Investments in gas, coal, nuclear and renewables could secure Egypt's energy future

The energy sector is an important driver of Egypt’s socio-economic development, accounting for around 13% of GDP in 2017. Aside from the member states of the Organisation of the Petroleum Exporting Countries, Egypt is Africa’s largest oil producer, as well as its third-largest producer of dry natural gas, according to the US Energy Information Administration (EIA). Despite the abundance of its natural resources, the country faced an energy crisis following the 2011 revolution, marked by frequent blackouts and a slowdown of foreign investment from international oil and gas interests. In response, the government has undertaken a wholesale reform of its subsidy system, licensed exploration activities in newly discovered fields and renewed its efforts to pay down its outstanding debt. These changes have allowed natural resource development that is more financially sustainable and attracted foreign direct investment (FDI) to support the exploration and exploitation of new sources.

Fiscal & Financial Trends

Foreign investment into the oil and gas sector reached approximately $10bn in FY 2017/18, around 25% more than the previous year. This growth marks a reversal of the trend of a few years ago, when foreign investors shied away from the sector (see analysis). The return of FDI has been facilitated by a modernisation of the financial model that underpins the energy sector, which has allowed Egypt to pay its partners in a more timely manner.

Since July 2014 the government has worked to gradually reduce the burden of consumer power subsides. Public spending on fuel subsidies as a share of GDP declined from a peak of 5.9% in FY 2013/14 to 3.3% in FY 2016/17, according to the IMF, and was projected to fall to 2.4% in the public budget for FY 2017/18. The Ministry of Electricity and Renewable Energy (MERE) envisions a total phaseout of these subsidies by 2022.

As part of the same fiscal consolidation programme, the MERE has simultaneously implemented a programme of tariff hikes on household and commercial electricity use. A 2017 report from the Egyptian Initiative for Personal Rights found that prices had increased by 160% since 2012, with the steepest rises observed in high-usage brackets. Prices rose by an average of 27% in FY 2017/18, and the MERE announced in June 2018 that it would hike costs by a further 24% in FY 2018/19. While these reforms have been politically challenging, their implementation has been a condition mandated by an IMF funding package that has helped Egypt to maintain capital spending sufficient to support the country’s economic growth.

Structure & Oversight

Reform has required the cooperation of various bodies responsible for overseeing sector activities. Foremost among these is the Supreme Energy Council, which is charged with formulating development strategy, regulation and pricing policy in the sector. The Ministry of Petroleum and Mineral Resources (MPMR) oversees the exploration, production and distribution of oil, oil products and gas, as well as related services. It carries out its duties through three affiliated entities – the Egyptian General Petroleum Corporation (EGPC); the Egyptian Natural Gas Holding Company (EGAS); and Ganoub El Wadi Petroleum Holding Company.

With regards to the power sector, generation, transmission and distribution services are overseen by the MERE. Meanwhile, its subsidiary, the Egyptian Electricity Holding Company (EEHC), is responsible for formulating and implementing five-year plans to develop the nation’s generation capabilities. Both agencies work in coordination with a number of other bodies, including the New and Renewable Energy Authority, the Egyptian Electric Utility and Consumer Protection Regulatory Agency, the Hydro Power Plants Executive Authority, the Nuclear Power Plant Authority and the Atomic Power Plants Authority.

Oil

Egypt’s known oil reserves declined from 4.5m barrels to 3.3m between 2010 and the end of 2017, according to BP’s “Statistical Review of World Energy 2018”. This trend is the result of field maturation and a lack of recent discoveries to offset a slowdown in crude production. By 2012 less than 10% of Egypt’s oil wells were naturally producing, according to the Society of Petroleum Engineers, and standard artificial lift systems – including beam pumping, electrical submersible pumping and gas lift, and less commonly implemented means like hydraulic and progressive cavity pumping systems – had become commonplace.

The production of petroleum and related liquids averaged around 666,000 barrels per day (bpd) in 2017, according to the EIA, with output concentrated in the Western Desert – bounded by the Nile River and the Libyan border – and the Gulf of Suez, the fork of the Red Sea to the west of the Sinai Peninsula. Recent production has not met domestic demand, which averaged 802,000 bpd in 2017, and Egypt has been a net oil importer since 2006.

However, recent discoveries in the Western Desert have raised the prospect that Egypt may become self-sufficient once again. In May 2018 the MPMR announced a new discovery located 103 km north of the Siwa Oasis, near the Libyan border. The find stemmed from the successful testing of new geological layers at more than 5000 metres in depth, which the MRMR hopes will encourage more international companies to undertake explorations in the area. This followed announcements in May and July of 2018 by the Italian firm Eni that it had discovered two light oil sites in the Faghur Basin, near the MPMR find, raising hopes of a new productive area. The Eni discovery was made at more than 4500 metres, suggesting that with the region’s more shallow reserves already exploited, future output will have to come from greater depths.

