EGYPT: Oil, Gas & Petrochemicals February 2015

Transcription

1 EGYPT: Oil, Gas & Petrochemicals February 2015

2 TABLE OF CONTENTS Map of Egypt... 4 Executive Summary... 5 Industry Structure... 6 Market Overview... 7 Figure: Energy Production and Consumption... 7 Figure: Primary Energy Production by Source... 8 Figure: Total Oil Resources... 9 Figure: Crude and Non-Crude Oil Supply... 9 Figure: Natural Gas Resources Oil Figure: World Energy Consumption Figure: OPEC vs. Non-OPEC Crude Oil Resources Figure: OPEC vs. Non-OPEC Natural Gas Resources Figure: LNG Export Destinations Natural Gas Figure: Natural Gas Export Mode Figure: Natural Gas Export Growth Petrochemicals Key Players...18 Alexandria Mineral Oils Company (AMOC) Alexandria National Refining and Petrochemicals Company (ANRPC) Apache Corporation British Gas Group British Petroleum Dana Gas Egyptian Methanex Methanol Company Egyptian Refining Company Eni Engineering for the Petroleum & Process Industries Oriental Petrochemicals Company Royal Dutch Shell Sidi Kerir Petrochemicals

3 Economic Overview Figure: GDP Per Capita Figure: Government Budget Balance Figure: Current Account Balance Figure: Economic Forecast Figure: Inflation Challenges to Industry...27 SWOT Chart...28 Projections...29 Figure: Economic Projections Figure: Industry Projections Needs Assessment...30 MENA-Wide Overview...31 Figure: Global Product Demand Figure: Global Capacity Requirements Figure: Energy Use Per Capita Figure: World Supply of Primary Energy

4 MAP OF EGYPT Marsa Matruh Mediterranean Sea Alexandria Damietta Port Said Tanta Suez Canal Israel Jordan Cairo Suez Al Jizah Sinai Siwah Bani Suwayf Al Minya Al Ghardaqah Asyut Sharm ash Shaykh Saudi Arabia Libya Egypt Nile Al Kharijah Bur Safajah Luxor Red Sea Aswan Lake Nasser Hala'ib Triangle Sudan REV2003 Source : PRS Group 4

5 EXECUTIVE SUMMARY Since 2011, political and economic instability in the country have negatively impacted Egypt s oil, gas and petrochemicals sector. Disruptions in exploration activities, production and exports have resulted from on going violence and political turmoil and the Egyptian government s increasingly dire financial situation has led to non-payment of suppliers and contractors and shortages of petroleum products in the local market. However, there is optimism that the sector could witness a recovery as Egypt s economy gets back on track, particularly following the elections of President Abdel Fattah el-sisi in June 2014 and his subsequent reforms, including cutting fuel subsidies. It is estimated that the sector could attract US$ 8.6 bn in investments during During the last decades, the Egyptian economy has made great strides, managing to capitalise on the country s natural wealth, appeal as a tourist destination and young, educated population to generate economic growth, industry and investment in key economic sectors. Although Egypt s legacy of state socialism and political authoritarianism has hindered the country s ability to build an equal opportunity economy, the Egyptian government has, in recent years, shown a willingness to cooperate with local and international investors to facilitate economic expansion, and to engage in public-private partnerships to push forward infrastructure and other development projects. Egypt s economic progress has stagnated, but despite on going political instability, the conditions that made the country s recent economic success possible persist. The most serious challenge facing Egypt s oil, gas and petrochemicals sector is EGPC s on going inability to honour its contracts to partners operating in the domestic market. While EGPC s long-term relationship with these companies and the companies awareness of the current problems facing Egypt has provided some leeway, there are limits to how long major partners such as BP can continue to operate at a loss. The longer this issue takes to sort out, the larger a threat EGPC s actions will pose to the continued participation of major players in the sector, and the worse Egypt s reputation will become as a destination for foreign investment. EGPC s non-payment has also put a damper on investments by stakeholders in further exploration activities and the development of new facilities. The Middle East and North Africa (MENA) region accounts for over one third global oil and gas production. By comparison with its regional neighbours, Egypt is not a significant hydrocarbons producer, with just 0.33% of world reserves. While not an OPEC member, the organisation that dictates much of global oil business, Egypt is a member of OAPEC and works with Arab countries to develop and carry out mutually beneficial petroleum policies. Egypt also exercises a key role in the regional and global energy sector through its ownership of the Suez Canal. 5

6 INDUSTRY STRUCTURE The oil, gas and petrochemicals industry encompasses a variety of activities, products and services that together enable the exploration, extraction, refining, transport and marketing of oil, gas and petrochemicals in their various forms. Petroleum products are sold in raw and refined form for industrial and individual use, and, together with petrochemicals, are used in the production of a variety of products including pharmaceuticals, solvents, fertilisers, pesticides and plastics. The international gas industry has gained increasing prominence as environmental concerns and supply issues have driven a transition from oil-based to natural gas-based fuel systems, enhancing demand for natural gas supplies and prompting investments in natural gas transport systems and other infrastructure. The dynamics of the oil, gas and petrochemicals industry are tied closely to world oil prices, global weather and conditions and, often, international politics. Egypt s oil, gas and petrochemicals industry is small by comparison to other regional players, but its central location close to Europe and land links to major energy importers such as Jordan, Israel and Lebanon, make Egypt a key regional player. Egypt is currently a net exporter of oil, although exports have dwindled somewhat in recent years as production has declined at key fields and new exploration has stagnated. The country has compensated by becoming a leading natural gas exporter to regional and international trading partners, although natural gas export deals with neighbouring countries came under scrutiny following the January 2011 uprisings. Since that time, shortages of gasoline, particularly diesel, and butane have become common in the country Egypt has traditionally managed to satisfy local demand for petroleum products without recourse to imports. Due to an absence of large-scale production facilities, petrochemicals have largely been imported, although the Egyptian government has expressed an interest in developing local production facilities. Currently new investments in the industry remain on hold as Egypt struggles with financial challenges in the wake of domestic political and economic disturbances. 6

7 MARKET OVERVIEW Egypt is the largest oil and natural gas consumer in Africa, accounting for more than 20% of total oil consumption and more than 40% of dry natural consumption in Egypt is also the largest oil producer in Africa outside of OPEC, and the second-largest natural gas producer in Africa behind Algeria. However, since 2011, political and economic instability in the country have negatively impacted Egypt s oil, gas and petrochemicals sector. Disruptions in exploration activities, production and exports have resulted from on going violence and political turmoil and the Egyptian government s increasingly dire financial situation has led to non-payment of suppliers and contractors and shortages of petroleum products in the local market. Energy Production and Consumption Oil Natural Gas Coal Hydroelectric Source : BP Statistical Review of World Energy The subsequent military coup in June 2013 has further paralysed the oil and gas sector. In particular, Egypt has been struggling with soaring energy bills caused by the high fuel subsidies it has long provided for its population, and has struggled to repay debts owned to foreign oil companies. The Egyptian government owes nearly US $6bn in debt to foreign oil and gas companies. US$4.9mn of this is due to British firms BG and BP. However, sentiment has improved as political stability has slowly returned, following the election of President El-Sisi. Since his election, El-Sisi s government has made several important steps in stabilising the oil and gas sector, including cancelling cut gas subsidies that had long burdened the government. The price of gas used by freight trucks is being raised 175%, and the price of gas used by cement, iron and durable good factories is being increased by 30-75%. Analysts predict an upside for investment and production in natural gas projects in the long term, though they point out that fuel subsidies may continue to disincentivise investment in the downstream. 7

