Roll out the barrel: Some tough decisions will determine the path forward

The upstream energy sector in Egypt is a tale of two resources: oil exploration and production is proceeding as planned, but the country’s leadership has yet to find the right mix of factors to leverage its natural gas deposits, which are much larger. A growing population and heavily subsidised products have resulted in fast-rising domestic consumption, and Egypt became a net importer of oil in 2010.

The debate over future growth is focused on offering better incentives for upstream gas exploration, reducing subsidies and possibly liberalising distribution channels downstream. Although multiple parts of the economy will need immediate and focused attention from the new government, the energy sector’s importance – it accounts for 14% of GDP – means it will be near the top of the agenda.

ON THE UP: Exploration is ongoing, and Egypt’s reserves are growing steadily – at the latest count 4.3bn barrels of oil and more than 77trn cu feet (tcf) of gas. Production figures have generally come in at 720,000-750,000 barrels per day (bpd) for oil. In total the energy sector produces around 1.8-1.9m bpd of oil or oil equivalents. Reserve totals are consistently on the rise as exploration is ongoing, but most of the easy finds have already been tapped. Just over two-thirds of Egypt’s potential is gas in deepwater deposits in the Mediterranean Sea – an expensive and challenging resource to extract, and one Egypt has not had large-scale success with.

A telling statistic is the reserves-to-production ratio, which serves as an indication of how many years Egypt has before the current wells run dry. That number is 16.7 for oil and 36 for gas. The former is the second-lowest among African oil producers. The numbers may rise, particularly if the country can unlock the potential of its unexploited gas reserves, which are overwhelmingly offshore in deepwater deposits. But consumption is growing fast, causing a profound change in the debate about how this resource should be used (see analysis). Earlier in the 2000s, Egypt sought to leave at least one-third of its gas undeveloped for the future, exporting one-third and maintaining a third for domestic consumption, but such a balanced approach is increasingly difficult to maintain. New export-oriented gas projects are unlikely to be considered, and the goal now is to mine the resources and deploy them as soon as possible. “Egypt needs to develop its resources more than ever now, as its energy demand is due to double by 2025,’’ said Jeroen Regtien, the chairman and managing director of Shell Egypt.

STRUCTURE: The main point of contact for the oil sector is the Egyptian General Petroleum Corporation (EGPC). It is designed to play the roles of regulator, joint venture partner, licence provider, refiner and marketer. The idea, according to the former minister of petroleum, Abdullah Ghorab, is to provide a one-stop-shop service. Oil produced is generally sold to EGPC, which then refines it into fuels or industrial feedstocks and sells it on to end-users. EGPC is also responsible for importing products.

Operating parallel to EGPC, and playing a similar role in the gas sector as EGPC does in the oil sector, is the Egyptian Natural Gas Holding Company (EGAS). The two are parastatal agencies under the Ministry of Petroleum (MoP), which has been led by Osama Kamal since August 2012, when a new cabinet was sworn in by newly elected President Mohamed Morsy. Kamal is the former president of Egyptian Petrochemicals Holding Company.

Three other organisations make up the balance of what Egypt considers its five main energy companies: Ganoub El Wadi Petroleum Holding, which oversees exploration in Upper Egypt below 28 degrees latitude; the Egyptian Mineral Resources Authority, which oversees mining; and the Egyptian Petrochemical Holding, in charge of petrochemicals.

EGAS was formed in 2001 and was envisioned by the then petroleum minister, Sameh Fahmy, in its current role as a gas-only complement to EGPC. Included in the agency’s responsibilities are the processing, transmission and distribution of gas in the domestic market, as well as liquefaction and liquefied natural gas (LNG) marketing.

The Ministry of Electricity and Energy is responsible for government agencies overseeing conventional, nuclear and renewable energy: a consumer protection and regulatory agency for electricity: and the Egyptian Electricity Holding Company, which is responsible for generating, transmission and distribution of electricity. Egypt has six production companies operating power plants, one transmission company and nine distribution companies.

