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Egypt opens up to new investors

By Charles Ellinas

Egypt has approved a new gas law opening its natural gas sector to private investors.

It enables private companies to contribute in gas trading activities, including shipping, distribution, sale, and marketing.

It also proposes establishing a new regulatory body to supervise the liberalisation of the Egyptian natural gas sector and be responsible for granting any required investment licences.

This is a part of the Egyptian government’s strategy to liberalise the country’s economy in response to the reform programme agreed with the IMF.

President al-Sisi signed the new Natural Gas Act into law on August 7.

In addition to the establishment of a regulator, key features of the law include setting up five primary roles open to industry: pipeline operators, distributors, storage providers, gas shippers and gas importers.

The law provides that future operators and owners of the gas distribution and storage infrastructure will be allowed to use the system in accordance with rules to be adopted by the Gas Market Regulatory Authority. It will also determine the stages and pace at which industry privatisation will take place.

The Authority will be established as an independent public body aiming to regulate and control all gas-related activities specified in this law. The World Bank is advising Egypt’s government on the establishment of the Authority.

Impact on gas sector

Liberalising the Egyptian gas market is the first step towards transforming the sector’s efficiency and competitiveness. What is also needed is to ensure the new gas regulator is completely independent, and to assure investors of objectivity and impartiality.

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Such measures would provide incentives for further investments within the gas sector.

Key requirements of the process for gas-import companies obtaining initial approval are proof of quality and specifications of gas to be imported, proof of source, a sales contract with a domestic buyer and the importing company’s financial background

The new law may also advance Egypt’s objective to achieve energy self-sufficiency by end of 2018, largely through gas from the giant Zohr and a plethora of other smaller natural gas fields currently being developed.

Egypt’s Petroleum Minister Tareq El Molla, predicts that the law will make it easier for Egypt to secure the natural gas it needs by gradually deregulating the gas market and opening it up for private investment. The government hopes to create a competitive gas market that will lead to efficient services and continuous development.

Gas-hub aspirations

Through this law Egypt is taking a giant step towards becoming East Med’s natural gas hub. It allows private sector firms to use the state import and distribution infrastructure to trade in natural gas.

Private firms will eventually be able to import, distribute and store gas in Egypt, under the supervision of the state regulatory body.

This deregulation will greatly enhance the flexibility of the Egyptian gas market. Combined with the possibility of gas imports from Israel and Cyprus and surplus domestic gas production, it could help turn Egypt into a regional gas hub.

Israeli and Cypriot gas-finds, together with the giant Zohr field and potential reservoirs off Lebanon, could create a gas hub right on Europe’s doorstep. ENI’s Chief Executive Claudio Descalzi has long been a strong advocate of this. But trying to figure out how best to develop this gas is fraught with commercial and geopolitical challenges.

Almost every option to develop this gas needs fixing of problems, enmities and old conflicts. This includes pipeline exports as well as use of Egypt’s LNG plants.

Even though liberalisation of Egypt’s gas sector could open the way, overcoming these problems and developing Israeli and Cyprus gas at commercially-viable prices is not proving to be easy.

In the meantime, the Petroleum Minister, backed-up by rapid developments on the ground, has confirmed that Egypt is well on the way to self-sufficiency by the end of 2018 and LNG exports by 2021.

Gas surplus and exports could reach 20bcm/yr by 2035, and possibly more. This could strengthen Egypt’s case to become the East Med gas-hub.

Impact on Israel and Cyprus gas

Deregulation of Egypt’s gas sector has been interpreted to open the way for gas exports from Israel and Cyprus to Egypt to return to the table. Speculation in both countries is rife.

The new Gas Market Regulatory Authority is expected to pave the way for private-sector companies to import and distribute gas within Egypt using the country’s domestic pipeline network, activities currently monopolized by the government.

In addition, Egypt has two LNG plants, owned by Shell and Union Fenosa, both of which are currently largely unutilised. These have a combined gas liquefaction capacity of 17.5bcm/yr.

Israel is desperate to secure export markets for its gas and the new developments in Egypt are encouraging speculation that the way is now open for such exports to Egypt.

In particular, an article in Bloomberg on August 20 excited interest by claiming, based on unconfirmed sources that Shell is in early talks to buy 5bcm/yr natural gas from Israel’s Leviathan field and combine it with gas from Cyprus’ Aphrodite field, of which it owns 35%, for liquefaction at Idku.

Shell declined to comment on this.

However, such talks have been ongoing, on and off, since 2014 without results as yet. A non-binding deal was signed between Leviathan and BG, now part of Shell, in 2014 but it has stalled. So have MoUs signed between Cyprus and Egypt for export of Aphrodite gas. Commercial factors and politics make such ventures difficult.

The same applies to the ongoing discussions between Noble/Delek and Dolphinous Holdings to import Tamar and Leviathan gas to Egypt.

Gas prices in Europe range at an average of about $5.50/mmBTU and in Asia at about $6.50/mmBTU, and are expected to stay close to these levels for a long time, if not forever. This is due not only to the glut of LNG in global markets, but also to the relentless shift in the global energy mix towards renewables.

At such prices, imports of gas from Israel and Cyprus, liquefaction in Egypt and export, especially to Europe,would be commercially challenged – unless of course Israel and Cyprus reduce the price of their gas to sufficiently low levels, $3/mmBTU or less.

There are also the issues surrounding the International Chamber of Commerce Court of Arbitration (ICC) decision in April 2017 upholding a 2015 ruling and finding against Egypt’s EGAS and EGPC for halting gas supplies to Israel in 2012. The Court ruled that the Egyptian companies must pay IEC close to $2bn.

Egypt’s Petroleum Minister in 2015, and now Prime Minister, Sherif Ismail, took the decision to suspend any gas negotiations with Israel and made dropping the claim against EGAS and EGPC a pre-condition for allowing import of gas from Israel to Egypt. This position has not changed.

The greatest challenge to gas exports from Israel and Cyprus to Egypt is commercial. This needs to be overcome first before other issues are addressed.

Undoubtedly, the new gas law and deregulation are going in the right direction, by liberalising Egypt’s gas sector, with the potential of creating a freer, more flexible and more efficient gas market. This should help attract more investment in a sector that is so crucial to Egypt’s economy.

Dr Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council

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