Energy crisis sparked Egypt revolution, but still burns bright

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Egypt’s economy, during the last three years, has been suffering from successive crises.

It began with the decline in its foreign reserves and the plunge in the Egyptian pound, in addition to the widening of the budget deficit and jumps in inflation. This has all led to deterioration in the social and economic welfare in the country. This was finally topped off with the energy crisis leading to scenes of people fighting at petrol-station queues and cement factories coming to a complete halt due to the lack of fuel. This was basically what sparked the second revolution, as it has been called, at the dawn of the one-year anniversary of Mohammad Mursi’s presidency.

A number of root causes lie at the core of the energy crisis, such as the smuggling of subsidized petrol and diesel, the low efficiency of field production and the deterioration in the refineries. Moreover, the Egyptian General Petroleum Company racked up around $7bn in payables to foreign oil companies that sell fuel products in Egypt, which led those companies to stop any further investments in the country.

As a consequence to the intensifying energy crisis, a spillover was inevitable in the power sector. The halt in feedstock to power plants and a spike in summer demand culminated in an increasingly complex crisis.

Egypt’s oil production remains limited, asserts Usama Kamal, Egypt’s ex-petroleum minister. He says that domestic refineries have a capacity of 36 million tones but only 26 million are utilized. This has pushed the government to import crude oil from Iraq and Libya to feed this underutilized gap. He claims that the solution is to diversify energy sources away from diesel and such products better left to the manufacturing sector such as the petrochemical one, where this feedstock could be used to give a higher added value.

Egypt’s current energy consumption mix is as follows: 55 percent gas, 41 percent oil, 1 percent coal, 2 percent hydro and 1 percent from other sources. The numbers show a great dependence on gas, which Egypt both produces and exports. So where is the problem?

Egypt’s current gas production stands at 5.5 billion cubic feet (bcf) per day. Around 4.3 bcf of that goes to the domestic power sector, whereas 650 million cubic (mcf) feet goes to the foreign energy partner that conducts the development and production of gas in Egypt and 250 mcf is exported to Jordan via pipelines.

But the domestic industry receives 1.65 bcf per day and this culminating in a daily deficit in gas of about 1.35 bcf.

The deficit extends to the oil sector, where the domestic production stands at 728,000 barrels per day (bpd) versus a daily domestic consumption of 815,000 barrels, leading to a significant deficit in the Egyptian oil market.

These deficits in the oil and gas markets have clearly impacted the power sector, especially in the summer time. The planned power generation stands at 28.8 thousand megawatts, whereas the consumption spikes to over 33 thousand megawatts. But the deficit spikes even further during the summer by around 8 thousand megawatt not least because of the low efficiency of power stations.

This deficit should be dealt with immediately by concentrating more on solar energy, states Kamal. A detailed plan should be devised in order to move the country to a more diversified mix of energy sources where solar power could play a bigger role because of the natural endowment of high solar hours in Egypt compared to the global average. He estimates the needed investments in solar to be near the $20bn mark in the next three years alone in order to produce 3 to 5 thousand megawatts. That’s in addition to transforming old low-efficiency power plants into combined cycle ones capable of producing more power from the same amount of feed stock. Kamal confirms that there is already a plan in place to increase the efficiency of nine refineries and build six more in the next three to five years, at a cost of $18bn to support the refining sector in the country.

The above illustration shows that the energy sector in Egypt suffers from a shortage of resources and the low efficiency in production and consumption. But how can the government compensate for these deficits?

Previous governments have sought to purchase the fuels and subsidize them. About 71 percent of all subsidies are fuel subsidies. This amounts to a whopping 6 percent of GDP, reaching $17bn in 2012-2013 budget.

Other temporary solutions that Egypt has tried in its attempts to come to grasp with its energy deficits were Arab aid. Just recently Saudi Arabia announced a $2bn energy grant (as part of a wider $5bn aid package), with another $1bn from Kuwait. Qatari pledged 13 gas shipments at $13 per mbtu and an additional 5 shipments of 16.5 bcf for free. Moreover Egypt also managed to get an Iraqi pledge of oil supplies amounting to $1.2bn with flexible credit agreement, but delivery has yet to begin.

The UAE has also recently stepped in, signing an agreement with Egypt to establish joint projects in the renewable energy sphere. The preliminary technical studies began on the first of these projects, a wind farm, to be set up at near the Gulf of Suez with a price tag of $570 million, which will be shouldered equally between Masdar of the UAE and Egypt’s New and Renewable Energy Authority.

But the question remains, will this aid be enough for Egypt to grapple with its burgeoning energy crisis? A number of suggestions were put forth towards weaning factories off gas and onto coal, but the Ministry of Environment is still studying the environmental effects. Other potential solutions could be found in wind and solar energy but these projects are still very limited in scale.