Wednesday, 12 June 2013

EGYPT: Energy Sector crisis

THE Egyptian economy and its energy sector are in crisis. Since the uprising that ousted former President Hosni Mubarak, Egypt continues to sail in stormy seas, even causing nostalgia among many Egyptians for ‘those pre-revolution good old days’.

Egypt’s GDP saw an average increase of around six per cent annually during 2005–10. In 2011, it dropped to 1.8 per cent. The factors that led to the social unrest – mainly corruption and limited job opportunities – have not been addressed. Unemployment increased to 13 per cent from about nine per cent before the uprising in 2011.

One of Egypt’s main problems is its generous energy subsidies, which continue to fuel wasteful consumption in a rapidly growing population. Overall energy demand is expected to more than double and electricity demand to triple by 2030. Energy subsidies weigh heavily on the government budget. They account for nearly 12 per cent of GDP (the combined expenditure for education, health and defence), half of which go to the richest 20 per cent of the population.

Egypt imports up to 70 per cent of its diesel, which is sold at very low prices domestically (barely US$0.18 per litre, compared with US$2.33 in Turkey, for instance). It is believed that Egypt subsidises diesel to the tune of at least US$1.5 billion a month, draining the country’s already low hard-currency reserves.

Egyptian governments – former and present - have tried to reform their domestic energy pricing strategies since 2004 but with limited success. In early 2013, the authorities increased fuel prices for the industrial sector and electricity tariffs. However, it is politically difficult to remove entitlements - once people have become used to them.

Oil and gas dominate Egypt’s primary energy mix. Oil production peaked in 1992 and in 2010 Egypt became a net oil importer, as oil consumption maintained its rapid growth. Still, Egypt remains the largest non-OPEC oil supplier in Africa.

There has been a sustained growth in gas production since the 1970s fuelled by strong domestic demand and long term gas export contracts. Egypt’s gas reserves are the third highest in Africa, after Nigeria and Algeria, and 16th globally. Egypt is the second largest natural gas producer on the continent after Algeria.

Since the late 1990s, natural gas overtook oil as Egypt’s main source of primary energy supply. From 2005, Egypt has emerged as an important Liquefied Natural Gas (LNG) supplier and is currently the 12th largest LNG exporter in the world.

Natural gas dominates the power sector, providing 68 per cent of the electricity – the rest comes from oil (20 per cent), hydro (11 per cent) and wind (1 per cent). In the longer term, Egypt aims to introduce nuclear energy to its power mix and to increase the share of renewables, mainly solar and wind.

Meanwhile, however, power shortages have become more acute because of fuel shortages in the light of a rapidly growing domestic demand. Domestic gas consumption jumped by 10 per cent in 2011 - the largest annual consumption increase in Africa.

Egypt exported its gas from four facilities, two LNG plants and two pipelines - the Arab Gas Pipeline (to Jordan, Syria and Lebanon), and the Israeli pipeline. However, for the last five years, exports have been irregular.

In 2013, Egypt announced plans to import natural gas to meet domestic demand and honour export obligations. Unlike other hydrocarbon-rich Arab countries, Egypt has a settled relationship with international oil companies. The country has the most diverse corporate landscape in North Africa. There are reportedly up to 100 international oil companies active in Egypt’s oil and gas sector.

The Egyptian economy remains the second largest in the Arab Countries, after Saudi Arabia, and the largest economy in terms of a non-oil depending economy. It is also a diversified economy, with sectors such as agriculture, industry and services accounting for 13.9, 36.7 and 49.3 per cent of GDP.

The share of the oil and gas sector of GDP and of government revenues reached 13.7 and 9.5 per cent respectively (2011). It is this diversification that ensured that the Egyptian economy did not collapse as the tourism sector weakened in the wake of the uprising.

The future of Egypt will largely depend on the boldness of the government to take the necessary steps and implement the required and long-awaited economic and social reforms.

By Guylain Gustave Moke
Political Analyst/Writer
Investigative Journalist
African Affairs Expert

Photo-Credit AFP: Egyptian President M. Mursi