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FEATURE

fossil fuel

oil has been the backbone of the petroleum sector for decades. now that its heyday has passed, how will the industry cope?

by daliah merzaban

morgan, july, ramadan, october and badri are all well-known names in the petroleum sector. the rich oil reserves at these and other off- and on-shore oil fields in the gulf of suez have been the breadbasket of egypt’s petroleum industry since the 1960s.

until recently, local oil production was esteemed for both satisfying domestic consumption needs and generating valuable export revenues. petroleum exports account for around 8 percent of gdp and 40 percent of total export receipts.

but local oil’s glory days are winding down, along with the production levels of the suez wells.

after more than 30 years of use, reserves are getting old, and yielding drastically less oil than they used to. newly discovered fields, meanwhile, don’t have the abundance of crude oil that distinguished their suez-based counterparts.

additionally, the long-standing petroleum subsidies system has encouraged gross over-consumption of fuel, throwing the very future of the industry into question.

egypt remains a net exporter of oil products – to the tune of $2.4 billion worth of petroleum exports in 2001/02. but a recent jump in crude imports has threatened to upset the delicate trade balance: according to industry analysts, egypt is teetering on the verge of becoming a net importer of oil in as little as two years.

in the meantime, oil companies, along with the government, are doing all they can to delay the inevitable.

a natural decline

approximately 70 percent of egypt’s oil reserves are located in the rich deposits of the gulf of suez, while the remainder are scattered throughout the fields of the western and eastern deserts and the sinai peninsula.

suez oil production began at the morgan site – the gulf’s largest field – in 1967. by the mid-1980s, the gulf of suez petroleum company (gupco), egypt’s biggest oil producer, was extracting some 550,000 barrels per day (bpd). gupco is jointly owned by british petroleum (bp) and the egyptian general petroleum corporation (egpc), the regulatory body mandated with carrying out joint exploration and production schemes with multinational energy concerns.

since then, gupco’s production levels have fallen dramatically, to a mere 190,000 bpd. “it’s a natural decline because of maturity,” explained bp president and general manager hesham mekawi.

natural it may be, but waning reserves spell the end of the boom times for the big oil companies that have built their names on the suez reserves, like petrobel and the suez oil company (suco), as well as gupco. most oil companies are now on damage control, hoping to keep production levels from sinking any further.

even in its heyday, the oil industry never reached its unstated goal of 1 million bpd, according to saiid el derini, chairman of tam oilfield services. from a peak of over 900,000 bpd a decade ago, the sector now produces an average of 630,000 bpd nationwide.

regional competitors, meanwhile, such as saudi arabia, the uae, kuwait and libya, all produce more than 1 million bpd, with saudi arabia alone pumping over 8 million bpd.
despite declining reserves, however, egypt’s oil industry continues to attract billions of dollars in foreign petroleum investment annually.

but now, competition is stiffer, especially from oil-rich developing countries that, like egypt, rely on foreign investment to fund oil exploration. “life is not as easy as before,” said suco chairman hamed mohamed al ahmady. “thirty or 40 years ago, the number of countries producing oil was 20.

nowadays, it’s almost 100, so the competition for... investment is very fierce between the different host countries.”

while there’s no dearth of new oil concessions on offer, they’re not as promising as the suez treasure trove, al ahmady explained. “our production is declining because we have limited acreage,” he said. “while we have more discoveries, they’re small discoveries.”

mass consumers

the pressure on egypt’s oil fields, though, isn’t only due to natural causes. domestic over-consumption of energy is also straining the country’s reserves – not to mention the state purse.
in the early 1980s, local consumption of oil and gas products was around 16 million tons per year, according to shamel hamdy, first undersecretary at the ministry of petroleum. for this fiscal year ending june 30, by comparison, the number will be around 44 million tons. “the problem for our petroleum sector is the huge consumption... this is swallowing part of the oil that we could export,” he said. “local demand is growing faster than our expectations.”

egypt continues to be a net exporter of refined petroleum products, like jet oil and fuel oil. but in the past few years it has become a net importer of two critical oil products: gas fuel (diesel) and liquefied petroleum gas (lpg), or butagaz.

