels of crude oil per month and 1.5m tonnes of petroleum products annually, as announced by state-owned Kuwait Petroleum Corporation. In addition, Saudi Aramco restarted refined products shipments to Egypt in March 2017 after a brief cessation early that year.

RISING FUEL PRICES: In an effort to reduce the budget deficit, fuel prices were raised – in some cases by over 50% – in June 2017. The price of 80-octane petrol and diesel rose from LE2.35 ($0.15) per litre to LE3.65 ($0.24), while 92-octane fuel increased from LE3.50 ($0.23) per litre to LE5 ($0.33). Egypt Oil and Gas noted a 10% drop in sales of 92-octane petrol in July 2017 after the price hike. El Molla said that even after these price hikes fuel subsidies cost LE122.4bn ($8.1bn) in 2016/17. Petroleum subsidies rose by 140% in FY 2016/17, due in part to the currency flotation.

TRANSMISSION & DISTRIBUTION: Egypt has made strides mitigating transmission and distribution losses. World Bank data puts the rate at 11.15%, below the MENA region’s average loss rate (13.58%) and that of other regional economies, such as Turkey (15.46%) and Morocco (13.58%). Still, the government has committed to upgrades to reduce transmission losses, setting aside $33m for the Central Electricity Distribution Company in the FY 2017/18 budget to replace distribution panels, improve lines and strengthen grids in governorates in Upper Egypt.

“We expect fewer generation investments but increased activity in transmission and distribution,” Ahmed Hafez, co-head of research and senior analyst, industrials, at HC Securities & Investment, told OBG. “Losses could be reduced by rehabilitating older parts of the network. We are also seeing contracts for transmission lines to bring new power plants to the grid, as well as upgrades on the distribution side, including smart metering.”

To expand the capacity of the transmission network nationwide, Siemens has also put three substations into operation to transmit the generated electricity to the national grid. Upgrading transmission and distribution systems is an important step for the viability of future projects.

RENEWABLES: Egypt has a stated goal of generating 20% of electricity from renewable sources by 2022, with wind providing 12%, hydropower 5.8% and solar 2.2%. Renewables plans for 2015-22 include 3.2 GW of government projects, 1.25 GW under build-own-operate mechanisms and 920 MW from independent power producers (see analysis). This development is much needed. According to BP, Egypt consumed 600,000 tonnes of oil equivalent in renewables in 2016, compared to 3.9m tonnes consumed by similarly sized Turkey in 2015.

The feed-in tariff policy, which has been in place since September 2014 to encourage private investment, should support solar photovoltaic and wind projects with capacities of under 50 MW. “Renewable projects now have strong support from the government in the form of targets and the gradual reduction of the energy subsidies, so I think they will do well,” Hegazi told OBG.

SOLAR: According to the Solar Mediterranean Atlas, Egypt receives over 2000 KWh per sq metre per year of direct solar radiation, with levels particularly high in Upper Egypt. To capitalise on this, the Egyptian Solar Plan calls for the installation of 3.5 GW by 2027. Current solar-generating capacity, according to the World Energy Council’s 2016 World Energy Resources report, is 45 MW. This comes from two sources: a 35-MW solar/thermal power plant at Kuraymat financed by the Global Environmental Facility and Japan Bank for International Development, and a 10-MW plant in Siwa opened in March 2015.

President El Sisi has instructed that government buildings in the New Administrative Capital should be run using solar power. In addition, the International Finance Corporation announced a $50m loan to the Arab African International Bank as part of a $100m package to help build its clean energy portfolio.

Notable upcoming solar projects vary in terms of investors and generation capacity, but many are to be centred in the new $4bn, 37-sq-km Benban solar development complex in Aswan, which has been under construction since 2015 (see analysis).

WIND: Egypt’s coastal areas also make the country well suited to harness wind energy – average wind speeds along the Suez Canal are recorded at 10.5 metres per second, and sites are considered strong with averages of 6.5 metres per second. The NREA has announced a goal of providing 12% of generated electricity (7.1 GW) with wind energy by 2022, more than any other renewable source, and the government has allocated 7845 sq km in the Gulf of Suez region and near the Nile for wind projects.

