Calgary Herald: Egypt plans to cut natural gas subsidies

WILL RASMUSSEN REUTERS CAIRO

Egypt’s plans to phase out gas subsidies to industry could stimulate investment by international oil and gas companies, and help raise gas supplies both for domestic use and for export.

Energy-intensive industries in Egypt will have to pay more than double the current price they pay for natural gas over the coming three years, the government said this week.

The pricing change will make selling to the domestic market more profitable for energy giants investing billions of dollars in the country, such as Shell and BP, giving them an alternative to selling gas on the international market.

Egypt already exports gas chilled to its liquid form (LNG) to the United States, Europe and Asia. It was the world’s eighth-largest LNG exporter in 2006.

“For foreign companies, this is good news,” said Gary Howorth, senior director for global gas at Washington, D.C.-based PFC Energy. “The risk for any company exploring for gas is that it will have to sell gas in a subsidized market rather than the lucrative international market. That risk is now mitigated, and companies can invest more to explore for and develop gas.”

However, Canadian oil companies are awaiting further clarifications from Cairo on its plans to phase out gas subsidies, before commenting on what impact it may have on their existing or future operations.

“On the face of it, it is not a welcome move,” commented Abby Badwi, president and chief executive of Rally Energy. “We are buying gas at a domestic price of $1.25 per BTU (British thermal unit) and this will now be subsidized.”

Rally, which operates a heavy oil field at Issaran and produces 6,500 barrels per day, utilizes gas to keep its steam-fired operations ongoing.

“Egypt is under pressure from IMF, the World Bank and other lending institutions to bring its gas tariff in line with international prices. However, we are awaiting further details on the policy. Our understanding is that the new ruling will not apply to all sectors,” he said.

Badwi admitted that in a worst-case scenario, his company’s operations are unlikely to be affected.

Vancouver-based Ivanhoe Energy, which plans the construction of a 45,000-bpd gas-to-liquids plant in Alexandria, was not available for comment.

The fate of the multimillion dollar project has been hanging in balance since October 2005, when Ivanhoe signed a memorandum of understanding with the Egyptian government. Main stumbling blocks have been gas price and feedstock allocations.

The new government initiative will hike the price of natural gas for four industries by about 110 per cent, to $2.65 per million British thermal units, over three years.

Egypt’s government has faced increasing difficulty keeping international companies happy as production costs rose compared with the price at which companies can sell to the Egyptian Natural Gas Holding Company (EGAS), a state-owned firm that manages the country’s gas industry.

“To some extent, oil and gas company investors have been helping to pay for low domestic prices by their low fixed sale price to EGAS,” says Catherine Hunter, analyst at the International Energy Agency. “But as the difference between domestic and international prices has risen, and project costs have soared, their willingness to do that has receded.”

Total energy subsidies of around $3.5 billion US a year had threatened to dim foreign interest in gas exploration in Egypt, which has Africa’s thirdlargest natural gas reserves.

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