according to hamdy, local production of diesel fuel falls 5 to 10 percent short of meeting local consumption needs. for lpg – the fuel used to power most household stoves – local production falls short by 30 to 40 percent.

the primary culprit, to talk to those in the industry, is the state subsidies system, which keeps energy prices artificially low, encouraging citizens to consume more gas and oil than they would if prices were higher.

the subsidies system also imposes a heavy fiscal burden on the national budget. in its 2003/04 budget, the government will spend £e 14 billion to maintain petroleum subsidies, hamdy said.

factoring in lost export opportunities, the total loss is closer to £e 24 billion.

but in egypt, energy subsidies are a time-honored way of life: a standard cylinder of lpg is sold at £e 2.65, year in and year out, while at service station pumps, diesel fuel is kept at a mere £e 0.40 per liter.

these prices, say observers, are unrealistically low – about five times lower, in fact, than world prices, according to paul f. rea, chairman and managing director of fuels marketing at exxonmobil egypt, which runs 395 esso and mobil service stations nationwide. “if you’re pricing diesel fuel cheaper than water, which is almost the case,” said rea, “then the public doesn’t understand its value and they waste it.”

hamdy referred to a recent study conducted by the ministry of petroleum which found that fuel prices in neighboring countries – like jordan, tunisia, morocco and sudan – were as much as 10 times higher than those in egypt.

meanwhile, as retail prices at petrol stations remain constant, the amount the government pays for oil imports is in a constant state of flux: the launch of the us-led war on iraq saw world crude prices rise to almost $40 a barrel, only to plunge by about one-third a fortnight later.

unpopular politics

meanwhile, the mere mention of fuel price hikes is enough to cause an uproar among drivers of taxis and microbuses, whose livelihoods depend on access to low-cost fuel. it is also more economical for freight companies to use diesel-powered trucks than to use the railway or river transport because of the lower cost of diesel, rea said.

yet many oil officials believe that energy subsidies encourage a culture of mass-consumption, prompting the citizenry to use fuel carelessly, and with little regard for how precious the commodity is. “we are abusing our resources,” suco’s al ahmady said. “if gas stations charged £e 3 per liter rather than £e 1, everybody would cut their consumption – even if it means walking to buy a pack of cigarettes rather than driving.”

abdel basit, who depends on money he makes from driving a taxi to support his wife and three children, couldn’t conceive of ever having to pay more for fuel. “it’s impossible,” he said. “the government could never raise prices.”

industry officials, meanwhile, contend that – since oil is an international commodity, subject to transnational price fluctuations – subsidies must be dismantled sooner or later.

michael barron, policy and corporate affairs manager at british gas (bg) egypt, said that the subsidies system distorts the market, is unattractive to investors and provides people with no incentive to buy more fuel-efficient cars or switch to cleaner fuels. bg is currently conducting studies on energy subsidies to assist the government in forming a more effective policy.

according to andrew vaughan, chairman of shell egypt, which produces and markets oil and gas, the experiences of other countries that have phased out fuel subsidies, such as india, can provide insights into how the transition to a market-driven petroleum sector impacts the population.

while dismantling the cumbersome system of energy subsidies might make sense from a macroeconomic perspective, such a move could result in an intense popular backlash. ending petroleum subsidies in india, indonesia, nigeria and the philippines was “a disaster,” rea said. “taxi drivers go on strike, block the roads and throw stones.”

social unrest in egypt would be just as sweeping, according to taxi driver abdel basit. he said that ending subsidies would, in turn, force the government to raise the wages of the public sector work force across the board – a move the state can hardly afford.