“Egypt has huge potential for further deep-sea discoveries in the Mediterranean, as well as new discoveries in the Western Desert and Gulf of Suez,” John Evans, country manager in Egypt for Dutch surveyor Fugro, told OBG. “Much of this potential is tied in with developments in technology and data interpretation.”

Refining

While Egypt continues to import many of the fuels it uses for power generation, transportation and heating, the minister of petroleum told international media in February 2019 that the government planned to stop importing fuel oil within four years. To that end, and to accommodate an anticipated increase of local oil flows in the medium term, it is investing $9bn to expand its domestic refining capacity. The nine refineries operated by EGPC and other state agencies already make up the most extensive refinery network in Africa, with an aggregate capacity estimated at 761,000-810,000 bpd in 2017. Refined petroleum output averaged 506,000 bpd in 2017, according to the 2018 OPEC Annual Statistical Bulletin, suggesting that refinery utilisation stood at 66% – an inefficiency attributed predominantly to ageing infrastructure.

The nation’s two largest refineries are located at El Nasr and Mostorod, which have nameplate capacities of 143,000 and 142,000 bpd, respectively. The Mostorod facility, located 20 km north of Cairo, has been at the centre of the MPMR’s expansion plans. In 2014 construction began on the Egyptian Refining Company (ERC), which will capture unused atmospheric residue as feedstock for up to 4.7m tonnes of refined fuels like diesel and kerosene. The project is being undertaken as a public-private partnership between EGPC and a consortium that includes the Egyptian private equity firms Citadel Capital and Qalaa Holdings, as well as several Gulf investors. While difficulties in covering ERC’s rising costs – now totalling $4.1bn, up from an initial estimate of $3.7bn – have pushed the project past its 2017 deadline, tests were under way in the third quarter of 2018 to prepare for inauguration in 2019.

Similarly, a 60,000-bpd expansion of the MIDOR refinery at Alexandria was scheduled to be finished by 2018, although completion has been delayed until the early 2020s. Lastly, in late 2017 the MPMR concluded decade-long negotiations with China by signing a cooperation agreement to develop a $7.1bn refinery at the Suez Canal Economic Zone, as part of a complex that will also house coal and hydroelectric power stations; further project details have not been forthcoming.

Gas

Dry natural gas production declined by 31% from 2012 to 2016, according to the EIA. Dwindling supply and growing domestic demand compelled the government to reduce its gas exports and to import more liquefied natural gas (LNG) to meet the shortfall, and as recently as 2016 Egypt spent $3bn on LNG imports.

However, a series of discoveries has returned the country to self-sufficiency. The El Zohr gas field, discovered in 2015 on an Eni exploration tender, is the largest offshore natural gas field in the Mediterranean, with estimated reserves of 30trn standard cubic feet (scf). Production at the site began in 2017 and is expected to reach a peak of 2.7bn scf per day by the close of 2019. El Zohr is being developed by a consortium that includes Eni, Rosneft, BP and Mubadala, and it produced roughly 440bn scf of natural gas in 2018.

Other new and significant gas reserves include the Atoll field, where production began in February 2018, and the West Nile Delta project, which started producing natural gas in March 2017. Renewed and accelerating activities at these natural gas fields – particularly at El Zohr – have made these sites central to Egypt’s drive to re-establish itself as a gas exporter and a regional hub for LNG production.

Egypt’s last import of LNG arrived in September 2018, and the country has moved to re-establish itself as a regional hub for LNG. Plans are under way to reopen plants that will liquefy gas derived from domestic fields and Mediterranean wells exploited by regional neighbours, with an end goal of processing for export. In February 2019 the MPMR announced that the Damietta liquefaction plant would reopen in April after a six-year hiatus. The resumption of activities follows the decision by the plant’s operator, Union Fenosa Gas, to drop a $2bn arbitration suit against the state, which cut off supply to the facility in 2012. Union Fenosa will instead be compensated for its losses through profits derived from its stake in the facility. Egypt is expected to ship its first LNG cargo to Jordan in 2019, though as of March 2019 tests have not yet defined the size limitations of those shipments.