8 Primary Energy Production by Source Source : IEA Egypt became a net importer of oil for the first time during the 2011/2012 fiscal year, managing to pay for imports with the US$ 2 billion generated from natural gas exports. Exports of petroleum products declined to just US$ 1.4 billion or one-fourth of the volume exported in In 2013 the country began diverting natural gas supplies to meet domestic demand, severely curbing export volumes and bringing processing plants on the country s north coast to a standstill. In the face of severe fuel shortages and frequent electricity cuts, Egypt accepted cargoes of petroleum aid from Gulf countries such as Kuwait and Qatar to stay afloat. Egypt was never a significant hydrocarbons producer, with oil and gas contributing just 6% to GDP, but in the past the country managed to cover domestic demand and support a healthy export industry. The energy sector also remains strategically important to the national economy, representing a major destination for foreign direct investment. The oil, gas and petrochemicals sector accounted for 53.1% of FDI inflows to the Egyptian economy in 2012, a figure disproportionate to the sector s overall contribution to GDP that indicates its foundational role in the Egyptian economy. The country s oil and natural gas sector remains under strong government supervision. The Ministry of Petroleum and Mineral Resources, which plays a leading role in the petroleum industry, is comprised of five state-owned companies: Egyptian General Petroleum Corporation (EGPC), Egyptian Natural Gas Holding Company (EGAS), Egyptian Petrochemicals Holding Company (ECHEM), Ganoub El Wadi Petroleum Holding Company (GANOPE) and Egyptian General Authority for Mineral Resources. These government entities partner with international oil majors to explore for, extract, process and distribute oil and gas. Due to concerns about the sector s disproportionate influence on the economy, Egypt has targeted diversification away from oil during the last twenty years. Long eclipsed by crude oil production in the Gulf of Suez, Sinai, Eastern Desert and Western Desert, the country s vast natural gas potential have begun to overshadow activity in Egypt s maturing oil fields. Rapid increases in natural gas reserves and production have led to the expansion of Egypt s dynamic petrochemicals sector which now supplies petrochemical products to 50 countries. 8

9 Total Oil Resources Source : JCEE As Egypt s petrochemicals and renewable energy markets promise strong growth over the next ten years, investment opportunities remain plentiful. In 2014, investment deals have increased. In December, Egypt s EGPC and EGAS announced an international auction for oil and gas exploration concessions. In September, Egypt signed a US $187mn oil and gas exploration deal with German RWE, Tunisian HBSI, Canadian TransGlobe and Italian Edison. United Arab Emirates energy firm Dana Gas was also awarded two onshore gas block exploration deals in September. If the well proves commercial, British Petroleum (BP) will have the option to buy up a 50% stake. Crude and Non-Crude Oil Supply Source : OPEC 9

10 Crude oil production is expected to decline with no significant discoveries expected in the future. Forecasts predict a decrease in production as companies use optimisation recovery techniques and develop existing acreage. However, natural gas production is expected to remain strong in the coming years as increased capacity allows for a rise in production on a number of concessions. Significant discoveries in the Nile Delta and Mediterranean have added to Egypt s natural gas reserves. The majority of exploration has recently been focused on crude oil and natural gas reserves in the Western Desert as well as the natural gas-rich Nile Delta and Mediterranean Sea. The government is encouraging exploration in Upper Egypt and following the first oil discovery in Sinai in 55 years in October 2011, there could be renewed interest in exploration activity in that region. Natural Gas Resources 14% 32% Cumulative production Identified reserves Undiscovered 54% Source : JCEE Egypt s expansion plans have been prompted by the growing demand for oil and subsequent rising prices worldwide, following a global trend for the last several years. Emerging markets such as India and China experiencing rapid economic growth are at the forefront of spending on oil and gas imports. Egypt, which has a modest energy sector as compared to advanced petro-economies in the Gulf, has been able to capitalise on rising oil prices after executing a number of development projects, including increased offshore drilling and development of alternative energy schemes. While the sector is expected to see further growth, profit margins will largely depend on the state of the global economy. Oil As of January 2014, Egypt s oil reserves stood at 4.4 billion barrels representing 0.33% of the world s oil reserves. Egypt s oil production has steadily declined since the 1990s as maturing oil fields lose their appeal for producers. Egypt s oil consumption has also outpaced production since In 2014, Egypt was still the largest non-opec oil producer in Africa, putting it in 26th place among the world s oil producers. Egypt has the sixth largest proven oil reserves in Africa. The country s control of the Suez Canal is where it makes its presence known on global oil markets. 10

11 World Energy Consumption Source : JCEE OPEC vs. Non-OPEC Crude Oil Resources Total (1/ 1/ 09): 1838 (109bbl) Total (1/ 1/ 09): 1501 (109bbl) 20% 26% 32% 44% 54% 24% Cumulative production Identified reserves Undiscovered Cumulative production Identified reserves Undiscovered Source : BP 11

12 Oil flow was at 2.4 million barrels a day in 2008 but dropped by more than a third the next year, paralleling the decline in oil demand from the economic recession. As of 2013, Egypt s total oil production averaged just under 700,000 bbl/d. 51% of Egypt s oil production comes from the Western Desert, and 20% comes from the Gulf of Suez. Smaller production levels occur in the Eastern Desert (12%), Sinai (10%), the Mediterranean Sea (5%), Nile Delta (1%) and Upper Egypt (less than 1%). Egypt s main oil grades are Suez, Belayim and Western Desert. In 2013, Egypt exported about 189,000 bbl/d of crude oil. The majority of these exports, about 56%, were sent to countries in the European Union. 28% of crude oil exports were sent to India, and 13% were sent to China. Most of the oil blends are refined domestically, with only a small volume of these grades designated for exports. Egypt has the largest oil refinery capacity in Africa, though it operates well below capacity. Despite growing oil consumption, Egypt s refinery output declined by 28% from 2009 to OPEC vs. Non-OPEC Natural Gas Resources Total (1/ 1/ 09): 5630 TCF Total (1/ 1/ 09): TCF 13% 29% 31% 41% 58% 28% Cumulative production Identified reserves Undiscovered Cumulative production Identified reserves Undiscovered Source : BP However, refinery capacities are expected to increase in 2015, when a new 96,000 bbl/d refinery, being developed by ERC, begins operations. Construction on this refinery began in In 2010, Egypt signed a memorandum of understanding with a Chinese consortium to develop a second refinery, with a projection of 300,000 bbl/d. However, progress on this refinery has been much slower. 12

