Exporting Egypt's gas is foolhardy, given the country's own rising demand for this invaluable resource, writes Hussein Abdallah* The Egyptian experience in exporting natural gas can only be analysed in the context of the country's overall energy policy. Therefore, we will try, in what follows, to briefly explain the major factors which govern this policy. The rapid growth of oil and gas production has influenced the Egyptian economy in many aspects, but two areas are worth emphasising. First, the availability of sufficient domestic sources of energy, mainly oil and gas, has encouraged and actually sustained rapidly-increasing energy consumption. Second, a growing surplus of oil and gas has made it easier to turn Egypt from an oil-importing country to an oil-exporting country since 1976, though it seems that we are now turning back into an oil and gas importer. During the period 1975-2006, domestic oil and gas consumption grew from 7.5 million tonnes of oil equivalent (toe) to nearly 52 million toe, at an average growth rate of 6.5 per cent per annum. Valued at 2006 world oil prices this consumption is worth nearly $20 billion. According to recent studies, Egyptian domestic oil and gas consumption is expected to grow by five per cent per year to reach 103 million toe by 2020. As estimated by the Ministry of Petroleum, oil and gas proven reserves now stand at 15.5 billion barrels of oil equivalent (boe), of which 12 billion are natural gas. In terms of tonnes, the total of these reserves are estimated at nearly 2150 million toe. Oil and gas are not totally owned by Egypt, since their sources have been explored and developed by foreign oil companies in accordance with production-sharing agreements (PSAs). A PSA would entitle a foreign oil company to explore for oil and gas in Egypt for an initial period of nearly eight years. If it fails to find oil or gas, it leaves and recovers nothing of what it has spent over this period. That is what is known as "exploration risk". However, if the foreign oil company is lucky enough to make a commercial viable discovery, the PSA extends to 25 years, renewable to 10 more years, which makes the total contract period 35 years. As compensation for the risks involved in the initial exploration period, the foreign operating company starts recovering all of its exploration and production expenses in annual instalments as soon as production begins. The company is further rewarded by receiving an annual share of total production, known as profit or equity share. The cost recovery is usually about 40 per cent of total oil and gas output, while the equity share is about 25 per cent of the remainder (that is 15 per cent of the total output). The Egyptian partner gets what remains, which is about 45 per cent of total production. Once all costs are totally recovered by the foreign operating company, total output is shared 25-75 in favour of the Egyptian partner. Past history of the application of these clauses confirms that Egypt's share of output over the lifetime of all fields is less than half. And since the PSAs, which usually extend to 35 years, cover the productive life span of most oil and gas fields, it follows that Egypt is effectively only entitled to one half of its proven oil and gas reserves, estimated at 2150 million toe or 1075 million toe. On the other hand, Egyptian cumulative oil and gas requirements to meet domestic consumption over the period 2006-2020 are estimated at 1,100 million toe, which means that Egypt's share of proven reserves may be totally used by 2020. These figures are merely forecasts but illustrate what may happen in real life. Oil and gas reserves gradually deplete, at which time the country would first start filling the gap of domestic consumption with imports. As reserve depletion increases, energy imports increase as well, and the period of total dependence on imports is further extended. Egypt is in fact already becoming a net oil and gas importer. In 2005-2006 fiscal year, oil and gas total production is estimated at 71 million toe. The Egyptian share on the basis of 50-50 production sharing would be 35.5 million toe. Even if Egypt's share of production is two thirds as some official authorities claim, it would not exceed 47 million toe which is still short of covering total domestic oil and gas consumption, estimated at 52 million toe in 2005-2006. The gap is being filled by purchasing the balance from the foreign operating company's share at the world price and paid for, or borrowed in, US dollars. The perils of being totally dependent on imports of oil and gas over the foreseeable future are dire. A simple example: at a price of oil of $90 in 2020 ($60 at present increasing at three per cent per year for inflation), and domestic needs of 103 million toe, the annual import bill would be more than $65 billion. In view of gas price of $5.68 per million Btu at London IPE in 2006, and after deducting the costs of liquefaction and LNG transport to Europe, the Egyptian export gas price would not exceed $3.75 per million Btu at the liquefaction plant in Damietta. On this basis, the export price of Egyptian gas before liquefaction, for the equivalent of a barrel of oil, would not exceed $22 compared with $60 for a barrel of oil exported. This means that we are giving away our gas for a third of price compared to oil, and what's worse, gas is environmentally cleaner than oil and does not involve any refining costs. The bottom line is that we should not be exporting gas at present, and we should try to keep as much as we can for the future to avoid the horrendous import bills awaiting us down the line. True, oil and gas reserves are dynamic phenomena; while the reserve/production ratio (R/P) has been a constant figure in some countries, it is increasing in others. Nonetheless, the size of proven reserves in Egypt, as compared with future oil and gas needs, should require cautious consideration. The more so, if Egypt's economy actually grows at a rate of six per cent or more as anticipated by official authorities, and/or if energy conservation fails to reduce the energy/GDP elasticity which is now higher than one, and indicates a lot of energy waste and inefficiency. * The writer is an energy economics consultant.