Global Insight Perspective | |
Significance | As a result of Egypt's gas export contracts being signed during the first half of the decade—when prices were dramatically lower—today they give the population the impression that Egypt is giving its gas away, some of it even to—considered by many—arch-foe Israel. |
Implications | Egypt's industrialists have been successful in taking hold of the issue and portraying it as an issue of national importance, where the government pursues international commitments to the detriment of the domestic industry, and attempts to cut domestic consumption and subsidies, while at the same time continuing cheap exports. |
Outlook | Ultimately not much new gas is coming onstream in Egypt until 2010, and the LNG market is looking healthy over that period, meaning that early contracts before a new Damietta LNG train are not vital. Additional smaller volumes to Jordan and Syria, or to Israel, could suffer, but these were uncertain anyway; nevertheless, Egypt's industrialists have been emboldened and could attempt to push for lesser export entitlements. |
Stating the Obvious?
Egypt's government will not sign any new gas export contracts until the end of 2010, according to a statement delivered to a parliamentary committee yesterday by Shamil Hamdi, first under-secretary at the Egyptian Ministry of Petroleum, Reuters reported. Hamdi then qualified the statement by adding "or until it thinks that world prices have stabilised", leaving the door open for a longer or—less likely—shorter moratorium on export agreements. The government has been coming under much fire following the commencement of Egyptian gas exports to Israel through the East Mediterranean Gas (EMG) pipeline—a deeply unpopular agreement among Egypt's broader population—and the disclosure that the export price, agreed years ago, was even lower then the one Egypt now pays to some of its producers (see Egypt: 3 June 2008: Future Gas Export Projects Threatened in Egypt Amid Popular Backlash Against Low Export Prices). As popular outrage started to boil, a more thorough review of Egypt's gas export deals conducted by the media found that all of its export contracts, generally signed before—or just as—Egypt plunged onto the gas export market for a short time in the middle of the decade, were priced significantly below today's inflated gas prices.
Meanwhile, Egypt's government has been fighting the country's short-term gas crunch, trying to cap spiralling domestic demand growth through phasing out industrial gas subsidies and offering higher gas prices to developers of expensive offshore gas fields. The second leg of that strategy has lately resulted in renewed commitment from Egypt's largest gas producers to step up exploration and development (E & P) once again. However, the first leg of the strategy might well have backfired, as industrialists have managed to portray lower subsidies as what pays for the lower export prices.
The growing pressure on the government—increasingly organised by the Egyptian industrial lobby—has now resulted in the government acknowledging that there will be no new gas export contracts until late 2010, or until global gas prices stabilise. With Egypt suffering a short-term gas crunch that may potentially be prolonged into the medium term, there would not have been large volumes coming onstream to be exported in any case during this time, rendering the statement as one directed more at domestic opinion than the gas markets. Nevertheless, it will impede the signing of early sale contracts for a new Damietta train, and this could complicate financing somewhat, though the robust health of long-term gas need in Europe—Egypt's main LNG market—is likely to mitigate against any adverse effects. Rather, and quite ironically, adding some small volumes to its Israeli, Jordanian, and perhaps Syrian and Lebanese pipeline exports at now very competitive prices might be the opportunity that is lost, leaving much of the EMG pipeline's capacity, in particular, lying idle.
Delaying the Trains?
Backed up by large new offshore gas finds, the SEGAS consortium, dominated by Italy's Eni and Spain's Union Fenosa, has been pushing for an added train where large producers such as BP and Germany's RWE would receive a partnership stake. A final investment decision (FID) was about to be signed just before the export furore began, but is now likely to proceed only following a political cooling-off period. The long-term reserves are there, and the project is seen as necessary to get the producers to develop their expensive offshore reserves and provide added volumes to the domestic market. This means that its ultimate construction seems comparatively safe, although the sudden anti-export turn in Egyptian politics is by now delaying the start of the project with every day that passes.
A potentially gloomier outlook faces the ELNG consortium led by the United Kingdom's BG and Malaysia's Petronas, which has been hoping for an additional liquefaction train at its Idku plant following the Damietta decision. With Damietta being delayed, and the ELNG reserve situation not as convincing, the project is likely to be the one sacrificed for now, should the Egyptian government feel the need to placate domestic export opposition further.
Nothing More in the Pipe
Added export volumes in the near term to Israel in particular, but also to Jordan, Syria, and Lebanon, are what have been hit by yesterday's statement. The EMG pipeline has significant spare capacity, and added volumes at today's high prices could have been a real opportunity. With Jordan also keen to take 0.55 bcm of added gas through the Arab Gas Pipeline and Syria eyeing the need to bridge its own gas supply before its delayed large-scale Shaer and Sharif gas projects come onstream, potential export volumes following this summer's domestic peak-demand season appear to have been lost. This will have further negative implications for long-term European plans for future Egyptian gas volumes through the Arab Gas Pipeline's connection with Turkey and—potentially—for the Nabucco venture, demonstrating the growth constraints it is experiencing.
Outlook and Implications
The Oil Ministry now appears to have regained the initiative, following a month of heavy criticism over handing out scarce Egyptian gas supplies at below-market prices, while trying to constrain domestic supply and raise industry prices. At least, this is what the Ministry will try to portray itself as having done, counting on a steady inflow of renegotiated export agreements with all its clients in the coming weeks to demonstrate its success in securing higher prices. At the same time, no real substantial change has yet had to be made to Egypt's long-term gas development and export strategy.
The victory by the industry lobbyists might, however, upset the new balance, should they continue to push for further increases in the domestic supply and a reversal of the decision to phase out industrial gas subsidies over the coming three years. With the domestic industry lobby having scored a victory and caused internal cabinet disunity, the Oil Ministry's grip on the situation has been called into question very publicly. In the choice of further export capacity—or lower domestic industrial growth, as the industry lobby presents the problem—popular sympathies with regards to future job creation have clearly come up against the Oil Ministry and the IOCs.
For the IOCs, swiftly agreeing to higher gas prices has been a wise strategy. Any efforts to push hard for new export projects should now be toned down and subject to a political cooling-off period, if the industrialist-driven "domestic supplies first" line is to be dropped, and thus lower export ratios, or gas prices, avoided. IOCs have secured good growth opportunities in Egypt over the past six months, and not rocking the boat for a while should guarantee that the better terms are not reversed. Supplying added volumes to the domestic market during the coming peak-demand period—as some companies did last summer—by diverting gas from the export projects, could also be vital to cultivating invaluable friends in the Egyptian polity.
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