Egypt’s grid is already connected to those of Libya, Jordan, Syria and Turkey, and by 2015 a link with the national grid of Saudi Arabia should be completed. While these connections were once envisioned as an export opportunity for Egypt, domestic demand has likely eliminated that possibility.

OIL: Egypt has a long history of oil production. Oil is spread over several regions, including the Nile Delta, the Sinai Peninsula, around the Gulf of Suez, and in the Western Desert and Eastern Desert regions. The country had 4.3bn barrels in proven oil reserves at the end of 2011, according to BP’s “Statistical Review”, or 0.3% of the global figure. The total has grown steadily over the years and is expected to continue doing so. Though exploration is ongoing, the rapid increase in demand means total reserves are unlikely to grow at the pace seen in recent years. In the past 10 years there have been 270 oil discoveries in Egypt, according to the MoP.

Onshore oil is relatively cheap and easy to find and extract in Egypt, which is why it gets most of the interest in upstream activity despite there being greater untapped potential in offshore gas. In the fiscal year 2009-10 80% of newly found oil reserves, accounted for in 64 separate discoveries, came from the Western Desert area, according to EGPC, which is considered the easiest territory to explore.

During the first quarter of 2012 there were 15 blocks open for bidding in what was the first block auction since 2009, seven of which were in the Western Desert. Officials said they hoped to find some new exploration-and-production partners through this sale, specifically citing national oil companies from Malaysia, China, Russia and others. Winners and details on the bids had not yet been released as of August 2012 (see analysis).

PRODUCTION LEVELS: According to data from BP, daily production in Egypt stood at 735,000 bpd in 2011, up 0.3% on 2010, accounting for 0.9% of the global total. Despite some increases in production in recent years, the country’s oil output has been more generally on a downward trend since 1996, when Egypt’s wells produced around 935,000 bpd, according to the US Department of Energy. Daily output hit a trough in 2005 at 696,000 bpd, and had been creeping upwards from there until 2010. Given that consumption exceeds the current levels of production, Egypt’s government has put exploration among its top priorities, which is why the energy sector was one of the only ones in which plans were acted upon during the period when the government was considered a caretaker one.

Terms can differ by block, but in general exploration periods are up to seven years. At that point, if a commercially exploitable deposit is found, a production-sharing contract common to many oil-producing countries spells out how production will proceed. Terms have been roughly the same since 1973: rights are for 20 years, with a five-year extension possible, according to an EGPC document intended as a guideline for bidders in the 2011 round. Once costs are recovered, production sharing leaves firms with 20-30% of output. Companies risk losing blocks if production does not start within four years, or if they fail to meet minimum spending requirements. There are no taxes on imported machinery and equipment. “From a regulatory standpoint Egypt is on solid ground,’’ said Brian Twaddle, the general manager and director of Transglobe Energy. “The contracts are issued as laws and have been stable for many years.’’ DELAYED PAYMENTS: Oil produced is generally sold in accordance with Brent Crude prices at the time to EGPC, which then acts as a reseller in the domestic market. In general there is a lag of three to six months between delivery and payment, and at times – in particular when oil prices are at elevated levels – EGPC’s arrears tends to build, in part because it is buying at market rate and selling at a loss due to the country’s system of generous energy subsidies.

“EGPC is paying unsustainable amounts of money to keep subsidies in place for Egyptians,’’ said Thomas Voytovich, the regional vice-president and general manager of Apache Egypt, the local branch of US-based explorer and producer Apache Corporation. “Some tough decisions will need to be made.’’ Moreover, the fact that EGPC has fallen behind on its payments has had an effect across the sector, not just on production companies. “The outstanding debt owed by EGPC has trickled down to service providers, as even big multinationals are failing to pay their bills because the sector is not liquid,” Amr El Marsafawy, the chairman of SeaHarvest, a local diversified oil services company, told OBG.

