Saturday, October 30, 2010

Al Ahram Weekly Article 2 (1 October - 7 October 2009)

Better than the Russians?

SeifAllah Rabie writes on the ins and outs of the Egyptian natural gas sector

As a curious member of the public following news of Egypt's political economy, I could not resist the temptation of trying to understand the story of natural gas in Egypt. Looking at the figures from the Central Bank of Egypt we find that petroleum and extracts constituted 14.2 per cent of the GDP for the year 2007/ 2008, standing as the second largest source of GDP (manufacturing, which holds first place, comprises 16.1 per cent).

In 2004/2005 oil and gas reached their peak, constituting the largest share of foreign direct investment (FDI) at 65.6 per cent, decreasing to 33.3 per cent of FDI for the year 2007/2008. This was due to a governmental move towards economic diversification, through which Egypt successfully raised its FDI from $2.1 billion to $13.2 billion, with oil and gas remaining a major contributor. As we chart these figures we find oil and gas part and parcel of Egypt's economic progress, and structure.

Upon digging further, we find that natural gas specifically is likely to occupy the lion's share in Egypt's energy sector in the foreseeable future as a result of major recent discoveries. The resource is also likely to play a huge role in key industries such as petrochemicals and hydrocarbons. Furthermore, the increasing level of global consciousness towards the environment is also likely to raise the level of demand for clean energy and therefore the importance of natural gas.

The more I dug into the facts and figures the more I found the story of natural gas in Egypt remarkable, though I couldn't determine whether it was a remarkable success or a remarkable failure. I am sure, however, that it is of great importance and worth close observation.

In its latest report about Egypt, The Financial Times recently hailed Egyptian authorities for their ability to double the production of natural gas from eight billion cubic feet in 2003 to 68 billion cubic feet in 2006, one of the highest growth rates of production in the world. Perhaps a more exploratory article could explain why it was eight billion cubic feet before and what happened to make it 68 billion cubic feet in just three short years.

Experts tell us that Egypt's natural gas production increased over 30 per cent between 1999 and 2007, one of the highest growth rates in production worldwide, higher than that of Russia which contains the largest natural gas reserves in the world, estimated at more than 1,680 trillion cubic feet (TCF), as opposed to the Egyptian reserves that amount to 58.5 TCF. The fact that we are having a higher growth rate than Russia, which is expected to grow by only one per cent for the coming two years, is striking and some readers may question our prominence as opposed to Russia in the oil and gas sector. The figures of production and FDI are at face value success stories. However, the devil is in the detail.

After reviewing the work of independent experts in the field, it is clear that the doubling rates of production, mentioned above, still do not solve the triangular riddle we find ourselves facing. The three angles of this triangle are production, the share of the foreign extraction company partner, and domestic consumption. In 2007, the production of oil and natural gas reached 76 million tonnes; the share of the foreign partner alone was 29 million tonnes, while our domestic consumption reached 60 million tonnes. An easy calculation shows that there is a deficit of 13 million tonnes.

This deficit entails that Egypt has to buy the difference of 13 million tonnes to satisfy its domestic consumption, so we actually buy this deficit from the foreign partner whom we sold it to in the first place. This entails a weaker position in negotiating prices and terms of agreement, bearing in mind that the pricing of natural gas is set through bilateral long- term contracts that are valid for 25 to 30 years at a time, unlike petroleum that has a unified cartel pricing system.

Amid such a deficit we get to hear about the Ministry of Petroleum's involvement in extensive exports of natural gas to Spain and Israel and several other countries, of which total Egyptian exports of both oil and gas mounted to about 30.2 million tonnes in 2007/2008. We also get to hear about cheap prices of natural gas export, when compared with international pricing levels, and the indebtedness of the General Authority of Petroleum to foreign extraction companies. Those issues are worth a whole new article, however the general question here is how far has the government been able to satisfy the domestic need for natural gas? And how is government policy taking into consideration the depletion of such an important resource in the near future?

The controversy in this matter is not only a problem of having a contract with an Israeli company -- which undoubtedly the public has every reason to resent -- but also the importance of transparency. And transparency is not just the claim of a democracy and its citizens to be fully aware of the actions of the state, but is also important because natural gas is a strategic resource, and is exhaustible, whether in 57 years (which is the optimistic government estimate) or in 10-15 years (the estimate put forth by experts), which brings us to the conclusion that in all cases it must be wisely used as a right of future generations.

So are we really better than the Russians?

No comments:

Post a Comment