Egypt Sees Some Hope in Nat Gas Tenders, But Will it Be Enough?

Following earlier reports pointing to an expansion of Egypt’s energy exploration and production, Cairo announced last week that they would offer a tender for a collection of on and offshore blocks for natural gas efforts taken on by international partners. The tender was announced after winning approval from the country’s Defense Ministry, clearing the way for the Egyptian Natural Gas Holding Company (GASCO) to begin offering the tender this week and for the next several months.

The exploration effort follows in the footsteps of a number of regional neighbors who have launched similar offshore natural gas efforts, including Cyprus, Lebanon and Israel. Those blocks included in the tender will be located very near or on the country’s maritime border with Israel, offering access to an estimated 223 trillion cubic feet of reserves, according to a United States Geological Survey analysis of the area. Of the 15 total areas included in the tender, 13 are offshore and six are located in waters bordering Cyprus and Israel.

The announcement comes as the country tries to stabilize both their energy and political situation, the latter of which has received a blow in the last week after former president Hosni Mubarak was sentenced to life in prison. Further, the political void he left behind is expected to be filled by either a former Mubarak military official or conservative Islamic candidate  – neither of which appeals to the country’s center or the revolutionary groups the led last year’s protests.

Meanwhile, the country’s energy sector is still reeling from cuts in exports and production brought on by a series of attacks on pipelines in the Sinai and an investigation into corrupt sales practices under the Mubarak government. While Cairo has been able to get deliveries of customers in Jordan back on line, the situation led to an eventual suspension of natural gas deliveries to Israel.

More than just lost revenues, the decision to cancel Egypt’s 20-year deal to supply natural gas to Israel is now resulting in a lawsuit filed by investors in the East Mediterranean Gas for violations of bi-lateral investment treaties, according to a Bloomberg report.

Despite such criticism, the government may have little choice than to support new production deals under the pressure of mounting debt and wavering interest from existing project partners. According to Australia’s The National, the Egyptian government has accrued about $4 billion in debt to international energy firms due in part to large-scale purchases to allow for heavily subsidized domestic sales.

Concerns about that debt and the ability of Cairo to ensure the money to pay for it have been credited for three major fuel shortfalls so far this year, the latest of which saw petrol stations and other sources closed or facing substantial delays last week. According to the Ahram Online news site, the country relies on imports for only 10 percent of its energy needs but has consistently faces funding obstacles, made worse by the unstable environment that has followed the government hand-over.

According to a recent Bloomberg report, the situation has required the country’s finance minister to announce a planned $100 million injection to help the local market meet domestic needs.

The actual shortage has been linked to a number of explanations, from the high consumption of the agricultural sector to a more conspiratorial angle that points to former Mubarak officials planting seeds of instability before the country’s run-off election in mid-June, but the end result and solutions are the same. Egypt needs to increase domestic production and address their liquidity challenges and they need to do it fast. Until they do, suppliers will continue to be wary about signing on to provide for the Egyptian markets or take part in an upcoming $1 billion tender.

The country’s fuel situation reflects a much larger challenge on the part of the new government and whoever wins this month’s runoff to offer some assurance to international lending institutions.

“After the outcome of the first round (of the election), we are much more bearish,” an economist at a major foreign bank, who did not wish to be identified told Reuters. “We see a lot more instability, but the major risk is the long-term outlook. This result does not unlock the situation.”

The report went on to say that Egypt would need a minimum of $11 billion over the next year “to stave off a balance of payments crisis and a potential devaluation of its currency”, making any appeal to foreign investors all the more important to weathering the fiscal storm ahead.

While the active development of the country’s natural gas reserves would undoubtedly help alleviate some of that debt and ease the country’s domestic energy demand, it is far from clear whether foreign companies view Egypt as a safe bet. Lingering uncertainty about the county’s stability and ability to ensure a stop in attacks in the Sinai have continued to hinder interest as Cairo struggles to sell themselves as a reliable energy bet.

Image: Jafria News

Originally Posted at Newsbase’s Afroil Monitor. All rights reserved.

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