Egypt has the largest refining capacity in Africa, with 10 oil refineries and an overall capacity of 975,000 bpd. That is well above current consumption, but when factoring in future growth and that some of the refineries are nearing the end of their useful lives, the need for additional capacity is clear.

The overall expansion plan calls for another 600,000 bpd of capacity by 2016. Part of the strategy is to go beyond basic fuels like petrol, and to crack crude oil into petrochemicals and other products, which would not be subject to the current subsidies and therefore have the potential to be more lucrative for EGPC. “The plan could be to focus on value-added products that are not regulated,” Moataz Darwish, the commercial manager for Shell Egypt, told OBG. “They could build a hub around the Suez Canal and ship fuels and lubricants.’’ REFINERY UPGRADE PLANNED: There was a major development in June 2012 with the announcement that the Egyptian Refining Company (ERC), a public-private partnership (PPP) led by private equity firm Citadel Capital, had closed on a $3.7bn debt and equity package for an upgrade to an existing government refinery in the Greater Cairo area. ERC will deliver diesel and other added-value products to EGPC. The facility is expected to reduce the country’s diesel imports by around 50% in today’s terms, and is scheduled to begin operations in 2016. It will have the capacity to produce 4.1m tonnes of high-quality oil derivatives per year. EGPC has invested $270m in the project for a 24% stake. Qatar Petroleum International has committed over $362m, for a 28% interest. Citadel Capital holds an effective equity stake of 12%, with a total direct and indirect investment of over $155m. “Recently Egypt did not have a president, constitution or parliament, and still this $3.7bn refinery deal was signed. This is testament to the fundamental strength of this project as well as the lenders’ and investors’ long-term confidence in the Egyptian economy,” Tom Thomason, the CEO of ERC, told OBG. “This project is a classic PPP situation where the private sector is partnering with the government to expand critical infrastructure that the government cannot afford to finance on its own. Due to the government’s tight financial situation, PPPs will become more prevalent as a well recognised mechanism for expanding the country’s infrastructure in the energy sector.”

UPSTREAM GAS: Unlike the country’s oil deposits, most gas is found in a concentrated area, in the Nile Delta region and offshore in the Mediterranean Sea. Around 70% of current production comes from these areas. Production in 2011 reached 2.17 tcf, down 0.1% from 2010. From 2000 to 2006 Egypt had doubled production, going from 0.74 tcf to 1.5 tcf. Momentum has slowed since, however. Consumption has not – the total was 1.75 tcf in 2011, a 10% jump on 2010.

Natural gas reserves amounted to 77.46 tcf at the end of the fiscal year 2010/11, according to EGAS, down from 78.1 tcf at the end of 2009/10. That compares with 49.4 tcf in 1990, and 52.9 tcf at the end of 2000. Gas was first discovered in Egypt in 1967 in the Nile Delta region, but it was only in the last decade that large discoveries amounted to enough to make Egypt a major gas producer. While figures for proven reserves are expected to grow for both oil and gas, it is the latter which is widely considered to have the greater potential. Indeed, EGAS believes there is at least 223 tcf in the Nile Delta region alone that has yet to be fully explored.

According to the MoP, there have been 156 gas discoveries in Egypt in the past 10 years. However, maintaining this rapid pace of discovery has been difficult. That is in part because the easy finds, in the relatively shallow waters of the Nile Delta region and the near offshore, have already been made. Boosting Egypt’s gas reserves is going to mean moving exploration and production into deepwater blocks, which is more expensive.

Egypt has yet to find a balance between the interests of the country and the interests of explorers, who want better contract terms for offshore gas than has been on offer in the past. As in the oil sector, it is expected that a bidding round will be completed in 2012. However, because the country has not managed to attract major interest in its offshore gas, expectations are far higher for the oil blocks on offer than for those that may contain gas.

Perhaps as an indication of things to come, Egypt has jettisoned its usual model for the West Nile Delta project, which consists of the North Alexandria and West Mediterranean concessions, both operated by BP. In that project, there is no joint venture and the contractor assumes full operatorship plus all cost risks during all phases of project and gets paid by an agreed gas price formula. Should Egypt’s administration of its energy sector see fundamental reform, it is this project which could serve as a model for new production terms (see analysis).

