March 20, 2014 1:38 pm

Egypt faces long, hot summer as power cuts grow

Egyptian passengers walk in the dark following a power cut at the Tahrir Square metro station in Cairo on April 3, 2013. AFP PHOTO / KHALED DESOUKI (Photo credit should read KHALED DESOUKI/AFP/Getty Images)©AFP

Egyptians have become used to frequent power cuts in summer, when demand from air conditioning units can overwhelm the country’s overstretched electricity generation system.

But it is a sign of Egypt’s worsening energy crunch that outages are now becoming common during colder months, as the supply of gas fails to keep up with rising demand.

The energy shortage is now so severe that government officials and investors alike recognise it as serious brake on industry. Bruno Carré, chief executive of Suez Cement, one of Egypt’s largest producers, said the shrinking supply of gas to his plants has led to output dropping to fifty per cent of capacity.

“The name of the game is to divert gas to power stations at the expense of big industrial producers,” he said. “We were planning to build up inventory ahead of the summer, but we cannot even produce at the normal level.”

To maintain its market share, the company has started to import cement to sell in Egypt, said Mr Carré, straining the country’s already dwindling foreign currency reserves.

Only a few years ago, Egypt was seen as a rising liquefied natural gas exporter, but the combination of growing domestic needs, delays in the development of new upstream ventures and arrears to international oil companies have created the crunch.

Exports have all but ceased and surging demand has caused the government to divert high levels of gas produced by foreign companies such as BG Group to the domestic grid. The oil and gas company, which gets about 18 per cent of its production from Egypt, declared force majeure in January because of its failure to meet its export commitments.

Cairo is also at least $4.8bn in arrears to international hydrocarbons companies.

Even an infusion of billions of dollars and free petroleum products from Gulf countries has failed to halt the worsening energy crisis. Delighted with the July coup that ousted Mohamed Morsi, the elected Islamist president, and restored the military to political dominance, Saudi Arabia, the United Arab Emirates and Kuwait have poured some $16bn into Egypt to bolster its new army-backed regime.

Analysts and officials say the shortages are exacerbated by costly subsidies to consumers that no government has yet dared tackle. All Egyptians, regardless of their income, benefit from heavily subsidised fuel which is expected to cost the state $20bn in the current fiscal year, which ends in July, according to recent remarks by Sherif Ismail, the oil minister.

Overhauling the wasteful system, which accounts for almost 20 per cent of government spending, risks provoking social unrest and will be one of the urgent challenges facing Abdel Fattah al-Sisi, the defence minister who is widely-predicted to become the country’s next president.

Although there is no date set for the presidential election, it will almost certainly take place as the summer heat sets in, potentially exacerbating the power cuts and further souring the public mood.

Mr Ismail said last month that Egypt needed to import $1bn of petroleum products and had to secure significant natural gas supplies in time for peak usage in the summer.

The oil ministry was reported in February to be in the final stages of awarding a long-delayed tender for a floating regasification terminal that would allow imports of LNG to flow into the country, but experts say it is already too late for any new supplies to arrive by the summer.

Cement manufacturers caution that imported gas would also be too expensive. According to Mr Carré, imports would cost $12-15 per million British Thermal Units – compared to the $6 per million btu for local gas that his company currently pays. Manufacturers are pushing to be allowed to import coal, despite the opposition of the environment ministry, and in recent days the prime minister has ordered a quick study of the issue, signalling a potential policy change.

Experts, officials and investors say subsidy reductions would enable the government to meet its obligations to foreign partners, and would encourage international oil and gas companies to invest in expensive deepwater upstream ventures. Realistic pricing of energy products they argue, will help rationalise wasteful use and incentivise investment in renewable energy.

“Subsidies are the reason for all that we are suffering,” said Mohamed Shoeib, the head of the energy division at Citadel Capital, an investment company. “We need to start immediately the liberalisation of prices in parallel with directing needs-based cash subsidies to families. We’ve reached a critical point. We are also entering an age of water poverty so we will need energy for desalination. We need to work on a complete vision for our energy needs at least until 2030.”

He and others say that an immediate target must be to put in place sustainable mechanisms to assure foreign partners that the state will be able to pay its debts.

“Arrears have impacted investment by gas producers,” said Martijn Murphy, analyst at Wood Mackenzie, an energy research and consulting firm. “I think gas production is unlikely to recover back to 2012 levels in the short to medium term. It is a difficult environment for companies to make multibillion-dollar investments.”

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