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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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The Soccer Player Saving Egypt’s Energy Sector

Salah

Following the discovery of the immense Zohr gas field and several new onshore oil deposits in Egypt, the country was full of optimism about the impact its new bounty of natural resources would have on the country. Recently, however, this optimism has faded and Egypt’s economic and social cohesion has come under an intense amount of stress. The reelection of president Abdel Fatah Al Sisi in March saw an overwhelming majority of Egyptians support the incumbent, but opposition is undoubtedly growing. In addition to the well-documented opposition of the Muslim Brotherhood, former Sisi supporters are also beginning to join protest movements. A wave of unexpected arrests and the targeting of opposition leaders, bloggers and journalists has created fears that Egypt is moving towards becoming a harsher military regime rather than the steady reform that many analysts had hoped for.

While Sisi is far from losing his grip over the country, the recent upheaval will have a negative effect on operators and investors working on the country’s recent energy discoveries. With an economy that continues to struggle with high unemployment, low wages and high government expenses, political tensions are threatening to upend Egyptian progress. Most analysts and politicians are putting their hope in foreign direct investment, a majority of which currently comes from the Arab world (Saudi Arabia, UAE), Russia and China. The country’s oil and gas resources are its other possible lifeline, with the Zohr offshore gas field being its greatest success at the moment. Despite this investment, the Egyptian economy, and broader society, is in desperate need for a boost. Related: Oil Giants Are Fleeing Iran On Sanction Fears

The largest economic factor weighing on the economy at the moment is the enormous government subsidy bills on food and energy. The wasta system, in which the support of the poor is being bought by extremely low energy, water and food bills, is badly hurting the country’s economy. The discrepancy between global market prices for grain or petroleum products and local Egyptian retail prices are still staggering. It is the government that has been footing a major part of the bill. Every Egyptian president in recent history has been confronted by angry masses in the streets of Giza or Alexandria demanding lower retail prices. Sisi will undoubtedly face similar unrest in the coming weeks. One notable flashpoint is the expected rise in electricity prices this summer, which is expected to come alongside a fuel subsidy cut. The subsidy cut is necessary to counter the cost of the current petroleum subsidy bill, slated to be around $8 billion (EGP104 billion). As global oil prices rise this figure may continue to grow.

Alongside soaring subsidies, the Central Bank of Egypt (CBE) has reported that the country’s total foreign debt hit $82.9 billion in December 2017, a 3.9 billion dollar increase over six months.

With the pressure on Egypt’s economy growing by the day, the success of new oil and gas fields is paramount. In addition to offshore Nile Delta, new resources are being sought in the Western Desert and the Red Sea region. A recent update by Egypt's Petroleum Minister Tarek al-Molla suggests that the Zohr gas field will produce 2 billion cubic feet of gas per day by the end of 2018. That would mean the country could become self-sufficient in regard to natural gas by the end of the year. For 2019, total production is expected to hit 2.7 bcf/d, which would push Egypt toward becoming an LNG exporter again.

Alongside this positive news, there are also new bid rounds coming up. The Egyptian Natural Gas Holding Company (EGAS), a former EGPC subsidiary, announced on May 22 a bid round of 16 blocks in the offshore Mediterranean Sea and Nile Delta. EGPC, meanwhile, offered blocks in the Eastern and Western Desert, and the Gulf of Suez. While natural gas is undoubtedly the focus for Egypt at the moment, crude oil is also set to play a role in stabilizing the country’s economy.

U.S. oil company Apache, one of the backbones of the Egyptian oil and gas sector, has expressed interest in expanding its activities and investments in Egypt. Potential new investments are expected in the Western Desert, as Apache is pursuing oil discoveries in its West Kalabsha and West Kanayes concessions. Drilling is expected to start in eastern Bahariya in the Western Desert in Q3 2018.

The attractiveness of Egypt’s oil and gas is still under severe scrutiny however, partly due to the country’s tough fiscal regime. The current situation is seen as a major risk for international operators and investors who lack the appetite to increase their exposure to the Egyptian market. At the same time, investors face increased risk from regional conflicts. To counter these international fears, Egypt has paid most of its debts to international oil and gas operators and is currently having discussions aimed at increasing the attractiveness of new bid rounds. Related: Don’t Take Higher Oil Prices For Granted

The biggest danger of all is that president Sisi and the Egyptian armed forces may soon face another ‘Arab Spring’. The honeymoon of Sisi’s reign has ended, with the ever-growing likelihood of protests on the streets of Cairo, Giza and Alexandria in the coming days. Internal strife and political-religious infighting could bring an end to the economic growth of the last two years. The big question is whether Sisi and his government will be able to fight off economic woes and inflation while also reducing the country’s enormous subsidy bill. The oil and gas projects in Egypt should begin to pay off by the end of the year - but holding out through summer will be no easy task.

There is, however, one small light at the end of the tunnel. All issues, from a political and economic crisis, to mass unemployment and instability, may well be forgotten in the next couple of weeks. As football economists in Europe have shown, the economy of a country that takes part in the Football World Cup always receives a major boost. In a nation as football mad as Egypt, competing in its first World Cup since 1990, this impact could be even greater. Success would remove reports of opposition to Sisi from the front pages and bring joy – at least temporarily – back to the streets. The return of Egypt’s national hero Mohammed (Mo) Salah, one of the best players in the world, to the hotspot of the 2018 World Cup in Moscow could have an unexpected effect. Mo’s goals could not only make Egyptians cry with joy, but also support international investors to consider hefty investments in oil and gas in the coming years. Football supporters are far from rational, but the link between the success of a team at the World Cup and their nation’s economy is undeniable. For Al Sisi and the Egyptian economy, the 2018 World Cup could not come at a better time.

By Cyril Widdershoven for Oilprice.com

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