[NGW Magazine] Egypt's law opens gas market

The role of the state in Egypt’s gas market is shrinking, to benefit private investors, with a new law that also paves the way for Egypt’s emergence as a regional hub.

The Egyptian government, under the direction of its oil minister Tareq El Molla, has approved a new gas law opening its natural gas sector to private investors.

The government’s role will become regulatory: stimulating market and infrastructure development through the issue of licences; and ensuring fair competition and non-discriminatory third-party access to pipelines and storage.

The new regulator and the new law are expected to pave the way for private sector companies to import and distribute gas within Egypt using the country’s domestic pipeline network, activities currently monopolised by the government. More broadly, given its reserves and so much idle export capacity, it could become a regional gas hub for the eastern Mediterranean.

The law is a part of the Egyptian government’s strategy to liberalise the Egyptian economy in response to the reform programme agreed with the International Monetary Fund. Other elements of the programme include the adoption of a flexible foreign currency exchange rate; the cutting of fuel subsidies; and the privatisation of the public sector. Most of these reforms have either been implemented or are on the way.

Cairo-based Pharos Holding’s head of research Radwa El Swaify said: “This law effectively relieves the government of the burden of providing for the rapidly growing natural gas consumption and turns it into a regulator… It’s all part of the same direction of having freer markets in Egypt.”

The new law may also advance Egypt’s objective to achieve energy self-sufficiency by end of 2018, largely through gas from the giant Zohr later this year; and a plethora of other smaller natural gas fields currently being developed.

El Molla predicts that the law will make it easier for Egypt to secure the natural gas it needs. It will gradually deregulate the Egyptian gas market, opening it up for private investment in trading, storing, selling, and distributing natural gas. The government hopes to create a competitive gas market that will lead to efficient services and continuous development and upgrades.

Egypt: a regional hub in the making

The law will greatly enhance the flexibility of the Egyptian gas market and lays the groundwork for its emergence as a gas hub for the eastern Mediterranean. Egypt may import gas from Israel and Cyprus for export along with any surplus of its own.

It allows private sector firms to use the state import and distribution infrastructure to trade in natural gas. This has the potential to generate price transparency as the regulations state clearly that one of the main aims is to “attract and promote investment in gas-market activities, and encourage a climate of competition in order to establish a competitive gas market.”

So far three companies have received initial approval to import natural gas into Egypt: Abu Dhabi’s sovereign wealth fund Taqa; Russian state controlled major Rosneft, which is along with BP a partner in the Eni-operated Zohr field; and Fleet Energy.

Five other companies, including Dolphinus Holdings which is in negotiations to import Israeli gas, have applied for an import licence. Approval requires proof that the gas meets the grid’s quality specifications and that the importer has good financial standing, as well as a contract with an Egyptian buyer and also a proven source of supply.

Egypt’s two largely idle liquefaction plants at Idku and Damietta could export gas from Israel and Cyprus and export it to Europe and Asia. Owned by Shell and Union Fenosa, domestic demand growth has starved them of gas, and they have a combined gas liquefaction capacity of 17.5bn m³/yr

Israeli and Cypriot gas finds, together with the Zohr field off Egypt and potential reservoirs off Lebanon, could create a gas hub right on Europe’s doorstep. Eni CEO Claudio Descalzi has long been a strong advocate of this. Eni is also planning to explore for gas off Cyprus (see separate feature). But trying to figure out how best to develop this gas is fraught with commercial and geopolitical challenges. Almost every option to develop it needs fixing of problems, enmities and old conflicts. This includes pipeline exports as well as use of Egypt’s LNG plants.

Meanwhile, El Molla has confirmed that Egypt is well on the way to self-sufficiency by the end of 2018 and is likely to be an LNG exporter by 2021. This is confirmed in the forecast in Figure 1, which is based on the very detailed knowledge of the Egyptian energy market by the Paris-based Observatoire Mediterraneen de l’ Energie (OME). In this the ‘proactive scenario (PS)’ allows for renewables penetration and impact of demand management measures like energy efficiency and conservation.

Egypt is also pursuing diversification of its energy mix through implementation of renewables, with support from EBRD, nuclear and coal power projects, to reduce dependence on gas. It is now targeting 20% of its electricity from renewables by 2022. This could further support freeing Egyptian gas for exports.

Gas surplus and exports could reach 20bn m³/yr by 2035, and possibly more. Depending on how effective deregulation becomes, open and free trading by gas buyers and sellers can enhance the development of a hub.

Impact on other gas

Deregulation of Egypt’s gas sector has been interpreted as the door opening for Israel and Cyprus to export their gas to Egypt. Speculation in both countries is rife. Israel is desperate to secure export markets for its gas and the new developments in Egypt are encouraging speculation that the way is now open for such exports to Egypt.

