Short-term thinking has put Egypt in the unsustainable position of buying at high cost energy resources while it exports the same at low prices, writes Hussein Abdallah* The electricity sector's consumption of oil and gas grew over the period 1975-2006 from one million tons of oil equivalent (ToE) to 21.2 million ToE, which represents 41 per cent of total oil and gas consumption (52 million ToE). Hydro-electricity generated from the High Dam and other waterfalls across the Nile reached a maximum of 13 billion kilowatt hours (kWh), which is equal to three million ToE and represents 12 per cent of 2006 total generated electricity of 109 billion kWh. Wind-generated electricity did not exceed in 2006 half a billion kWh, which equals 100,000 ToE. Nuclear electricity, which has become a compelling necessity, is not expected to be available before 2020, assuming all technical, financial and political obstacles are resolved, and these are not easy tasks. Therefore, it would be only oil and gas that can face Egypt's energy needs over the foreseeable future. Considering that over the period 1975-2006, oil and gas consumption has grown to 52 million ToE at an average annual increase rate of 6.5 per cent, we can conclude that the growth rate over the period 2006-2020 will not be less than a conservative five per cent. This is based on the assumption that a firm programme of energy conservation is applied under supervision of the Supreme Energy Council re-established in 2007, and headed by the prime minister, after being dormant for a quarter of century. Accordingly, Egypt's needs of oil and gas can be expected to reach in 2020 nearly 103 million ToE, or 750 million barrels of oil equivalent (BoE). Proven oil and gas reserves, as officially estimated, amount to 16 billion BoE, or 2,200 million ToE, of which gas represents three quarters the share. Since cumulative oil and gas to be consumed over the period 2006-2020 is estimated at 1,100 million ToE, it follows that Egypt's share of these reserves, net of foreign company shares, could be depleted by 2020 or a few years afterwards. This is based on the assumption that Egypt will not export even part of its share. However, if we risk expanding oil and gas production to such a level as to cover domestic needs and save a surplus for export, our share of reserves would be depleted long before 2020. This, in turn, would drive us into fierce struggle with other nations to get a share of world depleting reserves, at prohibitive prices. This is not unrealistic prophecy. Many credible studies confirm the nearer-than-expected arrival of the imbalance between world oil supply and increasing demand. Of these studies, that of the International Energy Agency (IEA) expects conventional production oil to reach a plateau around 2015, to be followed by irreversible and terminal depletion. Unconventional oil, which includes oil liquids extracted from gas, coal, tar sands and bio-fuel (ethanol), could partially fill the gap, but the world will still face a shortage of nearly 19 million BoE per day in 2020 that must be met from unconventional sources not known at present. Egypt is already a net oil and gas importer. Total oil and gas production in 2005 was 58 million ToE, of which the Egyptian share was 39 million ToE, while domestic oil and gas consumption superseded this share at 49 million ToE. We had to purchase 10 million ToE from foreign companies. This experience was repeated in 2006 when Egypt's share of 44 million ToE, out of a total output of 71 million ToE, fell short of 52 million ToE domestic consumption. Nearly eight million ToE were purchased from foreign companies. If Egypt turns into a gross oil and gas importer by 2020, which is a valid expectation, we will have to face an import bill of no less than $90 billion per year. This is based on domestic consumption of 750 million BoE and an oil price of no less than $120 per barrel. The bill can only escalate as domestic consumption grows. Could this enormous amount of money, in foreign exchange, be made available considering our meagre non-oil exports and rising imports of many commodities, including indispensable capital equipment and food? And if we fail to afford such a prohibitive bill, what would be the consequences of this energy deficiency, energy rightfully termed "lifeblood"? Why are we wasting our limited gas resources by increasing production and exports to unwise levels? Gas output has jumped during the period 2004-2007 from 24 million ToE to 55 million ToE, at an average rate increase of 32 per cent per annum. On the export front, Egypt, whose official gas reserves, though subject to doubt, are estimated at one per cent of world proven gas reserves, dashed into gas export markets in 2006 selling 17 billion cubic metres (BcM). This was more than one half of Qatar's gas exports (31 BcM), which is endowed with 14 per cent of world gas reserves. Likewise, Egyptian gas exports were more than twice Iran's gas exports (seven BcM), a country with 16 per cent of world gas reserves and wise enough to exclusively use gas domestically. Egyptian export commitments still have to climb to higher levels, whether from the liquefaction plants at Damietta and Edku or through pipelines to Jordan, Syria, Lebanon and Israel. To meet these export commitments as well as domestic needs, the chairman of the Egyptian Gas Holding Company (EGAS) confirms that gas output will climb from the present level of six billion cubic feet per day (BcFD), or 55 million ToE per year, to 10 BcFD by 2011, which is equal to 90 million ToE per year. Debates about the accuracy of Egypt's proven gas reserves solicited, in January 2007, the expertise of Wood Mackenzie which classified reserves into two categories: the first was estimated at 32 trillion cubic feet and termed "contracted gas reserves which are considered commercial"; the second, estimated at 31 trillion cubic feet, was described as "technical gas reserves" (non-contracted) which are discoveries where no development plan or sales contract has been agreed. The Mackenzie report raised more doubts because, according to petroleum engineer consensus, oil and gas reserves are not termed "proven" until one third of them is developed and produced. Therefore, since the second group is not yet developed, the term "proven" may only apply to the first group, estimated at 32 trillion cubic feet. However, even if official estimates of 70 trillion cubic feet were taken at face value, and with output of 3.65 billion cubic feet (or 90 million ToE) by 2011, the life span of these reserves (the reserve/production ratio) would not go beyond 19 years -- not 34 years as senior officials claim. Some in the People's Assembly called for a review of the price of gas exported to