Thursday, July 3, 2014

Egypt: A new natural gas importer?

During a June 25 state visit by Egypt's President Abdel-Fattah el-Sissi to Algeria, the Algerian state-owned oil company, Sonatrech, agreed to deliver 5 liquefied natural gas (LNG) cargoes (equivalent to about 15 billion cubic feet of natural gas) to Egypt later this year. The demand for natural gas in Egypt has been growing faster than production since 2010. As a result, the domestic market has been experiencing gas shortages.

Egypt is highly reliant on natural gas for power generation, and power outages have been common over the past few years, especially during the summer cooling season. Recent outages are due mainly to a lack of natural gas or other fuels, not to a lack of generation capacity. Additionally, the Egyptian Natural Gas Holding Company (EGAS) has had to cut gas supplies to some industrial consumers, mainly producers of methanol, cement, and fertilizer, in order to make more gas available to electric generators. In Egypt, natural gas and electricity consumption are subsidized. Residential and small commercial consumers pay less than $2 per million British thermal unit (MMBtu) for natural gas.

To minimize domestic gas shortages, natural gas originally intended to be exported as LNG has increasingly been diverted to domestic consumers. Natural gas exports peaked in 2009 and have been steadily declining since then. Egypt has two LNG export facilities. The facility at Damietta has been idle since 2013 because it has not had enough natural gas to continue to operate. More recently, in January 2014, BG, the operator of the second export facility, declared a force majeure on LNG exports because of a lack of gas. Revenue from exports of natural gas and its derivatives was down 81% in April 2014 versus April 2013 according to Egypt's Information and Decision Support Center. Egypt continues to export small volumes of pipeline gas to Jordan.

In addition to the LNG imported to alleviate domestic gas shortages, Egypt's LNG export facility operators have pursued preliminary agreements to import gas via pipeline to their underutilized LNG export plants. In June, BG signed a preliminary agreement with partners in Israel's Leviathan field to potentially import about 250 billion cubic feet (Bcf) of gas per year for 15 years. This follows a similar preliminary agreement signed by the partners in the Damietta export facility to potentially import 160 Bcf of gas per year from Israel's Tamar field.

There are still significant hurdles before any gas can be imported into Egypt. Before imports from Israel could begin, the companies involved would have to negotiate final, binding agreements, which would require government approvals in both Egypt and Israel. Additionally, new underwater pipelines would need to be built in order to move the gas from the production fields to the LNG export terminals. Imports of LNG from Algeria also face hurdles. Egypt does not currently have any facilities to import LNG, but it has been negotiating with Höegh LNG to lease a floating storage and regasification unit (FSRU). While negotiations are going on, Egypt plans on having the terminal in place and operating by the fourth quarter of 2014.

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