In particular, an article in Bloomberg August 20 excited interest by claiming, based on unconfirmed sources, that Shell is in early talks to buy 5 bn m³/yr natural gas from Israel’s Leviathan field and combine it with gas from Cyprus’s Aphrodite field, of which it owns 35%, for liquefaction at Idku. Shell declined to comment on this.

However, such talks have been ongoing, on and off, since 2014 without results as yet. A non-binding deal was signed with BG, now part of Shell, in 2014 but it has stalled. So have MoUs signed between Cyprus and Egypt for export of Aphrodite gas. Commercial factors and politics make such ventures difficult. The same applies to the ongoing discussions between Noble/Delek and Dolphinus Holdings to import Tamar and Leviathan gas to Egypt.

Gas prices in Europe range at an average of about $5.50/mn Btu and in Asia at about $6.50/mn Btu and the relentless shift in the global energy mix towards renewables will bring demand down further. At such prices imports of gas from Israel and Cyprus, liquefaction in Egypt and export, especially to Europe, would be commercially challenged – unless of course Israel and Cyprus reduced the price of their gas to sufficiently low levels, $3/mn Btu or less.

This is especially so in Israel where the new gas regulatory framework, agreed last year between the government and the oil and gas companies, requires Noble Energy and its partners to reduce prices to the domestic market to the same level as export prices, if these are lower. Tamar sells its gas to the Israeli Electricity Corporation (IEC) close to $6/mn Btu and it is highly profitable. Noble Energy is unlikely to undermine this.

Israel-Egypt gas conflict

There are also the issues surrounding the International Chamber of Commerce Court of Arbitration (ICC) decision in April 2017 upholding a 2015 ruling and finding against Egypt’s Egas and EGPC, and pipeline operator EMG, for halting gas supplies to Israel in 2012. The court ruled that the Egyptian companies must pay IEC close to $2bn. There are also other arbitration cases related to this pending, complicating the picture even more.

Egypt’s prime minister, Sherif Ismail, has taken the decision to suspend any gas negotiations with Israel until these issues are resolved satisfactorily. He made dropping the claim against Egas and EGPC a pre-condition for allowing import of gas from Israel to Egypt. This position has not changed.

There are those who claim that by working through private companies, instead of Egas, any political sensitivities between Israel and Egypt and any complications arising from the ICC judgment could be sidestepped. In addition, importing the gas through Jordan, or even through Cyprus, would avoid using a politically fraught pipeline directly from Israel. However, this is speculation at this stage, the practicalities of which are unclear and challenging. It will also add more costs to a project that is already commercially-challenged. The greatest challenge to such gas imports is commercial. This needs to be overcome first before other issues are addressed.

Egypt is also pursuing diversification of its energy mix through implementation of renewables, with support from EBRD, nuclear and coal power projects, to reduce dependence on gas. It is now targeting 20% of its electricity from renewables by 2022. This could further support freeing Egyptian gas for exports.

Key provisions of the gas law

The Natural Gas Act was signed into law August 7 and it was published in Egypt’s Official Gazette August 14. The executive regulations resulting from this law will be published in September. Key features of the law include a new regulator authorised to issue licences and permits, amend regulations and generally oversee the industry. Terms and conditions for using the gas distribution infrastructure can be proposed by the private sector but must be approved by the regulator.

There are five primary gas industry roles now open to the private sector: Pipeline operators; distributors; storage providers; gas shippers; and importers. Transmission system operators  must develop a five-year plan to develop their infrastructure. Operators can withhold gas if distributors fail to make payments for it. Distributors own and operate the local pipelines to which end-users are connected, it is their responsibility to build pipelines to the consumer. Distributors must also provide the government with regular gas demand data. Both pipeline operators and distributors can set their pipeline fees but they may not block access unless the grid is at full capacity or a shipper is late with payment. Storage providers must allow equal access. Gas shippers may sell imported gas to pipeline operators and gas importers may not sell imported gas to pipeline operators without a shipping licence.

• Pricing: The regulator will have a say on pricing of gas throughout the supply chain based on investment costs, maintenance, the cost of developing pipeline infrastructure and projected returns on investment.
• Tolling exports: The regulator will set and collect a fee on gas exports.

The law provides that operators and owners of the gas distribution and storage systems will be allowed to use the system in accordance with rules to be adopted by the regulator, which will also determine the stages and pace at which industry privatisation will take place.

The regulator will be an independent public body controlling all gas related activities specified in the law and ensure third-party access. It will also monitor the quality of services and foster competition and investment, and so it will have a say in pricing.

The World Bank is advising Egypt’s government on the creation of a regulator.