President Abdel Fattah al-Sisi has been thrown a more than welcome lifeline in his efforts to reboot Egypt’s troubled economy.
In August 2015, Italian energy company Eni announced the discovery of a ‘supergiant’ offshore gas field, the largest known field in the Mediterranean. Named Zohr, the field contains an estimated 30 trillion cubic feet of natural gas, equivalent to almost 20 times Egypt’s yearly gas consumption.
Eni soon started to drill wells for exploration, and the field is expected to start producing in late 2017. The discovery is not the only one; BP and Shell have also made significant gas discoveries.
The discoveries are a game changer in regional energy politics. Egypt, a net gas exporter before the 2011 revolution, had to start importing liquefied natural gas (LNG) in 2015 to meet domestic demand. Years of political unrest and a subsequent decline in tourism and foreign investments had pushed the economy to the brink, leading to a severe shortage of foreign currency.
Egypt was facing a vicious circle. It was no longer able to pay its debts to international oil and gas companies, which in response put investments on hold, negatively affecting oil and gas production and increasing the energy deficit. Rising domestic demand due to population growth worsened this deficit.
Moreover, a pipeline for exports to Israel through Sinai was shut done in 2012 after repeated bombings by an Islamic State-linked jihadist group. A Swiss court handed Egypt’s state oil and gas companies a $2 billion fine in May 2017 for failing to commit to their export agreement with Israel.
Importing LNG put a heavy burden on Egypt’s finances, especially as generous petroleum supplies from Saudi Arabia, which had started after al-Sisi’s takeover in 2013, were shut off in the autumn of 2016. In addition, subsidies on electricity, fuel and basic food commodities such as bread took a large and increasingly untenable share of the state budget. However, it was feared that reducing the subsidies could spark renewed social unrest.
By late 2016, the economic crisis had spiralled out of control, and the government had little choice but to sign a $12 billion loan from the International Monetary Fund (IMF). The loan came with conditions, such as reducing subsidies, floating the Egyptian pound and reforming the economy.
The gas discoveries, notably Zohr, are changing the country’s economic prospects. Egypt started to limit its orders for LNG shipments in 2017 and those planned for 2018. By early 2019, it hopes to break even, and in the years after it plans to become a net gas exporter again.
“In some ways, the discoveries can be considered as a saviour of Egypt’s economy,” Alex Warren, director of the market information service Egypt Energy Monitor, told Fanack.
“The impact on the economy is extremely beneficial, as the gas deficit was a major contributor to the crisis,” he said. The immediate effect of Zohr and other discoveries is that Egypt can reduce its gas imports, freeing up money to pay back foreign companies, which are expected to start investing again, thereby generating more money, Warren explained. By June 2017, international companies had indeed been paid part of their outstanding receivables. “The vicious circle has started to turn into a virtuous cycle.”
Furthermore, Egypt’s gas discoveries in combination with large fields in Cyprus and Israel may have an important geopolitical impact. Egypt has the facilities to turn gas into exportable LNG, which Israel and Cyprus lack. Egypt could import gas from Israel and Cyprus via pipelines, turn it into LNG and re-export it.
“There is an early stage agreement with Cyprus,” Warren said. “Egypt could turn into an important energy hub in the eastern Mediterranean. It’s likely to lead to closer relations with Israel, as there is a common commercial interest.”
However, concerns remain. Since Egypt received the IMF loan and floated the pound in November 2016, the economy has shown signs of recovery. Yet the high inflation rate of over 30 per cent year-on-year poses an additional burden on the already struggling poorer segment of society.
Furthermore, although the loan boosted Egypt’s foreign currency reserves, it also increased its foreign debts, which have now reached about 20 per cent of GDP. “Because of the gas discoveries, Egypt is confident it can repay loans,” Warren said.
With the prospect of new gas income, Warren is interested to see whether Egypt will pursue its economic reform programme, such as reducing the subsidies. “[Gas discoveries] transform the financial situation, but not the economy as a whole,” he said, noting that tourism and foreign direct investments also play a role.
An industry source who asked to remain anonymous also expressed doubts. “Of course, the gas discoveries will help Egypt to get out of the crisis, but it will not completely solve it,” he told Fanack. A revival in tourism is also needed, he said, as this was the largest source of foreign currency before the revolution.
In addition, Egypt will only see the fruits of the gas discoveries after 2022, the source said. “The first four years of production, a large percentage of the gas goes directly to the companies as cost recovery [to compensate for investments made]. Only after this period will Egypt have its own substantial share to sell.”
There are also sections of the economy that Egypt appears less willing to reform. Since November 2016, the military has been particularly active is setting up new projects and ramping up production for the civil market, with the apparent aim of strengthening its economic grip.
These business activities, which could constitute up to 40 per cent of the economy according to the highest estimates, are regarded as a deterrent to foreign investors. Military companies have a competitive advantage over the private sector through access to cheap labour in the form of conscripts and a monopoly on land use.
The gas discoveries may solve Egypt’s immediate cash crisis, but it will take more to build a resilient economy.