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Full steam ahead for Egypt

An expanded role for private investment in Egypt's natural gas sector will catalyse the country's drive to become a regional energy hub

A casual reader of Egypt's Official Gazette mightn't find much in the way of excitement in Law 196 of 2017. But for anyone interested in the country's burgeoning natural gas sector it's hugely important.

In effect, Egypt is taking a giant step towards becoming the region's natural gas hub and putting itself beyond the reach of potential competitors like Cyprus and Turkey. The new law allows private sector firms to use the state import and distribution infrastructure to trade in natural gas.

Section 3 of the regulations states clearly that one of the main aims is to "attract and promote investment in gas market activities, and encourage a climate of competition in order to establish a competitive gas market". Private firms will be able to import, distribute and store natural gas in Egypt, under the supervision of a state regulatory body.

The deregulation measures will greatly enhance the flexibility of the Egyptian gas market, creating a liberal atmosphere conducive to Egypt becoming a regional gas hub. This kind of flexibility is absent, for example, in Turkey, another country that aspires to this role.

The regulatory body, according to Law 196, will be chaired by the petroleum minister. The chief executive will be chosen from within the energy sector. Other members will include three representatives from the state natural gas sector and two from outside it, with technical, economic or legal expertise. The task of another member is to head a team ensuring free competition and eliminating monopoly practices. Full details of how the measures will be implemented, along with the mechanics of authorising firms to take part and setting tariffs are expected to be announced soon.

"Liberalising Egypt's gas market is the first step towards transforming the sector's efficiency and competitiveness," said East Mediterranean gas analyst Charles Ellinas. "It's also essential to ensure that the new gas regulator is completely independent, to assure investors of objectivity and impartiality."

The deregulation of the gas sector is leading to speculation that private firms may seek to import gas from Israel's offshore fields, where operators are eager to find overseas markets.

Egypt is taking a giant step towards becoming the region's natural gas hub

Allowing the private sector to deal in Israeli gas might be a convenient way of establishing trade without the Cairo government backing down from its official position—that there can be no deal until a legal dispute over the halting of Egyptian gas exports to Israel is resolved.

In April this year, the International Chamber of Commerce's Court of Arbitration upheld an earlier court ruling which ordered two state-owned Egyptian gas companies to pay around $2bn in compensation for cutting off gas supplies to Israel in 2012. The Egyptian government has said that Israeli gas can't be imported unless that financial claim is dropped.

The deregulation of the gas sector comes as Egypt prepares for the start of production from the mega-giant Zohr offshore gasfield (reserves of 30 trillion cubic feet). The operator, Eni, says that the red-letter day will be in December. Output will eventually reach 1.2bn cubic feet a day, equivalent to about a fifth of current Egyptian production (5.2bn cf/d). Earlier this year BP and Rosneft bought into the $12bn venture, taking a 10% and 30% stake, respectively.

While Zohr will dominate Egypt's gas sector, many other fields, onshore and offshore, are under development. Recent discoveries have convinced IOCs that there's a lot more gas to be found.

The companies also like the look of the fiscal terms offered by the Cairo authorities and the fact that a gas delivery infrastructure is already in place. Marc Benayoun, chief executive of Italy's Edison, has spoken of Egypt's "very competitive operating costs" compared to those in other regions. As for BP, it's investing more money in Egypt than any other country. "We have a lot of confidence in Egypt," chief executive Bob Dudley said.

Egypt is now confident of being self-sufficient in gas by the end of 2018. Such is the country's belief in the future of its gas sector that the government is talking in terms of output rising by 50% next year and 100% in 2020. This will mean resumption of capacity output from the country's two almost idle LNG plants, at Idku and Damietta, reinforcing Egypt's aspiration to become an energy hub for the East Mediterranean region.

Egypt's natural gas bandwagon isn't just rolling, it's reaching impressively high speeds, offering hope at last for the country's ailing economy.

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