The Egyptian gas landscape

The Egyptian gas sector has historically suffered from underinvestment and the country has experienced a domestic supply shortfall since the beginning of 2015. Subsidised gas pricing encouraged strong demand growth during the 1990s and 2000s and at the same time, declining gas reserves in the onshore and the high cost of offshore gas developments have resulted in investment being diverted away from gas to onshore oil.

The state of the gas market has led to two major concerns for the government: (i) the energy subsidies have become habitual and a key contributor to the fiscal deficit which is unsustainable at current levels; and (ii) persistent energy shortages and brownouts have been a cause of public discontent in recent years at a time when the government is trying to restore stability post the Arab Spring. President Sisi and his administration are keen to entirely phase out energy subsidies in an attempt to tackle the fiscal deficit, encourage more responsible energy use and reinvigorate investment in gas development. The move, which should lead to gas pricing increasing over time, is welcomed by international investors and the E&P industry.

In 2015, Egypt became a net gas importer in the face of a domestic supply shortfall. This followed the diversion of LNG export volumes to the domestic market with the Gas Natural operated Damietta plant and BG operated ELNG plant being placed into force majeure in 2013 and 2014 respectively. During 2015, two LNG regasification facilities were installed at the Port of Sokhna and multi-year supply deals were concluded with LNG sellers; the lease of a third regasification unit is under consideration. Discussions are also ongoing to import gas from Israel by pipeline to supply industrial customers and the grid.

LNG imports are an expensive source of gas supply and the government is keen to boost domestic production and reduce dependence on imports. The government has envisaged a gas supply shortfall for a number of years and has agreed to increase the gas pricing or improve fiscal terms for a number of developments since 2008; the pace of these revisions has increased in recent years. In 2015, Dea agreed a new gas price of USD3.5/mcf, BG and Eni agreed up to USD6.06/mcf for new phases of offshore developments and Apache’s shale gas production will receive USD5.45/mcf.

In July 2015, Eni made the Zohr discovery which is estimated to hold 30tcf of gas in place. The large resource base has the scope to help Egypt regain gas self-sufficiency (potentially with a return to gas exports), although in the near term, the country remains in a gas shortage and reliant on imports. Zohr’s ability to effectively address Egypt’s future gas shortfall could potentially limit the liberalisation of gas pricing. Despite the discovery being in deepwater (~1,500m) and 200km offshore, initial estimates suggest that a gas price of USD4.5/mcf could result in a 15%+ IRR for the project due to the large volumes and low operating costs once onstream. However, with the government’s plan to remove subsidies and IOCs’ desire to maximise gas pricing for developments/production, the outlook for the Egyptian gas sector appears positive. In the near term, costlier gas developments may be delayed or their ability to achieve higher gas pricing may be impacted by more favourable Zohr economics, however domestic gas pricing has the potential to increase significantly from current levels of USD2.73/mcf.

Egypt gas supply excess / (deficit)
Source: Wood Mackenzie, BMI research, BP Statistical Review of the World, EIA, OGInsights

Egypt gas pricing for producers
Source: Wood Mackenzie