13 LNG Export Destinations US Mexico Argentina Belgium France Greece Spain Turkey United Kingdom China India Japan South Korea Taiwan Source : BP Egypt faces key obstacles in the oil segment due to the nature of its reserves. The high costs and logistical issues associated with deepwater exploration, and the relatively small size of discoveries, has led to a slowdown in exploration and extraction activities in recent years. Egypt s other major reserves are located in the Western Desert, Eastern Desert, and the Sinai Peninsula. The BP-operated GUPCO Merged Area remains the highest producing oil concession in the country, although the Western Desert has emerged as a significant oil-producing region over the last decade due mainly to the efforts of Apache Corporation. Egypt also has reserves of shale oil totalling approximately seven million barrels in the Eastern and Western desert area. The cost and difficulty of extracting shale oil has made progress on extraction of these reserves slow. The Egyptian government s growing debts to partner companies since 2011 has also led to a slowdown in exploration and extraction activity, although major players such as BP have maintained their operations in the country with a long term eye on the future recovery of the sector. The Egyptian government owes nearly US $6bn in debt to foreign oil and gas companies. US$4.9mn of this is due to British firms BG and BP. The Egyptian General Petroleum Corporation (EGPC) currently owes Italian goal and gas company ENI more than US$ 1 billion, for example. In June 2013 the National Bank of Egypt was forced to grand EGPC US$ 1 billion in letters of credit to import crude oil from Libya. In December 2014, the Egyptian government paid back US$1.5bn to foreign companies. In September 2014, oil minister Sherif Ismail announced Egypt was aiming to pay back an addition US $2 to 3bn by the end of the year. While Egypt s oil segment is currently struggling, prospects for recovery should become clearer as the political situation stabilises and the country s economy rebounds. A foundational aspect of the national economy, oil will remain a key area of importance, although questions about its growth prospects remain. A major challenge will be attracting the significant investments needed to undertake the costly process of further deep water and shale exploration and extraction. Although some companies may be put off by the Egyptian government s failure to compensate its partners during this difficult period, oil companies can be expected to take on a certain amount of financial risk in order to reap the rewards of oil discoveries as international prices continue to rise and global demand skyrockets. 13

14 Natural Gas Natural gas is a bright spot in Egypt s economy and is growing rapidly in importance as an export commodity and as a solution to the country s increasingly challenging energy needs. However, Egypt s dry natural gas production has declined by an annual average of 3% from 2009 to Over the past decades, Egypt has gradually increased its natural gas production, increasing output from 30 billion cubic feet (bcf) in 1980 to 646 bcf in Production doubled within the next five years increasing rapidly to 2,214 bcf in According to OGC, as of January 2014, Egypt holds 77 trillion cubic feet (tcf) of proven natural gas reserves. Egypt is the fourth-largest holder of natural gas in Africa, and new discoveries are being made each year, particularly in the Mediterranean Sea, Nile Delta and Western Desert. Despite discoveries, since 2009, production levels have dipped. In 2013, Egypt produced almost 2.0 tcf of dry natural gas, of which 1.9 tcf was used domestically, and more than 0.1 tcf was exported. Natural Gas Export Mode 17 % Pipeline LNG 83 % Source : BP Major natural gas players include BG Group, which controls 40% of the country s natural gas production, and BP, which controls 22%. Exploration has slowed since early 2011, and in 2013 output has declined this year to a daily average of 5.75 bcf from 6 bcf in Exploration to maintain production is an important facet of Egypt s energy policy. But given the long lead times involved and the rate of demand growth, imports are likely to become an ever more important part of the gas supply. Indeed, Egypt plans to start importing LNG in 2014 to satisfy its natural gas consumption, which has increased by an annual average of 7% over the past ten years. EGAS signed a letter of intent with Norwegian Hoegh LNG to use of the company s Floating Storage and Regasification Unites (FSRUs) for five years to allow Egypt to import LNG, providing over 500 mn cubic metres daily. A range of gas exploration tenders should bring Egypt billions of dollars in investment this year and help the country meet its pressing long-term energy needs. Egyptian Natural Gas Holding Company (EGAS) awarded eight licenses for gas exploration in April 2013 and said it would potentially be offering at least 10 more this year. Combined, the licensed companies are expected to drill a minimum of 18 wells and make investments amounting to at least US$ 1.2 billion. The winning bidders will be allowed to sell their share of the gas produced. Previously, the Egyptian state was the sole buyer, with the exception of output that was exported as liquefied natural gas (LNG) from Idku on the Mediterranean Sea. These more accommodating terms were prompted in part by the initially limited interest in the most recent round. 14

15 Egypt has developed a robust natural gas export industry since 2003, when the country first began exporting dry natural gas. Natural gas exports peaked in 2009, reaching 647 bcf. Since then, exports have declined significantly, falling by an annual average of 30% from 2010 to 2013, reaching 259 bcf in Rising energy demand combined with falling output from domestic gas fields saw Egyptian LNG exports also drop, averaging only 13 bcf in the first half of Approximately 82% of Egypt s LNG exports are destined for Asia in 2013, with South Korea being the primary destination, followed by Japan, China, India and Taiwan. Egypt has two LNG plants with a combined capacity of 610 bcf per year. Part of the decrease in exports is a direct result of the Egyptian government redirecting natural gas supplies to the domestic market to mitigate fuel shortages and power outrages. Natural Gas Export Growth Source : BP Egyptian natural gas exports came under scrutiny following the 2011 uprising. Prior to the transition of power, natural gas was exported via a pipeline to Israel, Jordan, Syria and Lebanon and European markets such as Spain. The terms under which these exports took place caused controversy in 2011, with the government accused of selling natural gas at below market prices to Israel and Jordan. In 2011 the pipelines leading to Jordan and Israel were attacked nine times in protest, temporarily halting transportation and damaging business relations. EMG has threatened a lawsuit against EGPC for losses incurred from these attacks. In October 2011, Egypt renegotiated gas contract terms with Jordan, which will now pay nearly three times the previous price. The new agreement stipulates that Egypt will supply 253 mmcfd at US$ 5.20 per mn btu. The contract is subject to three reviews by No changes in Egypt s gas supply contract with Israel have been announced, which will likely continue to be a source of domestic political contention. In April 2012, EGAS cancelled the natural gas deal with Israel claiming that it had not received payment from the Egyptian-Israeli firm East Mediterranean Gas Company (EMG) that operates the El Arish-Ashkelon pipeline. The Israeli firm Ampal, a shareholder in EMG, stated that the firms would seek legal recourse. In June 2012, an Egyptian court found former Oil Minister Sameh Fahmy and Hussein Salem, a fugitive businessman, guilty of corruption in a natural gas agreement with Israel. The pair was sentenced to a 15-year prison term. Egypt cancelled its gas export deal with Israel in April It was announced in March 2013 that a retrial would be held for Salem and Fahmy. The pipeline was attacked again in 2013 and the lawsuit against EMG remains unresolved. 15