There are projects under preparation in cooperation with Japan, Spain, Germany’s state development bank KfW, the European Investment Bank (EIB), the French Development Agency (Agence Française de Développement, AFD) and the UAE’s Masdar. These build on existing schemes begun in 2001 that have given Egypt a current total capacity of 550 MW.

As part of the Siemens megaprojects, there will be 12 wind parks with around 600 wind turbines generating up to 2000 MW in the Gulf of Suez and West Nile. The EIB and KfW-funded Gabal El Zayet wind farm was completed in three phases: 200 MW in 2015, 120 MW in 2016 and 220 MW in 2017. In addition, the 600-MW Gulf of Suez wind farm is scheduled to be operating by the end of 2018 in cooperation with KfW, EIB, Masdar and AfD.

The strategy is not only environmentally friendly, but could also bring major cost savings down the line. A 2016 study by the Fraunhofer Institute for Solar Energy Systems calculated the levelised cost of electricity (LCOE) from conventional and renewable sources in Egypt’s market and found the LCOE for conventional power is $0.076-0.115 per KWh, while for onshore wind power it is $0.048-0.102 per KWh.

NUCLEAR: Egypt’s decades-long contemplation of nuclear power moved closer to fruition in 2017 with the finalisation of a 35-year, $25bn loan from Russia to finance construction and operation of a 4800-MW nuclear plant in Dabaa, 130 km north-west of Cairo, originally signed in February 2015. The loan will finance 85% of the project, for which Egypt will pay an annual interest rate of 3% through 2028.

According to local press, construction is expected to be complete in 2022, with the first of its four reactors ready to start energy production in 2024. Parliament’s Energy and Environment Committee is discussing a new law that aims to regulate construction of nuclear plants, building on Law No. 7 of 2010. The independent Egyptian Nuclear and Radiological Regulatory Authority oversees all nuclear efforts.

WATER RESOURCES: According to World Health Organisation data from 2015, 99.4% of Egyptians had access to improved drinking-water sources, while 94.7% had access to improved sanitation facilities.

However, water utilities require investment for network upgrades. The Central Agency For Public Mobilisation and Statistics noted that network losses of clean water in FY 2015/16 reached 37.6% due to neglected and leaking pipelines, as well as outdated distribution. In addition, the ongoing reduction in Egypt’s freshwater supply from the Nile may mean freshwater and energy shortages by 2025 (see Agriculture chapter). As noted in a Ministry of Water Resources and Irrigation 2014 paper, “Being the most downstream country on the Nile, Egypt is affected by climate change impacts, not only within its borders, but also within the whole basin, which it shares with nine other countries. Economic developments in upstream countries and measures they might take to adapt to climate change are likely to put more pressure on water resources in Egypt.”

As a potential solution, progress continues on desalination, with private plants cropping up around the Red Sea and Mediterranean coasts, and along the Suez Canal. As global desalination costs fall this could present a greater opportunity for Egypt.

UNICEF estimates indicate that 8.4m Egyptians do not have access to improved sanitation, primarily in rural areas in Upper Egypt. This has become a focus of aid efforts by international organisations, including a $50m World Bank project. In May 2017 the European Bank for Reconstruction and Development announced a loan of up to €186m to the Fayoum Water and Wastewater Company to develop and expand its wastewater services in Upper Egypt, and in September 2017 the Ministry of Investment signed a €4.7m agreement with the EIB for a sanitation project in Kafr El Sheikh in the Nile Delta.

The World Bank notes that the situation in the Nile Delta is of particular concern to sanitation provision due to high groundwater levels and the discharge of untreated sewage into the Al Salam Canal and Rosetta Branch, polluting fresh water resources.

OUTLOOK: Maintaining the momentum generated by the recent new discoveries upstream, as well as providing reliable electricity and water supply, will be crucial to further economic development in the coming years, especially as Egypt looks to regain its role as an energy exporter. If cooperation between the government and private players remains strong, there could be considerable growth opportunities both up- and downstream, which in turn should play a major role in maintaining a solid economic base.