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Egypt's petroleum minister: a man with a plan

Tarek el-Molla believes his country will be a major oil hub, and self-sufficient in natural gas

THE EGYPTIAN energy sector’s fall from promise to penury was swift. Just twelve years ago, two liquefied natural gas plants were about to come on stream – the Segas facility in Damietta and Egyptian LNG’s plant in Idku – each underpinned by several years of consistent, industry-leading success in the upstream that also brought plans for gasification of the local economy. But exploration dwindled, the discoveries ended, and the plants ran out of gas. Saboteurs killed off piped exports from Egypt to the Levant through Sinai. All the while, the energy needs of the Arab world’s most populous country soared, spurred by subsidised prices that drain the country’s budget. The 2011 revolution and the counter-revolutionary upheaval of 2013 destroyed what investors craved: stability.

Tarek el-Molla, the country’s petroleum minister, is charged with correcting all this, restoring credibility to the oil and gas sector, averting an energy crunch and persuading international oil companies (IOCs) to stick around. Other ambitions are even broader. He wants more exploration – new bid rounds are imminent. He wants shale gas production – Shell and Apache are trying out the Western Desert. He wants to expand petrochemicals and refining capacity – to lighten a crippling products-import bill. He wants Egypt’s gas self-sufficiency back. And he wants to make Egypt a regional energy hub – building up oil and gas storage facilities in the Red Sea for use by partners from the Gulf.

“We are correcting and adjusting the strategy to accelerate the production potential we have and to put us on the regional map playing the role of a hub for oil production,” says Molla. “This is the priority – using our fantastic location and infrastructure.”

Eni’s Zohr discovery, announced in August 2015, has revived momentum in the upstream – and, Molla says, confirms his strategy is sound. Once the company saw “that there is a new strategy, commitment from the government, the Ministry of Petroleum”, as well as state-owned partners Egas and EGPC, he says, Eni fast-tracked development of the 30-trillion-cubic-feet field. The Italian firm sanctioned its plan in March, just six months after the discovery. Molla now expects it on stream by 2019, producing 2.6bn cubic feet a day of gas.

“We are correcting and adjusting the strategy to accelerate the production potential we have and to put us on the regional map playing the role of a hub for oil production”

If so, it will come in the nick of time. Egypt produced about 6.1bn cf/d of gas in 2009, according to BP, but output is just 3.9bn cf/d now, and is shedding about 1.2bn cf/d each year. But power generation needs have grown by about 5.5% a year since 2000, says McKinsey, a consultancy, and rising gas consumption has lately only been stymied by lack of feedstock. Last year, demand was 0.7bn cf/d greater than supply, and the gap is widening. To plug it, Egypt has hired two floating-storage and regasification units (FSRUs) – another will arrive next year. Imports now amount to 1.1bn cf/d, but will hit 2bn cf/d with the third FSRU. Of $0.8bn Egypt spends each month on energy imports, gas imports account for $250m-300m.

Zohr is the reason for Molla’s talk of gas self-sufficiency. But other big discoveries will be needed. He is hopeful for BP’s 5-trillion-cf West Nile Delta development, where the UK firm will spend $12bn to produce 1.2bn cf/d of gas in 2017. Other smaller fields will also chip in – all told, 12 projects are underway, worth $33bn of investment. Zohr has perked up interest levels in Egypt’s offshore (not yet visible in the offshore rig count, which is stable), and capped a good period of licensing – Molla says his ministry signed 64 concession agreements in the past two years. He expects “some good discoveries later this year and next”. Most watched will be Edison’s drilling in blocks adjacent to Zohr in 2017.

Three bid rounds, offering 30 more licences – in the Mediterranean, Red Sea, southern Egypt, the Western Desert, and Gulf of Suez – will take place later this year. “We might be self-sufficient in gas by 2021, according to our supply estimates,” Molla says. Production will reach between 5.5bn and 6bn cf/d by the end of 2019. Nonetheless, at least one of the FSRUs will be kept beyond 2021, he adds.

Some hurdles in the upstream have emerged. One came with the murder in Egypt of the Italian researcher, Giulio Regeni, earlier this year. Egyptian-Italian diplomacy has been awkward since then. Eni’s interests in Egypt – it is a “strategic partner” for the country’s gas sector, says Molla – came under scrutiny in Italy. He says Egypt’s relationship with Eni is “pure business – we are not getting into politics.”

