Discovery of Natural Gas Reserve Creates New Hope for Egyptian Economy

The Arab Spring has affected Egypt in many ways, but one of the biggest problems facing the country since the 2011 Revolution has been energy shortages.

Discovery of Natural Gas Reserve Creates New Hope for Egyptian Economy

The Arab Spring has affected Egypt in many ways, but one of the biggest problems facing the country since the 2011 Revolution has been energy shortages.

For many years, power cuts have been an inevitable part of daily life in Egypt, especially in the hot summer months. However, the recent discovery of the Zohr natural gas field offshore in the Mediterranean Sea could be a game-changer for ordinary Egyptians and Egypt’s struggling economy and energy sector.

Eni, an Italian multinational oil and gas company, discovered the Zohr gas field in 2015. The gas field is often described as a “supergiant” because it has an estimated reserve of 30 trillion cubic feet. This is roughly equivalent to the reserves of Israel and Oman combined, thus making it the largest offshore field in the Mediterranean Sea.

The Zohr gas field started production in December 2017 and Egypt’s oil minister, Tarek El-Molla, said that “gas from the Mediterranean’s largest offshore field [will be] pumped to a facility in Port Said city, to be prepared for delivery to the national distribution network, with initial production of 350 million cubic feet per day.” Eventually the gas field’s “daily output is set to rise about 1 billion cubic feet in June and 2.7 billion by the end of 2019,” according to El-Molla.

The oil minister also added that production from the Zohr gas field will help Egypt achieve “self-sufficiency of natural gas, ease the burden on the state budget and cut the imports bill.” The discovery of the “supergiant” gas field could not have come at a better time for the most populous nation in the Arab world.

In the 2007-2008 fiscal year, Egypt made $3.2 billion from exporting gas to Israel, Syria, and Jordan, making it the world’s eighth largest liquefied natural gas (LNG) exporter. However, over the past two decades, Egypt has also experienced a substantial growth in local demand for natural gas.

While overall energy consumption in Egypt rose by 5.6% between 2000 and 2012, the demand for natural gas alone grew by 8.7%, according to a report by the German Marshal Fund. In that 12-year period, the amount of gas meeting Egypt’s total energy needs rose from 35% in 2000 to 50% of the country’s energy needs in 2012.

Although Egypt’s production of natural gas also rose during the same period, it was inevitable for demand to outstrip supply as the country was using gas for industrial, commercial, and residential purposes.  This led Egyptian policy makers to prepare for the eventual decline of the local supply of gas.

By 2015, Egypt’s gas consumption outstripped production for the first time in more than a decade.

As a result, Egypt was forced to spend billions of dollars to import LNG from other countries to fulfill its energy needs, thus relinquishing its role as a net exporter of gas in the Middle East.

However, the Zohr gas field could allow Egypt to reprise its role as a net exporter of gas in the region once more. Zohr’s output is estimated to be enough to bridge the gap between Egypt’s total gas consumption, which stood at 4.9 billion cubic feet per day in 2016, and its daily production of 4 billion cubic feet, according to data from a BP statistical review.

The gas field’s initial production will also save Egypt millions of dollars by replacing expensive imported LNG with cheaper and locally produced natural gas. Hany Farahat, a senior economist at Cairo-based CI Capital Holding said that the Zohr gas field will “improve Egypt’s balance of payments by narrowing the current account by approximately $4 billion” while also promoting more foreign investment in the country’s energy sector.

Last month, Mubadala Petroleum, an oil and gas exploration and production company, and subsidiary of Abu Dhabi stated-owned holding company Mubadala, acquired a 10% interest in the Egyptian concession holding the Zohr gas field from Eni.

The acquisition of the offshore Shorouk concession, which reportedly cost Mubadala $934 million, marks Mubadala’s first foray into the Egyptian energy market. Italy’s Eni stills owns 50% of the concession, while Russia’s Rosneft and U.K. company BP each own 10%. Egypt is also seeking to secure future bids for more oil and gas explorations rounds, according to Egyptian oil minister El-Molla.

The Egyptian government has recently implemented a host of new measures to encourage investment in the country’s burgeoning energy sector. These measures include allowing private businesses to transport and trade natural gas using Egypt’s pipeline network and infrastructure. Egypt has also adopted a flexible gas-pricing formula to encourage investment and boost supply.

Ongoing efforts to liberalize Egypt’s regulatory framework and promote foreign investment are crucial to secure the future growth of the country’s energy sector. However, the discovery of the Zohr gas field may not be enough to put Egypt’s economy back on the path to recovery. The Egyptian government still needs to promote the diversification of its energy production and, ultimately, its overall economic activities.

Egypt is in the process of trying to deploy various renewable energy projects. Last January, the country’s electricity ministry held its first competitive solar energy auction, in an effort to reach its goal of generating one fifth of its electricity from clean sources by 2022. Egypt also has a feed-in tariff system and is currently building more than 1 gigawatts of solar power in the southeastern Benban region.

With a fast-growing population and high energy demand, growing at a rate of about 6% a year, Egypt might be tempted to “do whatever it takes” to fulfill its short-term energy needs. However, Egypt needs to resist this temptation, so it can build a robust and sustainable energy sector that can meet the long-term needs of the Egyptian people and economy.

By reforming, investing in, and diversifying Egypt’s energy sector, not only will the Egyptian government be generating cleaner and more cost-effective energy for local consumption, it will also be paving the way for Egypt to sell its excess energy internationally, thus allowing it to become an energy exporter once more.