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GAS SHIFT STUCK IN THE PIPELINE
BY EMAN S. MORSI
Abundant reserves of natural gas are giving energy
strategists a chance to wean Egypt off its traditional dependence
on heavy oils and butane. According to Emad Hassan, regional manager
of Nexant Inc., an international energy consulting firm hired to
assist the government in planning an energy strategy through the
year 2030, the government is pursuing an aggressive strategy to
expand the country’s natural gas pipeline infrastructure.
“The shift from the use of different types of oil extracts
to natural gas comes as a logical reaction to the decline in oil
reserves and the increase in natural gas discovery,” he says.
Egypt’s proven oil reserves – currently estimated at
3.7 billion barrels – are being depleted quickly and experts
say they will be exhausted within 15 years unless new reserves are
found. On the other hand, Egypt has 70 trillion cubic feet in proven
gas reserves, enough to power up the country for 35 years. And more
are being discovered every day.
As part of its national gas strategy, the government is implementing
what Hassan describes as an “ambitious” plan to expand
its pipeline network to 1,000 factories, 500 tourist establishments
and 6 million homes by 2009. The plan includes four pipeline projects
to bring natural gas to previously neglected areas of the country:
a 220-kilometer pipeline to transport gas from Taba to Sharm Al
Sheikh; a 175-kilometer pipeline connecting Shaqir to Hurghada and
Safaga; the completion of the Upper Egypt gas pipeline, which will
run 800 kilometers from Beni Suef to Aswan; and the expansion of
the existing gas network in the Cairo and Delta region.
Though the decision to shift reliance from oil to natural gas is
wise, it doesn’t come cheap. The Shaqir-Hurgada-Safaga line
is expected to cost LE 490 million, the Taba-Sharm Al Sheikh line
LE 640 million, while the Upper Egypt gas line will require a hefty
LE 5.2 billion to construct. Finance minister Youssef Boutros-Ghali
has said he favors public-private partnerships (PPPs) whereby the
private sector builds the gas networks and either rents them back
to the government or manages distribution.
While all the talk of private sector partnership sounds very promising,
the reality on the ground is that relations between the two parties
are somewhat strained. Khaled Abu Bakr, managing director of Taqa,
a group specialized in gas distribution services, accuses the government
of reneging on its partnership agreements. He relates that Taqa’s
subsidiary, Nile Valley Gas Company (NVGC), was awarded a 25-year
concession in 1998 to build and operate the Upper Egypt pipeline.
But obtaining the licenses to actually build the pipeline has been
an uphill battle, and has shown how reluctant EGAS, the state company
that manages gas supply, is to relinquish its hold on the sector.
“EGAS is now constructing the line, which is against the agreement
they have signed with the Nile Valley Gas Company,” Abu Bakr
says bitterly. “We can only expand the line with their approval,
and here is where the conflict of interest begins. They are the
ones who give the approval and they are the ones who own the companies
– such as PetroGas and Egyptian Gas Company – that they
want to use to build these pipelines.”
Clearly there’s a lot at stake. The shift from oil to natural
gas is expected to attract more investment in the country, especially
in Upper Egypt where development has been slow. “The Upper
Egypt pipeline aims at creating a balance in the growth rates of
all of Egypt’s governorates,” explains Sherif Ismail,
CEO of EGAS. “By attracting investment to Upper Egypt, that
will in turn create thousands of job opportunities, [and] the immigration
from south to north will decline. In fact, it is expected that in
the long run people will immigrate from north to south instead.”
Abu Bakr however, is critical of how long it has taken the government
to realize the importance of building the line. “We’ve
been fighting for the past seven years to build the Upper Egypt
line, but the ministry insisted it wasn’t feasible,”
he says. “Instead of working on delivering gas to our own
industry, the Ministry of Petroleum was [preoccupied with] building
a pipeline to and investing in Jordan. While in Jordan we sell only
1 billion cubic meters per year; in Upper Egypt we could have sold
4 billion cubic meters per year.”