16 Petrochemicals Although Egypt s petrochemicals production capacity is small by regional standards, it is still one of the larger players in Africa. In an effort to overcome an energy crisis that has led to near daily power cuts and hurt company profits, Egypt is planning to invest US $14.5 million developing its petrochemicals sector over the next five years. Egypt s petrochemical sector represents 12% of industrial production and generates revenues totalling US$ 7 billion, equivalent to nearly 3% of GDP. The industry has strong growth prospects as it responds to growing global demand for a variety of products that require petrochemicals as a key component. Egypt supplies petrochemical products to about 50 countries worldwide, with Europe accounting for the majority of Egyptian exports. Germany, Italy and France are the largest importers of the Egyptian chemicals and fertilisers. Egypt s exports of organic and inorganic chemicals, carbon, plastics and fertilisers exceeded US$ 2 billion in Egypt s petrochemicals industry includes 84 companies operating domestically with total investments of US$ 4.6 billion, and 14 companies operating in free zones areas with total investments of US$ million. The Egyptian government is strongly involved in the domestic petrochemicals sector via state-owned holding company Egyptian Petrochemicals Holding (ECHEM), which is supervised by the Ministry of Petroleum. The company was created in 2002 by former prime minister Ahmed Nazif has multiple mandates as an investor and participant in the sector with minority stakes in some of the country s main production facilities. It is also in charge of marketing the sector abroad and long-term planning. Strong local and global demand is driving growth in Egypt s petrochemicals sector. For example, over 1.2 million tons of petrochemicals used to manufacture plastics are consumed in the local market each year. Local production of these materials is around only 470,000 tons per annum (tpa) at present, meaning two-thirds has to be imported, suggesting major opportunities for expansion. The PP market was reached 400,000 tons in 2011, with domestic production fulfilling less than half of demand. PP demand is expected to increase to 550,000 tons by Strong regional demand is expected to require larger volumes of olefins (ethylene, propylene) and polyolefins as well. Demand for urea fertiliser is expected to rise globally due to population increases, and manufacturing and exporting fertiliser from Egypt allows producers to benefit from discounted feedstock prices. Finally, demand for ethylene is expected to grow at 4.7% over the next six years reaching about 153 million metric tons by Recognising the petrochemicals industry s strong potential for domestic production and rising global demand for exports, the government has developed a long-term strategy to expand capacity in the sector. The 20-year plan, effective from 2002 to 2022, aims to decrease imports by support domestic production projects, and includes plans for 14 petrochemical complexes that will increase domestic ethylene production capacity to 600,000 tpa and polymer production to 1.9 tpa, and will be developed in three stages. The project s first phase, which ended in 2008, consisted of eight plants valued at US$ 5.6 billion. An additional 16 plants with total investments of US$ 13.4 billion will complete the second and third phases. Among the largest projects in progress is Ethydco, which will produce 460,000 tpa of ethylene and 400,000 tpa of polyethylene when it comes online at the end of Ethydco will be the largest producer of ethylene and polyethylene in Egypt, and will save the country more than US $500 million that is currently spent on imports. A 20,000 tpa butadiene extraction plant has also been planned. The Japanese firm Toyo was awarded engineering, procurement and construction contracts on both plants. There are also construction plans of a gas-to-olefins complex, an aromatics complex with a production capacity of 530,000 tpa of para-xylene and 350,000 tpa of benzene, and another propylene and PP plant. However, in November 2014, domestic petrochemical projects were postponed, and the completion of several petrochemical projects were delayed due to the paucity of natural gas. Indeed, one of the main problems for the petrochemicals and chemical fertiliser market are the on-going gas shortages and low production capacity. Egypt needs around 500,000 tpa of ethylene in order to sustain downstream production, but local production in 2014 was well below this level. Companies have correspondingly lowered their production targets. Sidi Kerir, for example, targeted total petrochemical outputs of 225,000 tpa in 2014, down 7.4% from 243,000 tpa in

17 The pace of investment has also slowed since the uprisings began, however, with several foreign projects cancelled or put on hold. In November 2011 ECHEM said that a group of Gulf investors had rescinded their offers to invest US$ 5 billion in petrochemicals plants in Port Said and in Suez. In August 2012 Ismail El Nagdy, chairman of Industrial Development Authority (IDA), announced the government s plan to establish a petrochemicals industrial trade zone, the first of its kind, that will include both foreign and domestic investments, totalling US$ 15 billion. The government has also reserved 33 million square meters of land in seven governorates for petrochemical projects to encourage investment. In September 2014, Oil Minister Sherif Ismail announced Egypt s plans to invest a further US $14.5bn to develop and expand its refining and petrochemicals sector over the next five years. Despite its contributions to the economy including job creation and decreased expensive fuel imports, the petrochemicals sector has been at the centre of controversy due to public outcry over several planned and existing projects across the country. The Egyptian Refining Company s Mostorod refinery project, which is located outside of Cairo, was the subject of a series of protests and lawsuits by local residents concerned about the environmental impact of the refinery. Misr Oil Processing Company (MOPCO) is also planning a refinery, which has seen recent protests resulting in the temporary shutdown of neighbouring Damietta Port. Strong government support from these projects has helped to counterbalance the negative press attention surrounding the protests, and both projects are going forward, suggesting improvements in investment climate in the sector and demonstrating the government s commitment to growth in the petrochemicals industry. 17

18 KEY PLAYERS Alexandria Mineral Oils Company (AMOC) The Alexandria Mineral Oils Company, the Egyptian-listed energy firm, is a second stage refinery operating two production complexes: a lube oils complex and a gas oil complex. The lube oil complex produces base oils, transformer oils, automatic transmission fluids, paraffin waxes and aromatic extracts which are sold to public and private oil companies for export. The gas oil complex produces gas oil, naphtha, liquefied petroleum gas and fuel oil blends, all of which are sold to the Egyptian General Petroleum Corporation at international prices. In March 2013 AMOC posted profits of EGP million for the previous nine months, a drop from the EGP million recorded during the same period a year previously. Profits dropped further in the first half of 2014, reaching a net profit of EGP mn. Alexandria National Refining and Petrochemicals Company (ANRPC) Founded in 1999, the Alexandria National Refining and Petrochemicals Company builds and operates refining units to produce a variety of petroleum and petrochemical products. ANRPC is currently implementing a new Naphtha hydro-treating unit with design capacity of 824,000 tons per year. The first stage of the project will see the introduction of 400,000 tons per year capacity to produce 116,000 tons per year of Light Naphtha, 271,000 tons per year of heavy Naphtha, and 5,500 tons per year of LPG. Apache Corporation Apache, the Texas-based drilling company, entered the Egyptian market in Apache has grown to become the leading explorer and driller in the country and the largest landholder and producer in Egypt s western desert region, controlling 9.7 million gross acres, only 18% of which have been developed. In 2005 Apache announced an ambitious program that aimed to double the firm s gross equivalent production in Egypt in five years. Apache achieved this target in 2010, reaching production rates of 189,000 billion barrels per day of oil. In November 2010, Apache acquired four development leases and a string of successful discoveries in the Faghur Basin in 2011 also strengthened the company s production outlook. In the beginning of 2012, Apache announced plans to invest an additional US$ 1.5 billion in its Egyptian operations. The company s Egyptian holdings account for nearly 25% of total business and Apache has struggled financially since mid-2012, when the Egyptian government s solvency problems began to impact payments to oil companies. In August 2014, Apache and Sinopec announced a global strategic partnership to pursue joint upstream oil and gas projects. Apache will receive US $3.1bn in cash in exchange for giving Sinopec a 33% majority stake in Apache s Egyptian ventures. British Gas Group British Gas Group (BG-Egypt), the London Stock Exchange-listed energy firm, entered the Egyptian market in 1995 and contributes more than 35% of Egypt s total gas production. BG Egypt has operated concessions including Rosetta with Edison and West Delta Deep Marine (WDDM) with Petronas. BG is also a major shareholder in the two-train 7.2 mtpa Egyptian LNG project. LNG from the first train is sold to GDF Suez, while supply from the second train is sold to BGGM, a subsidiary of BG Egypt. The company s Egypt production accounts for the bulk of British Gas s global activities. This emphasis on Egypt, where the company has over US$ 10 billion in investments, has caused the company financial hardship since mid-2012 when the Egyptian government suspended payments to oil and gas producers due to the worsening financial situation in the country. In 2014, the company suffered more setbacks, as outputs from its Egyptian operations fell by 52% in the first half of the year, compared with the previous year. In June 2014, BG sold its stake in a North Sea gas pipeline system. 18

