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Egypt lures in IOCs

The cornerstone of the country's energy reforms aims to tempt foreign firms wary of setting foot in the Egyptian market

The crux of Egypt's ambitious energy reform has been a better deal for upstream international oil companies (IOCs).

Stung by the failure of exploration rounds in 2012 and 2013, Cairo has guaranteed a higher minimum price for offshore producers. The old minimum price of $2.73/mn Btu has been replaced by $3.95/mn Btu to give IOCs a stronger incentive to invest.

The pricing hike, and other liberalisations, have seen a surge in exploration, led by the four IOCs that already dominate Egyptian production. Eni, flush from finding the 30tn ft³ Zohr field in 2015 last summer surveyed another field, Nour, 31 miles off Suez, although both the company and the Egyptian government are tight-lipped about rumours it may exceed Zohr in size.

BP and Shell, who each say they produce 20pc of total Egyptian gas production, which stands at of 5.2bn ft³/d, are both plunging fresh exploration resources into the offshore Nile Delta, with Shell last year upping exports through the Idku LNG plant from 150mn ft³/d to 250mn ft³/d. US independent Apache says its investment in new wells in the western desert is now over $1bn annually. Other IOCs are taking notice, with ExxonMobil making its first foray into the Egyptian market by taking one of 12 concessions announced in February this year.

Reform is also underway in the downstream sector, the centrepiece of which is the Natural Gas Regulation Act, or Law 196, passed in August 2017.

The Act, dubbed "bold and transformational" by the World Bank, ends the state monopoly on gas. Private companies can now buy, sell, transmit and store gas, ending the monopolies formerly enjoyed by the state's Egyptian Gas Holding Company (Egas) and Egyptian General Petroleum Corporation (EGPC).

The two state companies must now compete for contracts with private companies, three of whom have been licensed, with another four under consideration.

30tn ft³ — Zohr field reserves

Key to the new system is Egypt's first ever gas regulator, the Gas Market Regulation Authority, chaired by petroleum minister Tarek el-Molla, which began work in February last year.

It issues licences to private gas trading companies and among its tasks is ensuring private firms get a fair price to use Egypt's gas pipeline network, still owned by Egas. Transparency will be the key to the regulator's success, as it will need to demonstrate there is no conflict of interest as its chairman is also effectively the Egas boss.

Energy reform is itself part of a bold economic reform programme agreed between Egypt and the IMF, which has advanced Cairo a $12bn loan to ease the transition.

The hard part of this transition is weaning the Egyptian public off subsidies. Already Cairo has cut subsidies to food staples including bread, cooking oil and sugar, which have seen prices double. Partly as a result, the World Bank says poverty levels have risen since the epoch-defining Arab Spring revolution in 2010, from 25pc of the 95.2mn population to 28pc. Further price hikes are in the pipeline, with the government committed to more cuts in energy subsidies. Approximately two thirds of domestic gas consumption goes to power stations, which buy their gas at $3/mn Btu. That is below market price, with the government chipping in the difference, a subsidy that consumed 22pc of government spending in fiscal year 2012-13, although down to 11pc in fiscal year 2017-18.

For the reforms to work, the economy needs to grow, creating jobs and raising wages to take the sting out of the price rises that will follow subsidy reductions. Cairo is optimistic because economic growth, at 5.3pc, is at a ten-year high and it has a healthy $44.3bn in foreign reserves. On paper, Egypt's reform package, not least Law 196, is impressive. Much will depend on how well it is implemented.

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