SERVICES: Another potential market-mover would be additional help in oilfield services, a segment that is perceived as underserved. “One of the major challenges of operating in Egypt is the lack of service providers in the offshore segment, especially for shorter drilling campaigns,’’ Mohamed Al Ajeel, the country manager for Kufpec, a subsidiary of Kuwait Petroleum Corporation, told OBG. “Exploration in deepwater areas in the Gulf of Suez has become very expensive and the mobility of offshore rigs has been difficult. There are high fees for bringing in a new rig from another region. Otherwise you have to wait in a queue for a rig to become available,” he said.

While oilfield services providers have experienced sudden increases in demand, Egypt’s regulated downstream sector serves as a disincentive to spending what it takes to put drilling gear to work – a complaint that can be heard in many energy-producing countries. “Many natural gas finds in the Gulf of Suez and offshore Nile Delta have not been fully pursued because the set price of gas is so low that it would not be economical,’’ Al Ajeel told OBG. More generally, business has also been affected by the revolution and global events. “Demand for new rigs has dropped in the last two or three years, first from the financial crisis and now the revolution. It is important that the government initiates bid rounds to stimulate new development in Egypt’s petroleum sector,” Osama Wahab, chairman and managing director of Egyptian Drilling Company, told OBG. Indeed, some feel there is a danger of companies going elsewhere. “Many drilling companies have been forced to look outside of Egypt for new opportunities and contracts, sometimes as far away as South America,” said Mohamed Saada, the chairman of contracting firm FlowTex. However, firms that take this route can encounter challenges, Mohamed Shimy, the chairman of Egyptian Maintenance Company, told OBG. “Competition has become increasingly fierce in neighbouring markets and companies have to continually find niche areas to compete with cheap Asian products and labour,” he said.

DOMESTIC DEMAND: As of early 2012, 54% of gas extracted was used to produce electricity at power plants. Egypt’s increasing demand for electricity mandates the constant building of new power plants. The country expects to expand generation capacity from a current level of 28,860 MW to 58,000 MW by 2027. “As urbanisation increases, there will be huge demand for infrastructure, particularly for energy production and water treatment plants,’’ said Naji Jreijiri, who heads the Egypt and Central Africa operations of Swiss contractor ABB. New power generation capacity currently under development includes two combined-cycle plants near Cairo, which are due to open in mid-2013 and will together add 2250 MW to supply. In September 2011 US-based General Electric was awarded a $300m contract to supply six gas turbines for this project.

Even if Egypt succeeds in getting gas wells flowing en masse, the country aims to reduce its reliance through renewable energy. Egypt intends to derive 20% of electricity from wind, solar, hydro or other forms of renewable energy by 2020. “There are huge opportunities in renewable energy in Egypt, and indeed the region as a whole, for solar, wind and other independent power producer (IPP) investments,’’ Jreijiri said. Egypt is already off to a good start in renewables thanks to the Aswan Dam, built in the 1960s and yielding hydroelectric power that currently provides about 10% of total capacity. Areas around the Red Sea are ideal for wind power, and the first large-scale wind farm is now operational near Zafarana. Wind’s full potential could hit 7200 MW of capacity, or three-fifths of the renewables target. However, reaching it implies the same pace of construction envisioned for conventional energy – one new wind tower a day reaching completion until 2020, according to DSD Ferrometalco, a Cairo-based manufacturer of steel structures.

