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Looming Energy Crisis Again Confronts Egypt’s Leaders Looming Energy Crisis Again Confronts Egypt’s Leaders
(4 months later)
CAIRO — A growing energy shortage that helped inflame the protests against President Mohamed Morsi before his ouster last year is returning to vex Egypt’s new military-led government. CAIRO — A growing energy shortage that helped inflame the protests against President Mohamed Morsi before his ouster last year is returning to vex Egypt’s new military-led government.
Festering complaints by international energy companies that Egypt has failed to pay them for pumping its petroleum or to allow them promised gas to export spilled into the open on Thursday. BG, the British company that is one of the country’s biggest gas producers, warned in a statement that its Egyptian liquefied natural gas business “is increasingly at risk” without “concerted action from the Egyptian government.”Festering complaints by international energy companies that Egypt has failed to pay them for pumping its petroleum or to allow them promised gas to export spilled into the open on Thursday. BG, the British company that is one of the country’s biggest gas producers, warned in a statement that its Egyptian liquefied natural gas business “is increasingly at risk” without “concerted action from the Egyptian government.”
A joint venture partly owned by the Italian oil giant Eni cited similar reasons more than a year ago when it closed the only other Egyptian plant making liquefied gas, which can be shipped as well as transported by a pipeline.A joint venture partly owned by the Italian oil giant Eni cited similar reasons more than a year ago when it closed the only other Egyptian plant making liquefied gas, which can be shipped as well as transported by a pipeline.
BG’s statement was a blunt reminder of the challenges still facing the new government, even though it has received as much as $20 billion over the last 10 months from Persian Gulf monarchies eager to be rid of Mr. Morsi and his allies in the Muslim Brotherhood. Egypt no longer produces enough energy for the soaring domestic demand at its deeply subsidized prices. Yet it is unwilling to raise prices for fear of setting off unrest in the streets, and it is unable to buy enough fuel to meet the current demand.BG’s statement was a blunt reminder of the challenges still facing the new government, even though it has received as much as $20 billion over the last 10 months from Persian Gulf monarchies eager to be rid of Mr. Morsi and his allies in the Muslim Brotherhood. Egypt no longer produces enough energy for the soaring domestic demand at its deeply subsidized prices. Yet it is unwilling to raise prices for fear of setting off unrest in the streets, and it is unable to buy enough fuel to meet the current demand.
Egypt’s reserves hover just above the level needed to avoid a calamitous currency devaluation, around $17 billion, roughly the same level they were a year ago under Mr. Morsi. At the same time, Egypt owes international energy companies about $5.7 billion in back payments, enough to sink the currency if it were deducted from the reserves.Egypt’s reserves hover just above the level needed to avoid a calamitous currency devaluation, around $17 billion, roughly the same level they were a year ago under Mr. Morsi. At the same time, Egypt owes international energy companies about $5.7 billion in back payments, enough to sink the currency if it were deducted from the reserves.
Egypt owes BG alone $1.4 billion, half of it overdue, the company said in its statement on Thursday. BG also warned that the productivity of its gas fields was deteriorating partly because the government was not paying enough to justify investment in maintenance work. Industry executives here say the problem is widespread and point to a vicious circle of nonpayment, noninvestment and diminishing production.Egypt owes BG alone $1.4 billion, half of it overdue, the company said in its statement on Thursday. BG also warned that the productivity of its gas fields was deteriorating partly because the government was not paying enough to justify investment in maintenance work. Industry executives here say the problem is widespread and point to a vicious circle of nonpayment, noninvestment and diminishing production.
Most analysts and Western diplomats here expect Saudi Arabia, the United Arab Emirates and their Gulf allies to continue providing enough aid to keep the lights on in Cairo and the new government afloat, but some warn that Egypt’s voracious appetite for subsidized energy could test the generosity of even the oil-rich Gulf monarchs.Most analysts and Western diplomats here expect Saudi Arabia, the United Arab Emirates and their Gulf allies to continue providing enough aid to keep the lights on in Cairo and the new government afloat, but some warn that Egypt’s voracious appetite for subsidized energy could test the generosity of even the oil-rich Gulf monarchs.
“The Saudis and the Emiratis are going to regret and resent their investment in Egypt,” said Steven A. Cook, an Egypt scholar at the Council on Foreign Relations, who has written recently about the potential for a “solvency crisis” in Cairo.“The Saudis and the Emiratis are going to regret and resent their investment in Egypt,” said Steven A. Cook, an Egypt scholar at the Council on Foreign Relations, who has written recently about the potential for a “solvency crisis” in Cairo.
“The Saudi, Emirati and Kuwaiti money has merely kept the Egyptians above water,” he wrote in a blog post this week, and the Egyptian belief that they will continue to do so could be “a false sense of security.”“The Saudi, Emirati and Kuwaiti money has merely kept the Egyptians above water,” he wrote in a blog post this week, and the Egyptian belief that they will continue to do so could be “a false sense of security.”
In an interview on Thursday, Tarek el-Molla, chairman of the Egyptian General Petroleum Corporation, said it continued to negotiate with BG and other energy companies to schedule payments and work out other forms of in-kind compensation, in part to motivate them to continue investing in Egyptian production.In an interview on Thursday, Tarek el-Molla, chairman of the Egyptian General Petroleum Corporation, said it continued to negotiate with BG and other energy companies to schedule payments and work out other forms of in-kind compensation, in part to motivate them to continue investing in Egyptian production.