Israel, but the government's reply was negative on the basis that the export price of gas is part of a contract which is confidential and can not be disclosed without the permission of both contracting parties. This meant that parliament members, who officially oversee the management of the people's natural resources, might not be able to see this contract of sale without the permission of the importing Israeli gas company. The question is therefore: What guarantees that a public sector company headed by a public servant, together with a foreign partner (the gas importer), would not sign a contract which hurts Egyptian interests? All the more so considering that most gas export contracts extend for 20 years or more. The government's representative was keen to mention that the production cost of gas is only 70 cents per million British thermal units (Btu). Therefore, even if the price was only $1.50 per million Btu, the government is still making a handsome profit. He further mentioned that the price is actually more than $1.50, without saying by how much. Economics would tell us that there is no relation between production costs and the sale price of a natural resource commodity. A piece of gold, even if it costs nothing to mine, would not be sold at less than the market price as determined by gold supply and demand. As a good calculated guess, based on official statements that put the average export price of gas at $5 per million Btu of liquefied natural gas (LNG), the net price of gas in the national gas grid, before liquefaction, may be within the range of $3.75, because the liquefaction cost is about $1.25 per million Btu. In fact, the price in long-term contracts that cover the bulk of gas exports may be lower, because spot cargo prices are much higher than the $5 that is an average price of all sales. At an export price of gas of $1.50 per million Btu, as claimed by some members of the People's Assembly, and considering that a barrel of oil contains 5.6 million Btu, the price of a gas quantity thermally equal to a barrel of oil would be in the range of $9. Even if the gas price is as high as $3.75, still the gas price of a BoE would not be more than $21, which is less than one quarter of the export price of oil, averaging $93 per barrel over the first quarter of 2008. On a footing of equality, the export price of gas should not be less than $16 per million Btu, which has actually prevailed in most gas markets. Another dimension of gas export price is a price escalation clause that is usually part of long-term contracts. Over a period of 20 years, significant changes are expected to occur and affect the sale price, as happened over the past few years. Therefore, the petroleum sector should disclose whether such a clause was included or not, and, if yes, what it says. Or this is also a confidential matter? This is a moment to admit that gas export projects were bad ideas from the beginning and negated gas economics. All the more so considering the wasteful low prices that were contracted without solid escalation clauses to account for significant market trends. Oil is another sad story because its output has been on the decline since 1993 by about four per cent per year, leaving reserves at a constant figure of 3.4 billion barrels. Operating companies are now applying expensive advanced methods to recover the remaining barrels in old oil fields. Again, our share of oil production, net of the foreign partner share, falls short of meeting our petroleum needs and we have to purchase the shortage at world market prices. Excessive production and export of gas, and a lack of firm conservation programmes in domestic consumption, will lead us to fully import our energy needs, facing the risks explained above. To conclude, concession petroleum agreements are struck with foreign oil companies, ratified by law, and cover extended periods of 35 years, allowing foreign partners to get their full share of oil and gas reserves. Therefore, there is no hurry for such companies to accelerate production and exports, leaving the host country in a situation of energy insecurity. It is to be recommended, therefore, that oil and gas output should be limited to what is needed for domestic consumption, even if we have to purchase the full shares of foreign partners. According to concession agreements, Egypt is entitled to purchase from the foreign partner share all that is needed to cover the gap in domestic gas consumption, at a maximum price of $2.65 per million Btu. However, foreign companies have recently tried to assert the right to market part of their shares directly to Egyptian industries at market prices that much exceed $2.65. In other words, these companies are trying to change their contractual commitments so as to reap more money at the expense of the Egyptian economy and government. Unfortunately, the petroleum sector not only tends to approve this claim, but it has already upgraded the contractual gas price in certain agreements to a level of $4.70 per million Btu. We may ask: If the gas production cost is only 70 cents per million Btu, why should a foreign company sell part of its share in the domestic market and make an exceptional profit of $4? This would also raise the question of whether this $4.70 price is above or below the gas export price -- a question that finds no answer under the confidentiality clause! In all cases, it is to be recommended that the petroleum sector stick to the contractual price of $2.65 and feed the public treasury with whatever profits that may be made from sales in the domestic market. As was said earlier, nuclear electricity has become inevitable partial solution. However, even if it were immediately available it would not be competitive with gas unless the price of gas rises above $6 per million Btu. Therefore, it would be more economical and less risky to exclusively use gas output at home and keep as much as possible of our gas reserves to secure the needs of future generations. Those who claim that renewable energy will be large enough in time to meet 20 per cent of Egypt's future energy needs should prove it by realistic feasibility studies, considering that hydro-electricity has already reached its maximum capacity at three million ToE, or no more than three per cent of the 103 million ToE needed by 2020. Solar and wind energy are -- and will remain -- a very minor fraction of the energy needed over the foreseeable future. In sum, the Supreme Energy Council, which has been dormant for more that 25 years, has to answer the questions raised in this and other articles and studies, and to firmly apply strategies and policies capable of relieving a catastrophic energy crisis ahead. * The writer is an energy and petroleum consultant.