EXPORTS: While domestic demand for gas is large and growing, Egypt exports a significant amount of natural gas, both as LNG and via pipelines. LNG exports reached 0.34 tcf in 2010, according to BP, and piped gas 0.19 tcf. Spain and the US were the largest buyers of LNG, at 27% and 21% of the total, respectively. Other customers include Japan, Italy, France, Turkey, Kuwait, Chile and South Korea. LNG is processed through three trains: one operated by the Spanish Egyptian Gas Company and two by Egyptian LNG, both of which began operations in 2005. Piped exports leave Egypt via a pipe that begins in Port Said, on the Mediterranean coast, and then branches off into two pipelines: the Arab Gas Pipeline and the Israel Gas Pipeline. Jordan was the biggest taker in 2010, with 46% of exports bought. Israel took 38%, Syria 13% and Lebanon 3%. The Arab Gas Pipeline travels through Jordan into Syria, with a spur into Lebanon. In the past, plans had included an extension to Turkey, although Egypt’s loss of enthusiasm for exporting gas may have made that less likely.

Exports to Israel were a controversial aspect of Egypt’s gas policy until they were ended in April 2012 (see analysis), in part because of domestic demand and also as a result of the ongoing Israeli-Palestinian conflict. Popular Egyptian support for Palestinians has created, in general, wariness about doing business with Israel. In addition, the gas pipeline between the two countries had been subject to a number of bombing attacks, which may have played a role in halting exports.

USEFUL EARNER: Although domestic demand is large enough that eliminating exports from the mix seems logical, a counter-argument can also be made, namely that exports would bring in much-needed foreign currency. The government’s cash position has taken a massive hit since January 2011, in large part because its foreign currency reserves are dwindling as tourists avoided the country in the aftermath of the political upheaval. The total was at around $36bn before the uprising, and had sunk to $15.5bn as of the end of the first half of 2012, according to central bank figures. One benefit of this could be to force a more market-oriented discipline on the domestic downstream sector, and that could trigger investment in the future. “As long as energy tariffs are below real cost, you can neither effectively implement energy efficiency, nor competitively sell any product in that area,” said Mohamed El Mahdi, the chairman and managing director of Siemens in Egypt. “The same is true for renewable energy: if renewable energy has to compete with subsidised fossil energy then we are limiting Egypt’s renewable future.’’ REFORM: Though the intention when EGAS was created was to have a gas-focused version of EGPC, the reality of the system has strayed from the design and responsibilities now overlap. In addition to the regulatory arbitrage and confusion this creates, there is also a lack of transparency in the system. The most recent annual report posted on the agency’s website covers fiscal year 2007/08.

Reform of the agencies overseeing the sector and their responsibilities has been discussed for years, and is possible, if not likely, as the political environment further stabilises. In the latter years of the Mubarak era, a plan that had been discussed would have created an independent regulator for oil and gas, leaving EGPC and EGAS to play roles more similar to national oil companies – the model popularised by state-owned enterprises such as Saudi Arabia’s Saudi Aramco or Malaysia’s Petronas.

According to a US State Department cable from 2009, creating an independent regulator was a goal of the then-prime minister, Ahmed Nazif, along with providing additional transparency in the sector. One of the motivations, according to the report, was that oil and gas revenues bypass the Egyptian treasury and go straight to EGPC. Other parts of the plan floated at the time include creating holding companies for refining and distribution, as well as liberalising the distribution and sale of end-user fuels.

COSTS: One area that could get a closer look is the costs upstream companies incur. The nature of the production-sharing contract means that they can recover costs from later production, and therefore the higher the costs, the smaller the share of the oil produced for Egypt. According to Magdi Nasrallah, the chairman of the Department of Petroleum & Energy Engineering at the American University in Cairo, EGPC may motivate its joint venture partners to reduce costs by having an independent auditor, or an EGPC representative, keep an eye on the books. That could mean reviewing, commenting on or even approving or disapproving contracts signed with subcontractors, or encouraging the use of more local workers and content. “Foreign firms realise there is overspending in their operations,’’ he told OBG. “Some of them have been here a very long time, and have vested interests in Egypt. They are likely to be cooperative and willing to negotiate.’’ The status of reforms to liberalise downstream activities is still unclear. That would mean the removal, or at least partial removal, of the price caps on fuels, as well as allowing upstream producers to talk directly to end-users in the industrial sector. As of now, companies reliant on gas or other petroleum-based fuels buy from EGPC or EGAS. For heavy industries such as cement and steel, prices were raised from $3 per million British thermal units (mmBtu) to $4. EGAS typically buys gas from producers at $2.65 per mmBtu, and going from $3 to $4 effectively takes these industries off subsidy. The $1.35 difference represents the distribution cost for EGAS.