Finding a fee

Egyptian gas prices are another obstacle. Cheap and available LNG has effectively capped the price Egypt is willing to pay offshore developers. But to keep the Zohr momentum, it also needs to reward drillers. Key upstream players like the US’ Apache – the largest oil producer – have eked out some price rises; but it still receives just $3.65 per million British thermal units. Reports have suggested Egypt might give some developers up to $5.88/m Btu, but Molla says this is a maximum – and was based on a Brent-indexed formula, so “we wouldn’t see this number soon”. Eni is expected to be paid $4.00-5.88/m Btu for Zohr’s gas, while Shell has sought more than the $5.45/m Btu it earlier agreed to for unconventional gas in the Western Desert. Molla is confident he can reach agreeable prices with developers. “We believe in the right of the upstreamer and investor to have a fair return on investment,” he says, but adds that the price must also be a fair one for Egypt.

For the IOCs, a bigger problem has simply been getting paid. Molla says the government owes upstream producers about $3bn. (Middle East Economic Survey (MEES) says the debt stands at almost $5bn.) BP and BG are owed the most. But, says Molla, the bill isn’t rising. Egypt is now paying its monthly invoices from the companies. And the debt will be cleared, he says – possibly through payment in Egyptian pounds, or by borrowing money, or through equity oil and gas. “Three billion is a big amount – I understand. But it is a good sign that we are trying to keep the level.” Concession agreements last 25 years, “so the challenging time of two or three years, with the commitment they have seen, the seriousness, the flexibility, the new strategy we have adopted, they can be a bit more patient.”

"We believe in the right of the upstreamer and investor to have a fair return on investment"

Keeping foreign investors happy will also be critical to the regional energy hub Molla envisages. Gas will be a core component. The Idku LNG plant could become a liquefaction terminal for other East Mediterranean producers – a prospect brought nearer by recent negotiations between Israel and Egypt. LNG, LPG and fuel-oil storage facilities – including a 2km, 19-metre deep jetty to receive LNG – are also being created on the Red Sea as part of a broad expansion by Sumed, the pipeline company that ships oil from that sea to the Mediterranean.

Sumed, owned half by Egypt’s EGPC and half by Saudi, Kuwaiti, UAE and Qatari state firms, is central to Egypt’s regional-hub ambitions. Egypt’s plan is to build new storage facilities to handle crude and products, making Sumed much more than a 2.5m barrels-a-day pipeline to the Mediterranean. This will allow Sumed to keep earning money even when traffic through the pipeline itself slows in periods of market contango, when the exporters might stash their crude for shipping later.

Some Egypt-watchers think Saudi Arabia’s oil-marketing and regional interests lie behind the plan. A recent visit from King Salman to Cairo ended with Egypt handing back two Red Sea islands to Saudi Arabia, while the kingdom – a staunch backer of President Abdel Fattah el-Sisi – pledged $55bn of investment in Egypt.

The terms included Saudi Aramco making more use of Sumed. But the package also included soft loans, the supply of subsidised oil products (amounting to the bulk of Egyptian oil imports) and assistance as Egypt builds up its refining and petrochemicals capacity.

Steadying ships

All of this is manna for Egypt’s economy – but the loss of the islands and appearance of Saudi influence sparked protests against the Sisi regime. For Saudi oil interests, its growing presence in Egyptian energy makes sense. Its oil already accounts for 55% of the crude flowing through Sumed. “If Aramco is trying to coordinate and invest or expand through Sumed that means they believe in this,” says Molla. Notions that Saudi Arabia would demand Egypt bar Iranian crude from Sumed appear misplaced. At the time of Petroleum Economist’s interview in Cairo, Sumed was not carrying any Iranian crude, and Molla said Sumed had not been asked to. Since then, it is understood that Iran has begun some small shipments through the line.

Saudi Arabia isn’t the only investor seeking stability in Egypt. Molla talks of the years between 2011 and 2013 as lost ones, which have left Egypt with a “painful invoice” to pay. Things are still far from easy. A low-grade war in Sinai, lingering civil unrest, terror atrocities that have decimated the tourist industry and the plummeting value of the Egyptian pound have all caused damage. In late May, ratings agency Standard & Poor’s downgraded Egypt and predicted GDP growth would slow to around 3% this year, from 4.2% in 2015. The country’s budget deficit widened again in the first half of the 2015-16 fiscal year.

But the Zohr find – and with it the possibility for unearthing other large gas reserves – has brought some optimism to Egyptian energy after years of gloom. Alongside broader plans to add nuclear power, renewable energy and more coal-fired generation into the supply mix, Egypt could reverse a decade of decline. As Molla is keen to point out, the country’s location should give it strategic advantages. Transforming that potential into the kind of hub for oil and gas Molla envisages won’t be easy, but at least Egypt now has a plan again, and a man who thinks he can deliver it.

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