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Cairo crunch

Fast-rising fuel demand is a problem for a country relying increasingly on products imports

Egypt is going through a renaissance in oil-product demand. More than five years after a revolution that shattered its economy a growing and rapidly urbanising population now wants more fuel. Most of it has to come from abroad.

The country's GDP growth averaged around 4% last year, according to the World Bank, but will rise to 5% a year until 2020, it says. Egypt's population is also soaring-it will reach 100m people within the next four years, compared with 82m in 2013.People are getting richer too. AT Kearney, a consultancy, expects the size of Egypt's middle class to expand rapidly, from 19% of the population last year to 34% by 2019.

It's good news for exporters targeting the country, but not such a blessing for Egypt's supply security. And with just 38m-40m people attached to the power grid the potential for even greater fuel demand is plain.

Egypt's total oil demand in the first half of this year was already 60,000 barrels a day more than in H1 2015, according to the International Energy Agency (IEA), and reached 0.85m b/d, a rise of 7%. The IEA expects the growth rate to tick up, taking total demand by year end to 0.87m b/d.

Products are especially in demand. Facts Global Energy (FGE), a consultancy, reckons consumption of both fuel oil and combined gasoil/diesel increased by 20,000 b/d each in the first half of this year, compared with the same period in 2015. These are year-on-year rises of around 8% and 7% respectively, even while the government has tried to dampen the thirst by raising prices.

''This growth is a bit surprising considering the subsidy cuts we've seen,' says Audrey Dubois-Hebert, an analyst at FGE. "A large number of the population are living below poverty levels but a large proportion of the population are young and consuming more and more."

While Egypt's gasoline demand is lower than that for fuel oil and gasoil and diesel combined, its consumption is growing faster-between January and June it rose by 9%, a 15,000-b/d increase on the same period last year. FGE expects similar growth levels across all three products next year. The pace of demand will depend on subsidies.

In mid-2014 the government cut fuel subsidies in an effort to reduce its deficit, causing the price of some products to rise by as much as 80%. The cost of fuel subsidies fell to 55bn Egyptian pounds ($6.2bn) in the 2015/16 fiscal year, down from 71.5bn pounds a year earlier. This year the government plans to slash them by a further 43%, as part of its 2016/2017 budget, to 35bn pounds.

Rising fuel demand often points to a healthier economy-but for Egypt it also causes problems. Domestic production and refining capacity are lackluster. In the latter ledger, capacity of around 0.84m b/d has not increased since 2011, leaving it well short of the country's needs.

Domestic crude production is especially bleak. From a high of 0.941m b/d in 1993 it slumped to 0.723m b/d last year. It can't refine all this, so Egypt exports around 30% of the crude it produces, according to FGE, adding to the import bill.

For a country with a budget deficit of almost 12% of GDP, this is also bad news. Egypt spends around $795m every month on energy imports.

Last year, the country signed supply deals with Russia's Rosneft for both oil and liquefied natural gas. Earlier this year it agreed both a $12bn loan with the IMF and then signed an oil-products supply deal with Saudi Arabia. The $23bn, five-year agreement increased Egypt's oil-product imports from Saudi Aramco from 0.5m tonnes a month to 0.7m (equivalent to 5.5m barrels a month or about 180,000 b/d). Of this, 400,000 tonnes would be gasoil, 200,000 tonnes gasoline and 100,000 tonnes fuel oil.

The deal was part of a financial-aid package, whereby Egypt will receive financing to pay for the products and repay it over 15 years at 2% interest. It was controversial in Egypt, because the agreement-struck during a visit by Saudi king Salman to Cairo-also saw Egypt hand over some islands. Most analysts thought Riyadh was using Egypt's plight to sew up some regional loyalty, including Egypt's support for the kingdom's war in Yemen.

But Egyptian involvement in Yemen has not materialised-and neither, since 1 October, has Aramco's extra oil. Egypt's state company, EGPC, has been forced to issue tenders for spot cargoes.

Meanwhile, the decades-long decline of Egyptian oil production doesn't seem likely to improve soon. For international oil companies (IOCs) operating in Egypt's upstream, simply getting paid has been an uphill struggle.

Tarek el-Molla, the country's oil minister, told Petroleum Economist earlier this year that Egypt owes IOCs, most drilling for gas-where Egypt has been successful-around $3bn. Cairo is now meeting the monthly invoices, but doesn't have cash on hand to pay off the debt.

Unless investors can be lured back to find more oil, Egypt probably needs to find demand-side solutions. But taming demand growth while spurring economic expansion will not be easy.

Source: Facts Global Energy
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