19 British Petroleum British Petroleum (BP) has been active in the hydrocarbons exploration and production in Egypt for almost 50 years. BP is one of the most active producers in the market, accounting for 15% of oil production. BP s Egyptian assets mainly consist of oil fields in the Gulf of Suez and natural gas fields in the Nile Delta. The GUPCO Merged Area is the highest producing crude oil concession in the country. In July 2010, BP announced a development deal with EGPC for the North Alexandria and West Mediterranean deep-water concessions, which has come to be known as the West Nile Delta Project. The project, which will expand Egypt s natural gas production by 20%, will require an estimated US$ 10 billion gross investment. The first phase of the project is expected to be completed by 2014 and will include the development of approximately five trillion cubic feet of gas and condensate from five offshore fields which will be tied to a new onshore gas plant. Indeed, BP announced first gas from the project in August 2014, with the start of production at an initial rate of 50 million cubic feet per day. The agreement also involved improved fiscal terms for BP and partner RWE Dea to make costly Mediterranean development economically feasible. The company announced its first gas discovery at the US$ 334 million Seth development the end of June BP has been in the spotlight recently following mass protests at a planned natural gas installation in Edko, Upper Egypt. Local residents concerned about the environmental impact of the project staged mass demonstrations and drew attention from local and international media. In 2013, Egypt was awarded two new exploration blocks in the Nile Delta and Mediterranean. In November 2014, BP announced it would invest a total of US $240mn exploring these blocks. Dana Gas Dana Gas is a United Arab Emirates-based natural gas company and the sixth largest natural gas producer in the Egyptian market with production levels of 170 million cubic feet of gas per day. Dana Gas is composed of four subsidiaries, including Dana Gas Egypt, which is responsible for exploration and production, and Sajaa Gas and United Gas Transportation Company, which are responsible for transportation. The company s recent successes in Egypt include bringing the Ward Delta and West Delta Ward fields onstream. Dana also made one discovery, South El Naga-2 of the Abu Madi Formation. In July 2013, Dana Gas announced a new onshore discovery at its West Manzala concession in the Nile Delta. The discovery is expected to bolster the company s production by at least 1,600 barrels of oil equivalent per day. This discovery was the company s twenty-fifth since In 2013, Dana Gas was awarded 100% working interest in the North El Arish Offshore concession area, located in the Nile Delta. Egyptian Methanex Methanol Company Egyptian Methanex Methanol Company (EMethanex) is the Egyptian joint venture operation with Methanex. Methanex is the world s largest supplier of methanol to major international markets in North America, Asia Pacific, Europe and Latin America. Methanex holds a 60% interest in the EMethanex joint venture with 33% held by Egyptian government partners and 7% held by Arab Petroleum Investments Corporation (APICORP). EMethanex is currently developing a 1.3 million ton per year methanol facility at Damietta on the Mediterranean Sea in Egypt that will be among the most competitive methanol plants in the world. Joint venture partners the Egyptian Petrochemical Holding Company (ECHEM) and Methanex are exploring the development of a new project in Egypt for production of dimethyl ether (DME) from methanol. The DME production facility is expected to be located in Alexandria and have a production capacity of approximately 200,000 tones of DME per year. In 2014, the company s production was crippled by a shortage of natural gas supplies. Methanex had to temporarily halt operations in Egypt in June 2014 due to gas supply constraints related to higher electricity demand. Egyptian Refining Company Established in 1997, Egyptian Refining Company (ERC) designs, builds and operates state-of-the-art refining facilities. ERC is currently building a US$ 3.7 billion greenfield second-stage oil refinery in the Greater Cairo Area, which will produce over four million tons of refined products, including over two million tons of EURO V diesel, the world s cleanest fuel of its type. In June 2012, ERC and Egyptian PE firm Citadel Capital secured US$ 3.7 billion in project finance for the refinery. 19

20 Construction was delayed as the company struggled to find financing, but began in ERC s liquid products production will be sold to the state holding company EGPC under a 25-year offtake agreement at international prices. ERC will earn around US$ 200 million annually in import related savings to EGPC and fees paid by ERC to EGPC. EGPC owns a 25% stake in ERC, with private equity firm Citadel Capital holding a 13.1% stake. Eni Eni, the NYSE-listed energy firm, operates as the International Egyptian Oil Company (IEOC) in Egypt and is the country s largest foreign player in the oil and gas sector, and the largest oil and gas company in Africa. Eni was an early mover in the Egyptian market, beginning operations in Its portfolio consists of the Gulf of Suez giant Belayim Concession, and the Nile Delta s North Port Said, as well as shared stakes in Temsah, North Bardawil and a number of Western Desert concessions. Eni and partner Union Fenosa hold a 40% stake in the Damietta natural gas liquefaction plant. In February 2013 Eni announced a new discovery in Egypt s western desert, from which two wells with a production capacity of 2,000 barrels of oil per day are expected to result. This discovery followed the company s major 2012 discovery of a well that is currently producing 18,000 barrels of oil per day. In April 2013, Eni was awarded a new deep-water concession in Egypt s eastern Mediterranean. In September 2014, Eni was awarded an additional three new exploration licenses in the Western desert and near the Cypriot waters. As of November 2014, Egypt was also nearing agreements with Eni to offer the company a more competitive price for its natural gas extraction. Engineering for the Petroleum & Process Industries Engineering for the Petroleum & Process Industries (Ennpi) operates as a design and build engineering and management contracting company. The company was founded in 1978 and is based in Cairo, Egypt with branches in Egypt, Syria, Texas, Tripoli, Italy, Sudan, the Kingdom of Saudi Arabia, Abu Dhabi, Oman, Qatar, Algeria, Venezuela, Yemen, Jordan, and Kuwait. The Egyptian General Petroleum Corporation, the state oil and gas holding company, owns a 97% stake in Ennpi. The company provides engineering, procurement, construction, and project management services for the oil and gas, refining, petroleum, petrochemicals, power and other related, and general industries in the Middle East and Africa. It also participates in the execution of contracts as a subcontractor to international EGPC contractors. Oriental Petrochemicals Company Oriental Petrochemicals Company (OPC) is a joint-stock company established in Egypt in 1996, specialising in the production of polypropylene. Located in the industrial zone of Suez, it started production in 2001, at a working capacity of 160,000 megatons per year. OPC is the sole producer of polypropylene in Egypt, covering almost 85% of the local market demand of homopolymer polypropylene, and is looking forward to cover 100% of the expected demand during the coming few years with a new polypropylene plant located at the Suez Canal. OPC exports to more than 20 countries in Europe, the Middle East, Africa and Asia. Royal Dutch Shell Shell, the NYSE-listed energy firm, first entered the Egyptian market to operate two concessions in Gemsa and Hurghada in Shell has Egyptian upstream assets including a stake in 19 development leases in the Badr El Dine and Obaiyed areas of the Western Desert as well as in the North East Abut El Gharadig, West Sitra and West Alam El Shawish exploration concessions. Shell has a stake in two more concessions and operates North West Damietta in the Nile Delta. In 2011, Shell relinquished the NEMED concessions after ten years of unsuccessful exploration of the acreage for natural gas. In May 2013 it was announced that Shell had sold its retail and commercial activities in Egypt to Total for an undisclosed sum. In November 2014, Shell announced that it would not apply for any tenders to research areas other than the Western Desert, nor will the company engage in deepwater exploration in the Mediterranean. 20