Although the price remains lower than what firms in Europe pay for gas, Egyptian industries see their competition coming not from the north but from the east, in the countries of the Arabian Peninsula. In Qatar in particular, gas is even cheaper, said Khaled Ghareib, the head of research and strategy for the Egyptian operations of Lafarge, the French cement and construction materials provider. What heavy industry really wants, he said, would be to be able to negotiate directly with producers in order to lock in a long-term price. “We are getting our gas now at $4, but we don't know when that will change,’’ Ghareib told OBG. “To have some certainty would help our planning and it would encourage more investment.’’ SUBSIDIES: Without a doubt the biggest issue in the department of sector reform, and indeed one of the biggest issues in Egypt overall, is the question of how much people and businesses will pay for their energy in the future. Subsidised energy was one of the pillars of Mubarak-era policy, but by 2012, consensus has grown that the system cannot continue as it has been. In early 2012 petrol was literally cheaper than water: LE1.75 ($0.29) for a litre of 90-octane gasoline, as opposed to LE2 ($0.33) for a litre of water available at kiosks or in convenience stores. While Egypt has plenty of domestic energy to mine, these are prices more commonly seen in countries with a far friendlier ratio of reserves to people, such as Saudi Arabia or Qatar. Without incentive to conserve resources, Egyptians have consumed without restraint: consumption of cooking gas has increased by 100% in the past decade, according to a study by the American Chamber of Commerce in Egypt.

Fuels and industrial feedstocks are not the only consumer goods subsidised in Egypt; foods get the same treatment. However, energy comprises LE95bn ($16bn), or 71%, of the total of LE134bn ($22bn) allocated in the 2011/12 budget for all subsidies. That represents 32% of all spending. Expressed as a share of GDP, the overall subsidy bill has ranged between 8% and 12% of GDP since the 2005/06 fiscal year, according to Ministry of Finance data.

FLAWS: Even were the subsidies affordable, Egypt is now a net importer of oil and is expected to be within a decade for gas. Continuing with the status quo would become far more expensive. Some subsidised oil is smuggled outside the country, often to Libya, where it is sold at much higher prices. Similarly, according to a study by the Cairo-based Egyptian Centre for Economic Studies, “Under the current system, the poorest 20% of the urban population benefits from only 3.8% of total subsidies, while the richest 20% receives one-third of total subsidies.”

The logic of selling cheap natural gas to industry is also being questioned. Egypt had conceived of its gas resources as a way to attract industries that would generate employment, but has found that the activities it has attracted, such as cement and steel making, are not creating jobs at the pace imagined. Furthermore, Egypt cannot get financial aid from the IMF without cutting subsidies, as the group has made it clear that lowering them is a precondition to getting help, although foreign assistance looks increasingly necessary, given that the country’s foreign currency reserves are dwindling.

CHANGES: Reform is already under way. An EGPC proposal announced in May 2012 suggested boosting prices for fuels and then offering coupons for discounted rates for poor people. Once used, consumers would be forced to pay market rates, thus encouraging lower consumption. However, the implementation of moves already announced is in question. For example, energy-intensive industries are buying natural gas at $4 now instead of $3, which represents the price the state pays plus distribution costs. Several industry executives told OBG in April 2012 they are paying the new rates, although others say they have not seen a change. Galal El Zorba, the chairman of the Federation of Egyptian Industries, told local media in May that there had been no change. The incident is among several that serve as a reminder of the lack of transparency in the energy sector, leading to rumours and conflicting information. A similar episode happened in January 2012, when rumours of a fuels shortage led to panic buying, despite the country having ample supply.