“We definitely appreciate their upset or anger” at the delayed payments, he said, and he acknowledged that Egypt had increasingly been forced to retain its natural gas to generate electricity for its own use instead of allowing energy companies to export it as originally contracted.“We definitely appreciate their upset or anger” at the delayed payments, he said, and he acknowledged that Egypt had increasingly been forced to retain its natural gas to generate electricity for its own use instead of allowing energy companies to export it as originally contracted.
Still, he said he remained in close contact with the BG executives and expected to continue working fruitfully with them in Egypt.Still, he said he remained in close contact with the BG executives and expected to continue working fruitfully with them in Egypt.
But he also acknowledged that Egypt’s energy shortages were hardly behind it. As recently as three weeks ago, many neighborhoods of Cairo were suffering recurring blackouts, which Mr. Molla attributed in part to a temporary shutdown at a single facility. And he acknowledged that getting through the peak summer months without blackouts could be a challenge.But he also acknowledged that Egypt’s energy shortages were hardly behind it. As recently as three weeks ago, many neighborhoods of Cairo were suffering recurring blackouts, which Mr. Molla attributed in part to a temporary shutdown at a single facility. And he acknowledged that getting through the peak summer months without blackouts could be a challenge.
BG said Thursday that the Egyptian government had already been monopolizing so much gas for the domestic market that the company was unable to export a single shipment of liquefied natural gas in the first quarter of this year.BG said Thursday that the Egyptian government had already been monopolizing so much gas for the domestic market that the company was unable to export a single shipment of liquefied natural gas in the first quarter of this year.
While not known as a major producer of oil and gas, Egypt had relied for decades on the energy business as an important source of foreign exchange earnings, alongside tourism and Suez Canal tolls.While not known as a major producer of oil and gas, Egypt had relied for decades on the energy business as an important source of foreign exchange earnings, alongside tourism and Suez Canal tolls.
By 2012 — a year after the uprising that overthrew President Hosni Mubarak — the interim government said a soaring population and energy use were forcing Egypt to import growing amounts of natural gas for the first time. Exports plummeted as the government took as much gas as it could get to generate electricity for homes and businesses. Egypt’s exports of liquefied natural gas fell by almost half last year and seem certain to dwindle further, according to Trevor Sikorski, an analyst at Energy Aspects, a research firm based in London.By 2012 — a year after the uprising that overthrew President Hosni Mubarak — the interim government said a soaring population and energy use were forcing Egypt to import growing amounts of natural gas for the first time. Exports plummeted as the government took as much gas as it could get to generate electricity for homes and businesses. Egypt’s exports of liquefied natural gas fell by almost half last year and seem certain to dwindle further, according to Trevor Sikorski, an analyst at Energy Aspects, a research firm based in London.
Domestic demand for gas, which is sold at prices that are a fraction of international market rates, has been growing at more than 6 percent per year, Mr. Sikorski said. Supply has been growing at less than 2 percent.Domestic demand for gas, which is sold at prices that are a fraction of international market rates, has been growing at more than 6 percent per year, Mr. Sikorski said. Supply has been growing at less than 2 percent.
BG said Thursday that its first quarter production in Egypt was down 35 percent compared with the last three months of 2013. The problems in Egypt would most likely to lead to an overall drop in output at the company this year, the company said.BG said Thursday that its first quarter production in Egypt was down 35 percent compared with the last three months of 2013. The problems in Egypt would most likely to lead to an overall drop in output at the company this year, the company said.
The worsening of the company’s Egypt problem came at an inopportune time: On Monday, BG’s chief executive, Chris Finlayson, resigned for what were said to be “personal reasons.”The worsening of the company’s Egypt problem came at an inopportune time: On Monday, BG’s chief executive, Chris Finlayson, resigned for what were said to be “personal reasons.”
Although BG did not explicitly threaten to leave Egypt, the company is clearly hedging its bets on the territory, once BG’s most important source of energy. The company said it was shifting investment to more attractive and stable countries like Brazil and Australia.Although BG did not explicitly threaten to leave Egypt, the company is clearly hedging its bets on the territory, once BG’s most important source of energy. The company said it was shifting investment to more attractive and stable countries like Brazil and Australia.
Others are making similar assessments. Last year, Apache, a Houston company, sold one-third of its large Egyptian oil business to China’s Sinopec for about $3 billion.Others are making similar assessments. Last year, Apache, a Houston company, sold one-third of its large Egyptian oil business to China’s Sinopec for about $3 billion.
“Once the international oil companies have been burned, they lose their enthusiasm, at least for a time,” said Mr. Sikorski of Energy Aspects.“Once the international oil companies have been burned, they lose their enthusiasm, at least for a time,” said Mr. Sikorski of Energy Aspects.
Mr. Cook, of the Council on Foreign Relations, said that Egyptians believed the international energy companies would never turn away.Mr. Cook, of the Council on Foreign Relations, said that Egyptians believed the international energy companies would never turn away.
“The Egyptians believe that these companies are so far in, they cannot get out” because they “cannot extricate themselves without huge losses,” Mr. Cook said. But if that calculation is incorrect, he said, then the choice between an energy crisis and a currency crisis — between raising energy prices or paying in full for what it consumes — may be more urgent. That is, unless the Gulf countries continue to bail Egypt out, he said.“The Egyptians believe that these companies are so far in, they cannot get out” because they “cannot extricate themselves without huge losses,” Mr. Cook said. But if that calculation is incorrect, he said, then the choice between an energy crisis and a currency crisis — between raising energy prices or paying in full for what it consumes — may be more urgent. That is, unless the Gulf countries continue to bail Egypt out, he said.