21 Sidi Kerir Petrochemicals Sidi Kerir (Sidpec), the Egyptian-listed petrochemicals firm, is the sole ethylene and polyethylene (PE) producer in Egypt. Sidpec was established in 1997 by a number of government-related institutions, including Egyptian Petrochemical Holding Company (ECHEM) and the Egyptian Petrochemicals Company (EPC). Ethylene and PE sales account for 95% of Sidpec s revenue, with secondary products constituting the remainder. 20% of ethylene produced is sold to EPC, while the rest is used in PE production. Sidpec produces two grades of PE, which make of 80% of sales: high-density polythylene (HDPE) and Linear Low Density Polyethylene (LLDPE). Sidpec, under the name Egyptene, sells its polymer products directly to large manufacturers and to smaller manufacturers through nine distributors, though management is working to decrease its dependence on intermediaries. In 2010 Sidpec reached an agreement with GASCO and ECHEM for a new ethylene production facility in which Sidpec will own 20% stake. Sidi Kerir Petrochemicals posted full year profits for 2012 of EGP 855 million, down from EGP million in Profits have continued to fall, with Sidi Kerir posting a 22.9% drop in the first half of 2014, for US$71.35 mn. Revenue fell by 6.9%. However, the company hopes to increase its revenues by 18% over the next two and half years, increasing its output capacity of polyethylene by 40,000 to 50,000 tonnes a year. The company anticipates positive results following a 7% increase in polyethylene prices. The cost of initial investment is around US $75mn, which the company announced would be self-funded. 21

22 ECONOMIC OVERVIEW During the last decades, the Egyptian economy has made great strides, managing to capitalise on the country s natural wealth, appeal as a tourist destination and young, educated population to generate economic growth, industry and investment in key economic sectors. Although Egypt s legacy of state socialism and political authoritarianism has hindered the country s ability to build an equal opportunity economy, the Egyptian government has, in recent years, shown a willingness to cooperate with local and international investors to facilitate economic expansion, and to engage in public-private partnerships to push forward infrastructure and other development projects. Since the January 2011 uprisings, Egypt s economic progress has stagnated, but despite on going political instability, the conditions that made the country s recent economic success possible persist. In recent months, however, the Egyptian economy has begun to stabilise. In the past few years, Egypt s economic performance has been uneven. Following a long period of slow growth, the Egyptian economy began to accelerate in 2004 with the re-launch of a government privatisation programme begun in the 1990s, as well as implementation of numerous business-friendly reforms. These initiatives triggered a recovery in business confidence and gave a strong boost to local and foreign investment in the country. These reforms also supported a significant increase in GDP growth, which reached 7% annually in the period from 2005 to 2008, up from an average of 4% in the three previous years. On the heels of this strong economic growth, the government hoped to sustain an annual growth rate of between 6% and 7%, but this was not realised due to the effects of the global recession, which saw growth fall to 4.7% in Although GDP growth picked up again in , closing the year at 5.1%, a sustained recovery was not realised as a result of the upheaval and uncertainty that resulted from the Egyptian uprising in January GDP Per Capita (PPP) 100,000 Units Current International Dollar IMF Forecast 100,000 80,000 80,000 60,000 60,000 40,000 40,000 20,000 20, Source : IMF, TradingEconomics.com As a result of the uprisings that forced former President Hosni Mubarak from power and prompted major political changes, including Egypt s first democratic presidential election in June 2012, Egypt s economy struggled to regain its footing. Continuous political upheaval since 2011 has resulted in a series of devastating setbacks economic setbacks for Egypt. Former president Mohamed Morsi s economic decisions since his June 2012 election were more politically than economically expedient. 22

23 Privatisation, a major growth strategy employed by the previous government, is no longer possible due to political conditions; Morsi stated publicly in May 2013 that privatisation was not an option and that public sector workers would remain in their positions. Morsi also rejected a US$ 4.8 billion International Monetary Fund (IMF) financing package due to his government s unwillingness to implement tax increases and subsidy reductions in line with IMF conditions. Morsi s government has so far managed to survive on aid provided by the United States and friendly Gulf countries such as Qatar, which has provided nearly US$ 8 billion in aid during the past three years, with US$ 5 million of that recently released to Egypt in May In July 2013, Morsi was ousted from power through a combination of mass popular demonstrations and military intervention. His government was temporarily replaced with an interim council headed by the former head of Egypt s constitutional court, Adly Mansour. Economist Hazem El Beblawi, a former deputy prime minister and finance minister, was appointed interim prime minister. On June 8, 2014, Abdel Fattah El-Sisi, former head of the Egyptian Armed Forces and First Deputy Prime Minister and Minister of Defence under Mubarak s government, was sworn in as president. President El-Sisi received nearly 97% of the Egyptian vote. President El-Sisi has inaugurated a number of sweeping economic reforms, introducing new taxes, increasing selected taxes and reducing energy subsidies, increasing fuel prices by 78%. The implementation of such reforms has begun to have a positive effect on the economy, according to the World Bank. Economic growth in 2014 is at 2.5%, and is expected to increase to 3.3% in Currently, Egypt s budget deficit stands at 12%, and while this is higher than the government s target of 9.1%, the deficit is expected to shrink to 10% in Government Budget Balance US$ bn 0-4 % of GDP US$ bn % of GDP (LHS) -24 (RHS) F'cast Source : Oxford Economics After several years of a being caught in a vicious cycle of debt and stagnating economic growth, it appears that Egypt s economy is recovering and stabilising. In the fourth quarter of 2014, Egypt s GDP growth rate rose to 3.7%, up from 2.5% in the previous year, and 2.1% in However, the full-year growth rate has barely changed, which is a reflection of the first half of the year s weak expansion as the security and political situation in Egypt deteriorated. Egypt s GDP for the full fiscal year was recorded at 2.2%, which is an increase from the rate of 2.1%. Economists have predicted that Egypt s current fiscal year, which runs through June 2015, will have further positive developments, and have forecasted a 3.3% GDP growth rate. 23

