April 01, 2014
Problems associated with a lack of fuel in Egypt continued through the end
of 2013, but the sudden end to the shortages that plagued Mohammed
Morsi’s presidency in June suggested that Egypt was not facing a real energy
crisis rather a politicization of its oil and gas sector. It has since become
clear that fuel shortages in Egypt are more directly the result of structural
issues than of short-term political instability. Rising domestic demand as part
of economic growth prior to 2011 far outstripped available fuel supplies, while
inefficiencies associated with Egypt’s state-owned service provider, the
Egyptian General Petroleum Corporation (EGPC), increased the likelihood of
periodic fuel shortages. Following 2011, a weakening currency and an erosion of
Egypt’s foreign reserves worsened the challenges confronting the EGPC and
Egypt’s oil and gas sector more broadly.
In the uncertain months prior to the end of Morsi’s presidency,
Egypt’s oil and gas sector was in limbo. On the streets of central Cairo,
queues outside gas stations choked the city’s already strained commercial
arteries and paralyzed local businesses. In the governorates, amid vexing
shortages of fertilizers and diesel, farmers struggled to
irrigate fields, harvest crops, and move their produce to market. Then, on the
morning of July 1, 2013, lines outside gas stations all but disappeared,
for the moment intimating that the politicization of the oil and gas sector was
more responsible for the shortages than any longer term pressures.
Prior to the uprisings of January 25, 2011, Egypt’s oil and gas
industry was an important asset in the country’s expanding economy. Although
its annual output of approximately 710,000 barrels of oil per day (b/d) paled
in comparison to that of the world’s largest producers—Saudi Arabia, for
example, produced 9.4 million b/d
in 2011—its oil exports were a stable earner of foreign currency and by 2009,
Egypt had become the largest refiner of
crude oil on the African continent—behind only South Africa. Its production of
natural gas, too, had increased five-fold since the mid-1990s, to 2.2 trillion
cubic feet (Tcf) in 2011; estimates of its proven natural gas reserves of 77
Tcf were the third highest in
Africa as of 2013.
Egypt’s energy sector was growing. Foreign oil companies were
investing unprecedented capital in
exploration and development: nearly 70 percent of
Egypt’s approximately $7 billionworth
of foreign direct investment (FDI) in 2009-2010 flowed to Egypt’s oil and gas
sector, dwarfing FDI in tourism, telecommunications, and real estate combined.
Oil and gas revenues were roughly 16 percent of
Egypt’s GDP in 2011, a figure poised to increase through the Egyptian
government’s continued agreements with foreign oil firms and Egypt’s potential
to become a key exporter of natural gas to Europe. And while total FDI slumped by
more than two-thirds following the uprisings in January 2011, crude production
remained constant and foreign oil companies did not evacuate Egypt en masse.
On one hand, constant crude production suggests that the oil and
gas sector in Egypt is more robust than many commentators have argued. It's
reasonable to speculate that investment levels will remain high, particularly
as the government has not interfered heavily in the sector since June 30—with
the exception of several highly publicized contract breaches, most notably with
the BG Group. On the other hand, drastic government actions could affect
investor confidence in the oil and gas market in the future—if the government
begins nationalizing oil fields, for example, or continues to divert crude
supplies from export terminals to the domestic market at larger quantities.
This remains to be seen.
Yet despite stable oil production following January 25, 2011,
stresses to the street-level economy appeared in a series of gasoline, cooking
fuel, and power shortages at the beginning of 2012. At the time, Fayza Abul
Naga, the Mubarak-era Minister of Planning and International
Co-operation, blamed smuggling
and a growing black market for diesel—when the real issue lay in the underlying
mismatch between growing demand and dwindling supplies, which the government
struggled to reconcile and, as a result, could no longer ensure smooth
deliveries of fuel to the market.
