Minister of Petroleum Sameh Fahmy and British Gas (BG Egypt) CEO Frank Chapman reflected on Egypt’s natural gas industry in speeches during a packed luncheon hosted by AmCham at the Four Seasons Nile Plaza hotel on September 6.

In his opening remarks, AmCham’s executive director, Hisham Fahmy, called for a moment of silence to remember two prominent members who recently passed away; Gamal El Nazer, chairman of the Egyptian Businessmen’s Association, and Odette Iskandar, president of Egypt & Middle East Company and former chairwoman of AmCham’s Women in Business Committee. Fahmy praised both for their long-running commitment and contributions to AmCham and the business community.

AmCham president Taher Helmy welcomed the 550 guests to the first chamber luncheon since the summer break. He introduced the two speakers, highlighting the long-standing relationship between AmCham and the petroleum minister as well as the importance of BG in developing Egypt’s natural gas sector.

Chapman said he was pleased by the opportunity to speak at the luncheon, as it gave British Gas “a chance to share our ideas on how to stimulate investment in exploration and production in support of further growing the Egyptian economy by building upon the phenomenal growth in gas over the last 15 years.” He noted that between 1994 and the present, natural gas had risen from 18 percent of Egyptian hydrocarbon production to 60 percent. He argued that this rate of growth was made possible by Egypt’s positive approach to foreign investment that allowed the “transfer of new technologies directly to the gas industry” and expanded global demand for Egyptian gas.

Egypt uses a large amount of natural gas domestically, which has been beneficial to the environment and has promoted growth, according to Chapman. For example, he pointed out that 85 percent of all electricity generation in Egypt is fueled by natural gas. “Access to inexpensive and clean gas has driven rapid growth and development,” he said. Yet his praise of Egypt’s past performance was somewhat tempered by his concerns over the current trajectory of gas production.

Initially, subsidizing natural gas for the domestic market encouraged the industry to shift away from oil in energy production, freeing up oil for export. However, Chapman questioned the logic of the subsidies today. Due to a dramatic rise in global energy prices, exploration and extraction costs have shot up dramatically. “In just 18 months, the cost of an offshore drilling rig in Egypt has increased from $60,000 per day to $300,000 per day,” he said. “At the same time, the costs of developing new reserves, heavily dependant on steel, have tripled.” Given the level of energy subsidies this makes the returns to investment in the sector very low for the Egyptian economy.

In Chapman’s view, energy subsidies are unsustainable and are the largest challenge facing the Egyptian natural gas industry. He praised the government for its efforts to “accustom end users to the inevitability of higher gas prices,” pointing out that the 25-percent increase in natural gas prices introduced in July “marks a sound step in the right direction.” Higher prices will not make Egypt uncompetitive, he said, explaining that the country will be able to maintain its competitive edge because domestic prices in all other countries have increased.

In his closing remarks, Chapman addressed the minister, extending an offer to work together with the minister to find an appropriate solution for all players in the industry.

Petroleum minister Fahmy then took the podium, beginning his speech with an overview of the dramatic development of the oil and gas sector over the last several decades. He acknowledged the important role of multinationals’ investment in “both upstream and downstream facilities” and the impact this has had on development in Egypt. The minister provided statistics demonstrating the dramatic growth of the industry both in monetary terms and in terms of the scale of production.

Fahmy went on to say that “several challenges are facing all stakeholders in the Egyptian oil and gas industry.” He agreed with Chapman that foremost among these challenges is greater demand for petroleum products in the highly subsidized domestic market. “Increasing local demand is limiting investment opportunities and is definitely minimizing revenues to the petroleum sector in view of subsidized prices in the local market,” he said. For example, domestic demand for these products rose from 30 million tons in FY 1995-96 to 52 million tons in FY 2005-06, nearly a 75-percent increase.

Another challenge facing the sector is the depletion of reserves causing “production plateaus,” which put a financial strain on investment. This, in combination with dramatically increasing costs of exploration and extraction driven by the higher price of inputs, has hurt the profitability of the industry. The minister argued that the solution to these problems is increased production efficiency and amortization within oil and gas companies operating in Egypt. But to increase efficiency, additional investment is needed to develop new concessions as well as human capital and the adoption of the latest science and technology.

The speakers then fielded questions from the audience, mostly on the topic of energy subsidies. The role of foreign businesses in the Egyptian energy market was also addressed. At the end of the event, Sameh Fahmy was awarded an honorary AmCham membership.