24 Current Account Balance US$ bn % of GDP (RHS) US$ bn (LHS) % of GDP 8 6 F'cast Source : Oxford Economics Economic Forecast Real GDP growth (%year) CPI inflation (%) Exports of goods ($ bn) Exports of services ($ bn) Imports of goods ($ bn) Imports of services ($ bn) Exports of goods (% year) Imports of goods (% year) Current account ($ bn) Current account balance (% of GDP) Exchange rate per USD (year average) External debt total ($bn) Government balance (% of GDP) Population (millions) Nominal GDP ($bn) GDP per capita ($ current prices) 2,646 2,749 2,912 3,127 3,343 3,562 Source : Oxford Economics 24

25 The aftermath of the 2011 saw the drying up of foreign direct investment (FDI) and a decrease in domestic investment appetite, both of which severely reduced prospects for economic growth. FDI fell 4.5% during the fiscal year to US$ 2.1 billion, down from US$ 2.2 billion a year previously. However, a recent massive inflow of funds from the GCC has begun to reverse FDI in 2014 and In 2014, the UAE invested US $7bn in Egypt, while Saudi Arabia invested US $5bn and Kuwait invested US $4bn. This large-scale exceptional financing has been distributed through a mix of central bank deposits, cash grants, in-kind grants and project aid. Egypt s FDI is likely to get a boost from the International Monetary Fund (IMF), which endorsed Egypt s economic reforms at the conclusion of an Article IV mission in November The IMF praised the government s energy subsidy bill and tax increases, but has also encouraged the government to allow for a more flexible exchange rate policy that would allow the currency to depreciate. Since the 2011 uprising the EGP has lost over 13% of its value against the US dollar, leading the government to impose strict limits on foreign currency exchange transactions. Although the official exchange rate has not changed in Egypt since mid-summer 2014, the pound has slid against the USD on the black market. The gap between the two rates was most recently recorded at 8% in late November, according to Bloomberg. The EGP has fallen about 3.7% against the USD in the past year, and headline inflation rate was recorded at 11.8% in October Inflation % year Egypt Middle East & North Africa 6 3 Forecast Source : Oxford Economics As of June 2014, Egypt s domestic debt reached US $251bn, of which 84.7% was government debt and 3.2% was public economic authorities debt. Eternal debt increased by 4.8% at the end of March 2014 to US $45.3bn, compared with US $43.2bn. According to the Central Bank of Egypt, the rise in debt is attributed to the increase in net distributions of loans, facilities and deposits to US $1.6bn, and the increase of US $516.8mn worth in eternal debt because of the rise in most currencies of borrowing versus the US dollar. In a positive development, however, Egypt recorded a US $2.2bn surplus in the balance of payments during the first six months of 2014, compared to US $2.1bn the previous year. 25

26 Another sign that the country s economic situation is improving is the uptick in tourist arrivals, which have shot up nearly 70% in the third quarter of 2014, as compared to the same period in ,000 tourists were recorded in September 2014, a 193% increase from 2013, when 301,000 tourists arrived. A large percentage of these tourists are from Gulf countries. The number of Saudi Arabian tourists increased by 64.9% in the first ten months of 2014 as compared to 2013, and the overall number of Emirati tourists grew 72.7%. Kuwaiti tourists increased by 44.8%. Although these numbers are still below peak pre-2011 postings, analysts are optimistic that tourism will continue to grow. Although Egypt s government faces significant challenges in overcoming the issues of stagnating growth, declining revenues and mounting debt, the country s underlying economic potential has allowed Egypt to continue positing positive growth through one of the most difficult economic periods in recent memory. FDI has begun to recover, Egyptian companies have slowly begun to invest in expansions and new projects, and recovering consumer confidence is helping to bolster demand for consumer goods, real estate and domestic tourism. The 2011 uprising and its tumultuous aftermath has also seen more and more Egyptians turn to entrepreneurism; small businesses have flourished since 2011, with restaurants and retail outlets in Cairo s upscale neighbourhoods and suburbs faring particularly well. Rising GDP per capita levels are contributing to the success of retail-based small businesses. Despite the ability of Egypt s affluent classes to support the success of new small businesses, Egypt s poverty level remains high, with an estimated 25% of the population living on less than US$ 1 per day, demonstrating the extent of income disparity that still exists in the country. Increased taxes and subsidy fuel cuts have hurt Egypt s most marginalised populations. One bright spot is the reduction of unemployment in the country, which has fallen to 12.3% from 18% in As Egypt continues through this phase of political, social and economic transition, its strong and longstanding partnerships with key markets such as the United States, Europe and the Gulf region, together with its developed financial system, abundant natural resources, and outstanding human capital, will provide a strong foundation for recovery and the resumption of rapid social development and economic growth. 26

27 CHALLENGES TO INDUSTRY The most serious challenge facing Egypt s oil, gas and petrochemicals sector is EGPC s on-going inability to honour its contracts to partners operating in the domestic market. While EGPC s long-term relationship with these companies and the companies awareness of the current problems facing Egypt has provided some leeway, there are limits to how long major partners such as BP can continue to operate at a loss. The longer this issue takes to sort out, the larger a threat EGPC s actions will pose to the continued participation of major players in the sector, and the worse Egypt s reputation will become as a destination for foreign investment. EGPC s non-payment has also put a damper on investments by stakeholders in further exploration activities and the development of new facilities. Over 53% of Egypt s FDI inflows are destined for the country s oil and gas sector, and the industry depends on continued investment to maintain its exploration and production activities. It is important for EGPC to attempt to make its payments in a timelier manner in order to maintain a positive relationship with its partners and encourage growth in the sector going forward. While the Egyptian government s financial situation is not likely to allow payments to be made in the short term, particularly given the supply issues Egypt is facing with petroleum products in mid-2013, economic recovery should allow EGPC to honour its financial commitments to partner companies in the medium term. Another challenge for potential investors and current stakeholders are the development costs associated with the Mediterranean Sea s deep-water reserves. The government has amended the gas price structure for development leases such as North Alexandria, allowing for commercial development of the block s reserves. If the government cannot afford to offer the same term amendments on other stalled developments, a natural gas shortage on the domestic market is likely to result in the coming decade. Already, one of Egypt s main challenges is satisfying increasing domestic oil demand amid falling production. Total oil consumption has grown by an annual average of 3% over the past ten years, and oil consumption has outpaced production since Egypt suffers from an unbalanced energy mix, where oil and gas dominate, representing 96% of total energy consumed- globally, the energy source mix is 60% oil and gas. Contracts with some sector companies, such as BG-Egypt, have come under fire domestically due to perceived preferential contract terms that fail to give Egypt fair returns from its natural resources. While operators are unlikely to shy away from further investments in the sector, the government will need to be careful to emphasise transparency in future dealings with oil and gas companies to prevent future domestic discontent. Similar preferential contract terms would benefit the development of shale oil reserves in Egypt s Eastern and Western Desert regions, but the government must be careful to execute any such agreements with full transparency. The petrochemicals segment has managed to escape some of the more severe challenges experienced by the oil and natural gas segments since 2011, and has actually posted strong growth and expansion despite on going political and economic unrest in the country. The government s petrochemicals master plan has continued largely unhindered throughout this period, despite the cancellation of a few projects, and development moves are helping to bolster growth in the industry on a large scale. It is possible that the second phase of the plan, currently under implementation, could experience delays as a result of the most recent transition of power in July 2013, as the new government attempts to get Egypt s fiscal situation under control and identify new economic priorities. However, the promising opportunities presented by the sector should ensure that it receives the investment funds it needs to realise expansion and growth in the medium and long term. 27

