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Energy to industry: fact and fiction

Is it possible for the private sector to provide for its growing energy demands? Sherine Nasr investigates
Reports by the Ministry of Petroleum about strategic gas discoveries during the past year sharply contradict with the trend currently adopted by the government which indicates that new factories will have to provide for their energy either through import or by building their own energy facilities. On Tuesday, Rachid Mohamed Rachid, minister of trade and industry was quoted by Al-Mal as saying that the door will be open to the industrial sector to import its energy demands starting from 2015.

Earlier, Minister of Finance Youssef Boutros Ghali made it clear that the government is promptly planning on liberalising energy prices, which will take effect within the next five to seven years. During a seminar that was organised by the British Egyptian Business Association last week, the minister underlined that Egypt is facing a growing shortage in its gas supplies, a fact that will drive the nation to export gas in the near future.

This is perhaps the first time a government official speaks openly of the fact that Egypt's natural gas wealth is depleting. Prior to the minister's statements, the United States Department of Energy predicted in its report entitled The Forecasts of Energy in the Short Term, issued last February, that Egypt's oil production will decrease during 2010-2011.

Within its plans to phase out energy subsidies and liberalise the energy market, the government has readily issued new factory licences while it left the question of providing for the energy supplies to the private sector to solve. During the past few months, eight new licences to produce cement, categorised as energy-intensive industry, have been granted leaving the issue of energy supplies to the new companies to take care of. According to Ibrahim Zahran, member of the National Specialised Councils and former chairman of Khalda Petroleum Company , this is no longer an assumption but the actual practice on the part of the state now.

This, though, is easier said than done. Energy experts know that the devil is in the details. Zahran underlined that if these new companies opt for natural gas as their energy source, then they will have to encounter endless difficulties related to the nature of the energy source itself. "First, it is important to know that natural gas cannot be stored. Using it involves very technical and complicated operations that can only be handled with state-owned petroleum companies not the private sector," said Zahran. Natural gas supplies can be obtained using one of two methods, either extending a gas pipeline to the new factory or building a gasification unit at the production site.

"Neither option is economically viable for any new industry," said Zahran. "Who will bear the costs for extending a gas pipeline from the export destination up to the new factories, where to buy gas from, how to secure these supplies are but some of many other questions that need to be pressed before the fact of importing gas is propagated by the government as the magical solution to new industries."

Zahran believes that if the possibility to extend pipelines is out of question, companies will have to opt for Liquefied Natural Gas (LNG). Doing so, these companies will have to build their own gasification units in order to be able to utilise the gas.

"It is equally ridiculous to imagine a $250 million new cement company will be able to build a gasification unit at a cost of $2-3 billion to secure its natural gas demands."

Tapping on the possibility to export natural gas, Ramadan Abul-Ela, professor of petroleum engineering at Alexandria University and former member of the People's Assembly, noted that only the Egyptian General Petroleum Corporation (EGPC) is entitled to purchase gas or any other petroleum products from external market by virtue of law.

"In other words, a modification to present laws regulating this process has to be introduced and ratified by members of the parliament beforehand," said Abul-Ela.

Another important obstacle to the government's ready-make solutions is where to buy gas from. According to Zahran, Saudi Arabia and Algeria were on top of the candidate countries but neither is practically possible. Building a 5,000km pipeline to Algeria is economically unviable, while Saudi Arabia, whose gas production is double that of Egypt, does not actually sell gas but seeks to export products with an added value.

Other candidates may include Libya, Qatar and Iraq but this will also open the door before other problematic findings; for example, Libya does export gas from its western territory while its eastern part, the closest to Egypt is poor in natural gas. To export from Qatar, pipelines have to be extended through Saudi Arabia which is unforeseeable while Iraq presents a special case as all the oil activities are within American sovereignty.

"To wrap it up, it is practically impossible for the private sector to export gas, in any of its forms, from the external market," said Zahran.

A good example is one of Al-Kharafi 's projects in Egypt which aims at extracting minerals from Lake Qaroun in Fayoum. "The project came to a standstill and could not operate because it could not supply energy on its own," said Zahran.

One of the suggested scenarios is for the EGPC to import natural gas and sell it in the local market. But the question of fair pricing will be another problem to resolve.

Egypt has been involved in long-term gas export agreements with a number of countries including Israel, Spain, Italy, France and Jordan. According to Zahran, Egypt sells its gas at a rate of $1.25 per million British thermal units (Btu) while it buys gas from foreign partners operating in the local market at around $4.10 per million Btu. If Egypt goes to the external market, it will purchase gas at its market rate estimated at $10 per million Btu. "How to sell an increasingly depleting energy resource at that rate while now seeking to buy it at international rates is the question the ministry is avoiding to answer by all means," said Zahran.

Although it has not been clear yet how this new strategy on the part of the government will be put to practice, there is no doubt that it may have some very adverse impact on the investment and industrial sector in Egypt.

"The government has created the problem and now it is trying to withdraw at a time when transparent regulations and efficient solutions should be provided," said Abul-Ela who added that one of the most important factors to attract foreign direct investment into the country has been good energy prices.

"It has become clear that we have failed to manage our energy resources in the best possible manner. Things will grow even more difficult within the next years with the absence of strategic new discoveries to be added to Egypt's proven reserves. To say that the private sector is responsible for providing its energy demands, thus, becomes bizarre."

© Al Ahram Weekly 2010