By BNP Paribas (Philippe d'Arvisenet) Market Overview
Egypt has laid out its vision to become a regional energy hub following discoveries of large offshore gas reserves in the East Mediterranean. This vision is critical as the energy sector remains the major driver of the country’s balance of payments. Recent developments suggest that Egypt has a clear potential to become a trading and export hub, notably for natural gas. However, the realisation of this ambition will depend on the country’s capacity to mitigate geopolitical, financial and regulatory risks. This should go hand in hand with energy diversification to reduce dependence on gas and sustain anticipated exports.
Can Egypt become a net gas exporter again?
The hydrocarbon sector is a key force driving the economy. With total proven reserves of 65 trillion cubic feet (tcf) at end-2015, Egypt is the 16th largest gas reserve-holder globally and the second largest gas producer in Africa. It is viewed as a world-class hydrocarbon area with active drilling in four basins including offshore Mediterranean, which holds c.65% of the country’s total gas reserves. The exploration and production (E&P) segment is critical for the balance of payments (BoP) as it typically contributes two-thirds of incoming gross foreign direct investments (FDI) with at least four oil majors among the top 10 foreign investors in Egypt. Hydrocarbons also underpin Egypt’s trade balance and account for nearly half of total exports mainly in the form of light crudes and naphtha. Furthermore, as the largest source of corporate taxes in Egypt, the energy sector strengthens fiscal stability.
Egypt’s energy sector boomed in the early 2000s, driven by strong domestic demand and Liquefied Natural Gas (LNG) exports. Gas production increased more than three-fold to 6bcf/d between 1999 and 2009. Since 2010, however, sharp macroeconomic deterioration and structural natural resource trends have pushed the sector into difficulties. The first hit was the decline in offshore Mediterranean gas production as a result of reservoir maturity and stalled investments. The production of four of Egypt’s major offshore gas fields started to decline in 2012 as they had been discovered and developed at the same time in the mid-1990s. The second hit was the accumulation of Egyptian General Petroleum Corporation (EGPC) arrears to upstream investors peaking at USD 6.3bn in 2012 (2% of GDP) as a result of mounting fiscal deficits and deteriorating external liquidity during the political transition. The third hit came from the decline in crude prices in 2014-15, thereby discouraging foreign investment especially in high-risk deepwater exploration.
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