28 SWOT CHART Strengths Egypt s natural gas sector has proven a strong area of growth in the past several decades and domestic and international demand will continue to drive expansion in this segment long-term. Strong domestic demand for petrochemical products is bolstering innovation and expansion in the sector. Egypt s ownership of the Suez Canal allows it to exercise strong influence in global energy markets, despite being a relatively minor producer of hydrocarbons. The new Egyptian government recently reworked its subsidy program, slashing spending on energy subsidies by almost a third. In June 2014, fuel subsidies were cut from US$ 20 bn to US $13.9 bn. Opportunities Strong growth in the petrochemicals sector will offer opportunities to fully supply domestic demand as well as to develop international export markets, particularly as new planned facilities come on stream. The recent award of new exploration blocks across Egypt could result in significant new reserves of oil and natural gas if receiving companies are able to undertake exploration activities. Egypt s emphasis on renewable energy production has the potential to free up more of the country s oil and gas production for export in the medium and long term. Weaknesses Egypt s oil industry is witnessing decline as reserves stagnate and the costs and difficulty of developing existing reserves grow as a result of their locations in shale and deep water areas. Skyrocketing domestic fuel demand has caused Egypt to become a net importer of petroleum and weak natural gas and petroleum product exports in 2014 have put the industry in a precarious financial situation. Egypt s energy demand has been increasing steadily as production has been decreasing, forcing the country to import. Egypt has a cash flow problem, which has delayed its payments to IOCs. The country owes nearly US $6bn to foreign oil companies, and has been forced to borrow from banks to begin paying off loans. Threats EGAS s inability to cover payments to its partner companies is currently threatening activity in the sector and has the potential to damage Egypt s reputation as a destination for FDI into the future if not resolved. On going disputes with export partners and unresolved trials of leaders in the sector threaten progress and recovery. New transport routes and technologies could threaten Egypt s strategic role in the international energy sector if the Suez Canal ceases to be a major transport route in the future. 28

29 PROJECTIONS Economic Projections Nominal GDP (US$ bn) Real GDP Growth (%) GDP Per Capita (US$) Population (mn) Source : Noozz Industry Projections Oil Porduction (000 bpd) Gas Production (US$ mn) Refining Capacity (000 bcm) Source : Noozz 29

30 NEEDS ASSESSMENT A sound fiscal policy that will enable EGPC to uphold its commitments to partner companies in a timely manner is essential to attracting sustained FDI in the oil, gas and petrochemicals sector. New exploration projects to unlock the potential of Egypt s resources will be necessary to sustain the growth of the sector in the long-term. While appetite for such long-term investments may not be high at the moment, recent discoveries indicate that potential for lucrative finds still exists in areas across the country. US$ 13.4 billion in additional investments is required to support the government s petrochemicals strategy for the seven-year period ending in These investments will be crucial in expanding the capacity of Egypt s petrochemicals industry to supply domestic demand and exports. Emphasis on attracting investments in renewable and alternative energy projects could help give Egypt an edge over its regional competitors, and help alleviate the high costs of importing and subsidising energy for domestic consumption and open up supplies for export. Egypt needs to continue paying off its US $6bn debts to foreign oil companies as quickly as possible, in order to attract more investment and continued projects. 30

31 MENA-WIDE OVERVIEW The MENA region accounts for over one third of global oil and gas production, although regional unrest since January 2011 has had an impact on regional oil and gas production. It is estimated that 10% of OPEC infrastructure was damaged as a result of uprisings in various regional countries since LNG operations in Yemen operated by French giant Total experienced shutdowns due to attacks on pipelines and political instability. Libya, which holds the largest reserves in Africa and the eighth largest in the world, experienced a major slowdown for much of Global Product Demand Source : OPEC Following the removal of Muammar Qaddafi at the end of 2011, production levels have begun to climb again and are expected to reach levels of 800,000 bpd by the end of Sanctions imposed on Syria by the Arab League, the United States and the European Union have caused Royal Dutch, Shell and Total to cut production estimates drastically. Syria produces less than 1% of total oil output, about 350,000 bpd, one third of which is exported to Europe. Larger producers, however, such as Qatar, the UAE and Saudi Arabia, remained unaffected by regional unrest, making them particularly attractive targets for foreign investment (see figure). Iraq s oil and gas sector is getting back on its feet, with the government in talks with top companies for development of key assets across the country. Algeria, Kuwait, Bahrain and Iran are also significant regional producers attracting significant investments (see figure). Though political unrest has continued to plague the region well into 2014, with no signs of abating, particularly in Syria and Iraq, oil and gas output has stabilised in the last year. According to the IMF, GDP grown in MENA oil exports will rise from 2% in 2013 to 2.5% in Iraq, which holds the world s fourth largest proven oil reserves, had boosted production levels to over 3mn barrels per day over the course of However, the Islamist insurgency has hit oil exports from Iraq s northern pipeline, and while the southern oilfields have not been affected by the Iraqi s fight with the Islamic State, a multi-billion dollar seawater injection scheme to boost production in the south is currently tied up in bureaucratic red tape. 31

32 ( Egypt: Oil, Gas & Petrochemicals Global Capacity Requirements Source : OPEC While subsidies remain a point of contention and a massive burden on governments with large populations relative to oil and gas reserves, such as Egypt and Algeria, it is unlikely that governments will reduce subsidies in the short to medium term. In Gulf countries, it can be expected that high subsidies will remain in place for the foreseeable future. Governments seeking to scale back subsidies can look to Iran for inspiration. The Iranian government enacted a largely successful reform to energy subsidies at the end of 2010, drastically cutting price controls and allowing energy prices to rise closer to market prices. Plans are in place to up prices to 90% of international energy levels by This action has not been met with any major protest actions within the country, and succeeded in driving consumption down by between 5 and 20% in the first two weeks following implementation. Continued cooperation between regional and global producers to create beneficial and sustainable policies will be crucial to the future development of the regional oil and gas industry. Investments in technology and training, the development of clean energy solutions and the securing of new export and energy sharing contracts will contribute to the dynamism of the regional sector going forward. As global energy demand continues to rise year after year, oil and gas producing countries will enjoy an ever-increasing source of geo-political power and steadily rising income. While Egypt will remain a minor player in the sector on a regional scale, it stands to benefit from gains made by larger players, and opportunities to make its mark as a growing LNG and petrochemicals player, as well as a pioneer in alternative energy exist in abundance. 32

33 ( Egypt: Oil, Gas & Petrochemicals Energy Use Per Capita Source : OPEC World Supply of Primary Energy Source : OPEC 33