“all 70 million of us would get up and protest,” emad mohamed, a part-time taxi driver, added. “i’d have to pay for the difference from my pocket. we are the ones who will lose.”

some in the industry criticize the blanket nature of the subsidy, which benefits drivers of luxury bmws as much as it does microbus drivers. “it’s a curious subsidy,” mused vaughan. “the government oil sector is going to have difficulties ahead if the oil subsidies continue. the money is going to have to come from somewhere.”

hamdy, meanwhile, mentioned a “targeted” petroleum subsidies scheme as a possible solution. “certain mechanisms need to be put in place to make sure that poor people would get the energy for a cheap price that they can afford.”

others argue that the subsidies system can be dismantled only gradually. “the government shouldn’t remove subsidies entirely, but the drive should be in the right direction for the safety of the country,” said rea, who recommended immediate incremental price increases of a few piastres per liter of fuel.

still, it’s no secret that the subsidies system is so pervasive, so thoroughly woven into the fabric of society, that such a decision could never be made by one ministry alone.

the sector’s salvation

the promotion of further exploration – in the hope of keeping pace with local consumption – has become one of the petroleum ministry’s major short-term goals.

last year alone, there were international tenders for 36 oil and gas exploration blocks in the mediterranean, gulf of suez, red sea, western desert and nile delta. according to ministry figures, there have been 114 oil and gas discoveries in egypt from 1999 to the end of 2002. meanwhile, 22 oil and gas concessions are currently in the process of being finalized.

with more concessions being awarded every year, it’s hoped that – at the very least – egypt will be able to maintain its current rate of production. “the picture is still rosy,” said hamdy, the ministry’s first undersecretary. “last year, we added to our reserves 101 percent of what we consume.” he added that domestic oil reserves were sufficient for another 14 years of consumption.

to most industry watchers, 14 years may seem a bit of a stretch. but they agree that egypt’s oil industry shouldn’t be written off just yet.

even though oil field production is declining at an average rate of 30 percent annually, bp’s mekawi said the company had managed – with the help of new concessions and improved technology – to keep its rates of decline at between 5 and 10 percent in recent years. in fact, he added, for the first time in a decade, bp forecasted no decline in production for the year.

“enhanced oil recovery,” meanwhile, has become the latest buzz phrase within the industry, referring to the new secondary and tertiary recovery methods now available to maximize the potential of mature wells.

according to el derini, whose tam oilfield services utilizes such techniques, secondary methods include “lifting” oil with electrical or hydraulic pumps, or injecting water or gas into the fields to pressure deep-lying oil upwards. tertiary methods involve “steam flooding” and the injection of polymers to coax out reluctant reserves – a last-ditch method currently being employed in the first-generation suez fields, according to el derini.

big oil companies are also investing heavily in new engineering technology to maximize oil recovery at younger fields as well.

using seismic imaging, for example, bp was able to move from an initial exploration phase to production within 11 months at its edfu field in the gulf of suez – an area previously thought to be devoid of exploration potential. “it’s an example of what new technology allows you to do,” mekawi said.

the shift to gas

new concessions and technology aside, oil’s place in egypt’s economy is undeniably regressing.
but, by happy coincidence, as oil reserves begin to run low, new discoveries in natural gas have promised to soon make up for the energy shortfall. “the blessing is that god gave us gas now. it is coming at the right time,” hamdy said, adding that “the increase in the added gas reserves will balance the decline [in oil].”

even globally, natural gas is expected to replace oil as the world’s largest energy source within the next 15 to 20 years.

egypt’s gas reserves at the end of 2002 stood at 58.5 trillion cubic feet (tcf), while, according to scientific estimates, there could be a further 100 to 120 tcf of gas still waiting to be discovered. “the future is promising,” said mekawi, “because of gas.”

as local oil production declines, egypt’s gas production, by contrast, is increasing at a rate of 15 percent per annum, according to bg egypt’s barron.

but as bright as the future of gas appears to be – bg says annual gas exports could bring in $1 billion by 2006 – there are some disadvantages. for example, it is much more expensive to process and transport gas – which requires an elaborate system of pipelines – than it is to process and ship off a barrel of crude. “gas exports are not going to create the same magnitude of revenues as oil exports have in the past,” barron predicted.

so for now, oil companies are doing everything they can to extract the waning amounts of oil that are left.

bp, for example, which has been dabbling in natural gas since the early 1990s, is still planning to invest heavily in oil exploration and production. “with the development of new technology every year, i don’t think oil will lose its place,” mekawi predicted. “i am confident that we will continue to find significant oil.”

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