Trade

Egypt has two LNG facilities with which to reassert itself as a gas exporter. The Damietta plant has a single LNG train – or liquefaction and purification facility – and a yearly capacity of 240bn scf. A second facility, the Egyptian LNG project, operates at Idku, east of Alexandria, as a venture between Shell, Malaysia’s Petronas, EGAS, EGPC and ENGIE. The plant has two trains, each with a capacity of 172.8bn scf per year, though the facility lay idle from late 2014 to 2016 and has only operated intermittently since 2016.

Egypt also retains significant potential to export dry natural gas via the Arab Gas Pipeline, which has fallen out of use. The line’s first section runs 265 km between Arish, on the Mediterranean coast of the Sinai Peninsula, and Aqaba, on the Jordanian coast of the Red Sea; other sections extend into Syria and Lebanon. The line was commissioned in 2003, and exports from Egypt reached a record high of 647bn scf in 2009. However, beginning in 2011, domestic attacks in Arish disrupted supply, and its Egyptian operations ceased entirely in March 2012.

Egypt’s location has also made it a geostrategically important transit point for the global trade of crude oil and natural gas. The 193.3-km Suez Canal connects the Mediterranean with the Red Sea, allowing for shipments between the Gulf, the EU, Russia and the US. Vessels that exceed the canal’s draft limitations are able to offload their cargo at the Red Sea port of Ain Sokhna, from which it can be transferred via the 320-km Suez-Mediterranean (SUMED) pipeline to the Sidi Kerir terminal on the Mediterranean coast. In 2016, some 3.9m bpd of crude and refined products transited through the canal in both directions, while around 1.6m bpd of crude passed through the SUMED pipeline to the Mediterranean.

The pipeline and other facilities have been the targets of considerable FDI: SUMED itself is a joint venture between EGPC and several petroleum producers in the Gulf. Meanwhile, in February 2019 Egypt signed a deal with Saudi Aramco to construct 222,000 cu metres of capacity at Sidi Kerir to store and re-export oil and gas to Europe. A second agreement with Saudi Aramco will support the development of another 165,000 cu metres of capacity at Ain Sokhna to store fuel oil.

Consumption

According to the EIA, Egypt was the largest consumer of oil and natural gas in Africa in 2016, accounting for approximately 22% of the continent’s consumption of petroleum and other liquids and 37% of its dry natural gas usage. Domestic demand has been growing steadily in recent decades, driven by population growth, rising industrial output, expansions of energy-intensive hydrocarbons extraction, and an increase in private and commercial vehicle sales. Between 2007 and 2017, Egypt’s total primary energy consumption increase from 67.3m tonnes of oil equivalent to 91.6m tonnes, and its growth rate of 3.6% per annum was more than double the global average of 1.7% over the period.

Oil and natural gas are the two most important fuels in Egypt’s energy mix, and together they supplied around 95.9% of the nation’s energy consumption in 2017. Hydroelectricity provided a further 3.3%, while other renewables and coal contributed 0.65% and 0.22% to the mix, respectively. The removal of subsidies on fuel products, tariff hikes and an increase in the value-added tax have made diesel and petrol more expensive, though this has done little so far to slow the growth of domestic energy consumption: in 2017 total primary energy consumption rose 4.2% over the year prior, higher than the 3.6% average growth rate witnessed during the previous decade.

Electricity

Egypt is the most populous country in the MENA region, and is served by one of the most extensive generation, transmission and distribution networks in the region. In FY 2016/17 the EEHC oversaw more than 50 thermal power plants run by five regional electricity production companies and one nationwide, hydroelectric firm. Three more thermal facilities have operated privately since 2001 under build-own-operate-transfer models and currently maintain installed capacity of 2048 MW. Since 2017 three gas-fuelled plants operated by Siemens have fed an additional 5600 MW into the grid. Five facilities add a hydropower component to the mix, and two wind farms and a hybrid facility – partly gas and partly solar – make up the remainder of the on-grid renewables. Conventional thermal accounts for around 90% of national generation capacity, with natural gas comprising about three-quarters of all output.

The EEHC plan for 2012-17 called for the addition of 12,400 MW of thermal generation capacity, and its realisation has significantly eased the power difficulties that the country has faced since 2011. At that time, years of underinvestment in generation and a shortage of the gas that supplies the bulk of its power stations were key to the sector’s underperformance. By August 2014 peak demand regularly exceeded the system’s total capacity of 27 GW, which resulted in serial power outages and extended a period of load-shedding – or intentional blackouts – that began in 2013.