He argues that the government has promoted export production at
the expense of the domestic market. Egypt currently stands as the
world’s eighth largest exporter of natural gas. “We
have over-committed ourselves to exporting gas,” he told Business
Monthly. “The ministry wants to export gas to Romania, Bulgaria
and Turkey while, ironically, our own investors, local and foreign,
do not find enough gas here.”
According to one independent estimate, domestic demand accounts
for approximately 80 percent of Egypt’s 50.4 billion cubic
feet in annual gas production, though only 70 percent is actually
provided. But for domestic industries that do have access to natural
gas, the price is certainly right. A 50-percent subsidy provided
by the government makes gas the cheapest form of energy for industry.
While the subsidy is intended to encourage the industrial investments
that create jobs for Egyptians, Nexant’s Hassan argues that
too often the real beneficiaries of this cheap gas are consumers
in western countries. “Why should we subsidize the energy
used by an investor who is manufacturing goods for export? When
we do that, we are actually subsidizing people living, [for instance,]
in Europe, who buy that product. This is illogical and it won’t
lead to any economic development.”
Taking this argument even further, Hassan also believes that when
it comes to individual consumers, the rich should not be subsidized.
“Why should we provide energy, whether gas or electricity,
to houses for the same fixed price whether that house is a LE 2
million villa or a LE 5 per month rented apartment? This is not
fair,” he says. “We should introduce different rates
for different areas. People in places such as Zamalek, Mohandiseen,
Heliopolis or Garden City, who own cars for LE 50,000 or LE 500,000,
can obviously pay for the full cost of energy.”
Petroleum minister Sameh Fahmy has acknowledged that the gas subsidy
structure warrants review. In March, he announced that the government
was considering a new arrangement that would supply natural gas
to factories that export products at a different price than factories
that manufacture for the local market. He is reportedly mulling
a similar two-tiered subsidy for residential use. If the revisions
increase the profitability of domestic gas sales, producers would
have more incentive to supply gas to the local market. But that
would also increase the urgency of expanding the nation’s
gas pipeline network.
PIPE DREAMS
In seeking a fuel suitable to provide energy to Egyptian
homes, natural gas is the obvious choice. It’s abundant,
clean-burning and efficient. But running a natural gas pipeline
to every home in the country has proven an onerous endeavor.
After a 25-year effort, the government has only managed to
supply natural gas to 2.4 million residential units –
mostly in the Cairo and Alexandria areas.
For Egyptians living in remote areas and lower-income neighborhoods,
butane gas – supplied in 12.5-kilogram cylinders –
remains the primary source of energy for cooking and heating
water. The cylinders are cumbersome, must be changed regularly
and are prone to leak or explode. A string of butane gas cylinder
explosions – including one that led to a fire that gutted
over 250 homes in a Cairo suburb in March – has made
the latter point painfully clear.
Yet despite the dangers and inconvenience, families dependent
on the cylinders are not overly keen to switch to piped natural
gas. After all, while natural gas is subsidized, butane gas
is still cheaper to burn.
For the consumer at least. For the government it is a costly
and wasteful habit. Butane subsidies – estimated at
LE 9 billion per year – account for 20 percent of all
energy subsidies.
Egypt imports 1.4 million tons of butane gas per year, mostly
from Algeria, to fill the estimated 40 million butane gas
cylinders in circulation. While it costs LE 42 to fill a cylinder,
the government subsidizes over 90 percent of the cost of the
butane to bring the retail price down to LE 3.5, though private
filling stations often charge up to LE 18.
While the infrastructure costs associated with extending natural
gas pipelines to homes are high – averaging nearly LE
3,000 per individual gas line – the savings realized
would be enormous, says Sherif Ismail, CEO of EGAS, the state
company that manages the natural gas sector. “If half
a million housing units are provided with natural gas, this
would mean cutting 10 million butane gas cylinders annually,
which in turn means that the government would save LE 500,000
in subsidy,” he says.
Emad Hassan, the regional manager for energy advisory firm
Nexant Inc., puts it another way: “Technically speaking,
if every flat in Egypt used natural gas for free it would
still be cheaper for the government.” |
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