Egypt's energy quagmire could sink Sisi

Industry experts predict that Abdel Fattah al-Sisi will keep breaking contracts with foreign companies.

FILE: Industry experts predict that Abdel Fattah al-Sisi will keep breaking contracts with foreign companies.

CAIRO - Egypt's army chief, Field Marshal Abdel Fattah al-Sisi, won vast popularity by crushing the Muslim Brotherhood, but even a man seen by his followers as invincible may be unable to fix the mess in the politically sensitive energy sector.

Sisi, who toppled Islamist leader Mohamed Morsi in July and promised to bring calm to Egypt, is expected soon to stage a triumphal run for the presidency in elections due within months.

His first big challenge is likely to be power cuts and fuel shortages - the same issues that plagued Morsi and helped spur mass protests that enabled the army to oust him.

"Sisi is still very popular, but he realises that Egyptians can go to Tahrir Square tomorrow if his administration is seen as not being as efficient as promised," said Justin Dargin, a Middle East energy expert at the University of Oxford.

Cairo's Tahrir was the hub of protests that ended three decades of one-man rule by President Hosni Mubarak in 2011.

To many Egyptians, Sisi is all-powerful, but industry experts, foreign oil and gas companies and Western diplomats doubt he can take bold steps to tackle Egypt's energy nightmare.

Successive governments have failed to develop a sound strategy to tap major natural gas reserves even as an exploding population boosted demand for the fuel.

Egyptian gas exports began in the mid-2000s, but more than halved from 2008 to 2012. They have now slowed to a trickle, contributing to a global decline in liquefied natural gas (LNG) supplies.

Production from maturing gas fields is declining. The government forecast this month that consumption will outstrip output for the first time in the fiscal years starting in July.

Gulf Arab donors have propped it up with aid that includes $4 billion in oil products from Saudi Arabia, Kuwait and the United Arab Emirates, but their diesel is not compatible with Egypt's gas-based power plants and big factories.


Qatar bailed out Egypt with extra gas during Morsi's rule, but his ouster badly soured ties with Cairo. Like its predecessor, the interim government has failed to secure a means of importing LNG directly, so Egypt has nowhere to turn for gas.

Egypt's energy troubles are rooted in fuel subsidies that cost the government $15 billion a year, a fifth of the state budget. The money keeps pump prices well below market values, giving Egyptians no incentive to curb their consumption.

The subsidies, in place since the era of socialist President Gamal Abdel Nasser five decades ago, drains foreign currency that could instead be used to pay off debts to foreign energy companies and improve payment terms to encourage investment.

Companies forced to cut output in periods of peak electricity use in recent years will "have to consider if it's even profitable to stay in Egypt for the long term", he said.

Industry experts also predict that Sisi will keep breaking contracts with foreign companies such as BG and diverting gas promised for export to satisfy domestic demand.

BG's problems in Egypt have affected its LNG unit so much that it issued a profit warning last month. Blaming political turmoil in Egypt, BG cut production forecasts for the year and served "force majeure" notices to affected buyers and lenders.


Since the beginning of this year, Egypt has been diverting the maximum amount of natural gas produced by BG and its Malaysian partner Petronas based on pipeline capacity constraints, said Martijn Murphy of Wood Mackenzie.

Companies will not press ahead with new development unless they get guarantees on future export volumes.

If Egypt can't persuade companies to exploit its gas reserves, it will be forced to spend more hard currency on energy imports, creating the same dilemma it faces with wheat.

Egypt is the world's biggest importer of wheat because inefficiency and corruption undermine farming along the Nile.

Oil Minister Sherif Ismail hopes Egypt can satisfy its ever-growing energy demand from own resources, but acknowledges the government will have to resort to imports.

Until Egypt deals with issues obstructing gas output by foreign firms, it "will have to cover all its energy needs with imports, either gas or crude oil", he told Reuters last week.

Energy imports would also send a discouraging signal to foreign companies, which are becoming increasingly reconciled to the prospect of LNG exports halting entirely this summer, said Peter Hutton, an analyst with RBC Capital Markets in London.