By 2017, however, regulatory reform and infrastructure investment had largely resolved this shortfall. The peak load for FY 2016/17 reached 29,400 MW, which the system accommodated without resorting to load-shedding. The total installed capacity of the national grid at year end stood at around 45,000 MW, an increase of 15.8% over the previous year. Although the EEHC acknowledges that factors such as the age of some units, adverse summer heat and the fluctuation of water resources and other renewable inputs are likely to keep the system from fully utilising its installed capacity, the recent trend towards expansion has clearly been a positive one.

The ongoing overhaul of the power and electricity sector has also included extensive investments in the country’s transmission network. The Egyptian Electricity Transmission Company oversaw a national grid that grew by 8.6% in FY 2016/17, to a capacity of 120,000 MW. Distribution therein is managed by nine state-owned companies, led in terms of network reach by the Canal Company for Electricity Distribution.

In February 2015 the government approved legislation that would allow for the privatisation of electricity production, transmission and distribution services. While public entities continue to dominate the power sector, the new law prepares the ground for a shift from a state-managed network to a state-regulated system powered by private investment.

Non-Hydrocarbons

The administration has worked hard to extend electricity coverage to residents even in its most remote areas, and by 2017 it had achieved almost universal access, estimated at over 99.8% by the World Bank. Rapid increases in domestic energy consumption, however, mean that sustaining the development of the power sector will remain a national priority in the near term.

In response to rising demand, Egypt intends to double its current installed electricity capacity of 50 GW by diversifying inputs like renewables, coal and nuclear power. In 2017 renewables accounted for just 2% of installed generation capacity, but Egypt’s energy strategy calls for renewables to provide for 20% of supply capacity by 2022 and 42% by 2035.

While hydroelectric power is the oldest and largest renewables segment in the country, recent growth has been driven by sizeable public and private investment in solar and wind. There is an abundance of renewables potential: daily sunshine averages 9-11 hours per day; median wind speeds reach 8-10 metres per second on the coast of the Red Sea and 6-8 metres per second both on the south-west banks of the Nile and in the south of the Western Desert; and more than 30m tonnes of solid biomass waste are produced annually from agriculture and municipal resources.

Coal & Nuclear

Efforts to broaden energy inputs are creating investment opportunities in other areas of the power spectrum. Egypt does not currently generate any electricity from coal, though it entered the consumer mix in 2014, when the government permitted cement producers to switch over from gas in response to severe natural gas shortages.

In 2017 the government announced a plan to build a $1.5bn, 6000-MW, coal-fired power plant at the Red Sea port of Hamrawein. Three international consortia submitted bids for the project, with the Chinese pair of Dongfang Electric Corporation and Shanghai Electric Group signing a deal in September 2018. The two firms will construct six low-emission, coal-fired units over the course of the next six years, with their combined capacity projected to reach 6.6 GW.

Nuclear power has been a topic of debate within the energy sector since the creation of the Egyptian Atomic Energy Authority in the 1950s. Plans for two new facilities with a combined capacity of 4000 MW had reached an advanced stage by 2010, and that year the government passed legislation regulating nuclear power and enlisted the Korea International Cooperation Agency to train Egyptian nuclear engineers.

While the political disruption resulting from the 2011 revolution has extended the project’s timeline, recent cooperation with Russia has renewed the initiative’s momentum. In December 2017 Egypt signed a $30bn deal with Russia to build North Africa’s first nuclear power plant on the coast at El Dabaa. Russia’s state nuclear monopoly, Rosatom, will build four 1200-MW reactors on the site and provide fuel over the plant’s entire lifetime. Rosatom plans to commence operations at the first unit in 2026, with the remaining reactors coming on-line one or two years thereafter.

Outlook

Egypt’s re-emergence as an exporter of gas and its move towards energy self-sufficiency testify to the government’s success in implementing a difficult series of sector reforms – subsidy reductions and tariff hikes foremost among them – necessary to secure further investment. In terms of new discoveries, the Red Sea is expected to become an industry focus in the near term. Schlumberger’s seismic mapping of the area shows that Egypt’s assets in the area resemble those of Saudi Arabia, which have been the sites of several recent discoveries. Some of the Egyptian areas present a 70% chance of offering natural gas discoveries, according to Schlumberger, and the MPMR has indicated that it plans to launch exploration and production tenders in the first half of 2019.

With regards to power, the planned diversification of inputs and the retreat of the state from the sector will continue to create possibilities for private investment in generation, transmission and distribution. Given the government’s commitments, the renewables sector particularly presents opportunities to develop human capital and adaptive technologies, especially vis-à- vis wind. Meanwhile, the country’s first forays into nuclear and coal power should bring further stability to a volatile economic sector that is critical – both as an export earner of foreign currency and as an input for other activities – to the growth of Egypt’s economy.