For the oil producers themselves, a switch to a market in which the government agencies are no longer middlemen and subsidies are ended or phased out somehow would be welcome. Under the current system, EGPC is the sole buyer of unrefined products in Egypt. It is buying from the joint ventures it has established with IOCs, meaning that it is in part reimbursing them for the costs they incur upfront.

There is often a lag in payment, in part because the company is buying at the market price for Brent and then refining the crude into end-user fuels that it must sell at a loss. That leaves the company in a constant state of negative cash flow, and struggling to come up with the payments it owes to producers. The problem is most pronounced when oil prices are high, which boosts the discrepancy between the prices at which EGPC buys and sells.

Currently, with Brent trading well above $100 since the revolution, the arrears are building. Though EGPC will not disclose the actual amount it owes its IOC partners, and the figure is subject to some dispute, sector watchers in Cairo believe the total was at least $5bn as of April 2012, and most likely between $6bn and $8bn. The agency has also established lines of credit with local banks, which according to estimates as of July 2012 could add up to another $6bn-10bn in liabilities. “EGPC is unable to pay on time right now, but it is paying,’’ said Nasrallah. The concern, however, is that in the future, its balance sheet could prove to be a problem.

CREDIT CHECK: Ghorab told the local press in March 2012 that EGPC’s line of credit with various banks is normally sufficient to keep the arrears from building. However, since the revolution, lenders are unwilling to extend more credit than they already have. “EGPC’s financial situation is the biggest concern for petroleum companies,’’ said Voytovich. “The government needs to encourage new developments in the sector as a precursor to increasing supply.”

In the downstream segment, consumption of oil averaged 709,000 bpd in 2011, according to BP stats – 26,000 bpd more than production. EGPC and EGAS are responsible for major activities such as selling petrol and distribution of gas to marketing and distribution companies, and in the case of meeting oil demand, EGPC is the importer. According to EGAS, the national grid had 17,068 km of pipes and a capacity of 175m cu metres per day, as of March 2010. A total of 3.5m residential customers had been connected to the grid by December 2009, the most recent statistics from EGAS. Around one-third of the total were in Cairo. The agency’s goal is to have 5.5m customers for residential gas by 2015.

If subsidies were phased out and upstream producers allowed to sell directly onto the market, or to downstream companies of their choice, greater investment could be expected. That could mean more refineries, more jobs in the sector and more options for consumers. “It would be a new opportunity,’’ Darwish told OBG. “We are importing some of our products from our refineries elsewhere, but liberalisation could mean producing them here.’’ OUTLOOK: Over the past 18 months, political risk and policy uncertainty have emerged as some of the most pressing concerns for foreign investors in Egypt, resulting in some very tangible impacts on certain segments of the economy (see Industry chapter). However, the energy sector – both upstream and, to a lesser extent, downstream – has been comparatively buffered from the worst fallout of the events of 2011. Nonetheless, the sector is far from untouched and some of Egypt's looming socioeconomic problems, including a high level of poverty and stubborn inflation, will have a significant impact on how output from the country's upstream production is actually used. Pricing and exports are likely to be subject to serious scrutiny over the medium term.

As a result, most of those with a stake in Egypt’s energy sector remain in wait-and-see mode as 2012 progresses. A renegotiation of prices for gas exports to Israel is unlikely but has not been ruled out by authorities. Such a development would have the potential to obscure most other issues, aside perhaps from the political hot potato of subsidies. Deregulation in the downstream sector seems certain to remain a key topic, with other reforms, such as restructuring government agencies or considering alternative contract terms, likely to come later. In the long term, one of the most commonly mentioned problems is the lack of transparency. Because it is difficult to know precisely the measure of this sector, rumours spread easily and some maintain a hands-off approach. One example is the size of EGPC’s arrears. EGAS’s cost to deliver gas to customers is another. One of the benefits of the political changes will likely be an increase in transparency. More information is likely to be followed by more investment, perhaps into the offshore gas deposits that will be key to unlocking the sector’s potential.