The Morsi government inherited these problems when
it took office in June 2012 but failed to find a solution. As the government
elsewhere avoided securing a desperately-needed $4.8 billion IMF loan and
proved incapable of stemming the
loss of Egypt’s foreign currency reserves, its response to the
fuel shortages was conspiratorial. Rumors abounded that the military was
interfering in the sector, that it was forcibly preventing foreign firms from
working concessions or moving oil to market. In turn, government critics saw
Egypt’s fuel shortages as a convenient way for
the Morsi administration to preempt street protests and demobilize the
opposition. The disturbances to the street-level economy and fears of prolonged
shortages underlined popular perceptions of the Muslim Brotherhood’s
mismanagement of the economy. Alongside political grievances, they were major
factors behind the mass protests that materialized at the end of last June. Outbreaks
of violence worsened these tensions as foreign oil companies periodically
closed their country offices and evacuated international staff, as BP did in
the days following June 30, 2013.
These issues were more political than economic and they do not
explain the industry’s underlying challenges. Egypt’s previous disruptions to
its fuel supply, such as the shortages and blackouts that emerged in 2007-2008, were
largely explained by a market mismatch: Egypt’s economy was growing between 5
and 6 percent, and domestic demand for oil and gas far outpaced supply. After
Egypt’s overall economic slowdown following 2011, the mismatch should have
eased, but energy consumption continued to rise. This was somewhat paradoxical,
but rising energy consumption could be explained by Egypt’s growing population,
outdated infrastructure, and according to industry experts a higher rate of GDP
growth—between 3 and 4 percent—than most current estimates.
In addition to the overall market imbalance, the domestic fuel
supply is also complicated by the role of Egypt’s state-owned service provider,
the EGPC, and how it operates with a weakening currency. Although private firms
are mostly responsible for exploration and production, the EGPC is tasked with
much of the downstream business—the
marketing, distribution, and sale of oil products—in the country. As such, it
is charged with ensuring the availability of subsidized fuel, which it does by
buying oil from foreign companies in Egypt at below-market prices and then
reselling it at a further discount to Egyptian consumers. Prior to 2011, when
Egypt’s public finances were healthy, it could afford to pay oil companies in
foreign currency. But as investors pulled money out of Egypt and unloaded the
Egyptian pound on the foreign exchange market following January 25, 2011,
honoring contracts denominated in foreign currency became exceedingly expensive
for the Egyptian government. With fewer financial resources and a grossly
disadvantageous macroeconomic climate, the EGPC could no longer ensure steady
supplies of fuel at below-market prices.
Political tensions have compounded these structural issues, but
there are compelling reasons to be optimistic. Despite several highly
publicized contract disputes,
international oil companies have by and large continued to deploy unprecedented
capital in Egypt and have expanded their
exploration and drilling operations. There continue to be major new discoveries
in the country, such as the majority BP-owned Salamat well,
drilled in September 2013 as the deepest well opened to date in the Nile Delta.
Moreover, it would be misleading to see the short-term woes of Egypt’s oil and
gas industry as a barometer of broader political instability. Where
longstanding market players have sold interests in
their oil business in the country, others, such as France’s Total, have
expanded their downstream operations, purchasing all
of Chevron’s retail gas outlets in Egypt at the end of last August. Even for
the Houston-based Apache Corporation, which sold a 33 percent stake in its
Egyptian interests to the China Petrochemical Corporation (Sinopec), it still
plans to invest $1.4 billion in Egypt for the coming year. The relatively new
presence of Chinese firms—as in Iraqi Kurdistan—is perhaps more a sign that
the opportunities outweigh
the risks of investing in Egypt’s energy sector.
Shortages will likely continue in the near term and will only be
solved as part of a comprehensive resolution of Egypt’s primary economic
challenges: stabilizing its currency, strengthening its foreign reserves, and
reforming its subsidy program. In the case of the latter, there are creative options for
the government to phase out the costliest subsidies in a way that is socially
equitable. As difficult as it might be to concede, given the ongoing political
transgressions and violations of civil liberties, a Sisi-led government might
have the political capital to carry out overdue subsidy reform if it so
chooses. Whatever the political climate, any Egyptian government—even a Sisi
one—should ensure that the country’s oil and gas sector remains an asset for
Egypt moving forward. The future of Egypt’s economy depends on it.
This
article is reprinted with permission from Sada. It can be accessed online
at:
http://carnegieendowment.org/sada/2014/03/27/fueling-egypt-s-economy/h5yp
Max Reibman is a Gates Scholar and PhD candidate in Modern Middle East History at Pembroke College, Cambridge.