Depleting Egypt's reserves
Amr Kamal Hamouda*
explores the complexities with which the issue of selling gas to Israel is laden
Nothing could be more ambiguous than the issue of selling Egyptian gas to Israel. The news that it is happening is all too often confirmed by the Israeli media, while in Egypt, the whole matter has always been shrouded in a peculiar silence.
From time to time, the Egyptian Prime minister or the minister of petroleum announces that there are behind-the-scenes negotiations underway with the Israelis to amend the terms of the first gas export agreement signed in 2005. These are followed by confirmations that the price has been raised to $3 or $3.25 per million British thermal units (Btu), instead of the exceedingly low price levels that had been previously agreed and which range between a minimum of 75 cents of a dollar per million Btu, and a maximum of $1.25 per million Btu, while the price of crude oil reaches $35 per barrel.
According to a report by the Organisation for Arab Petroleum Exporting Countries (OPEC) dated 1 July 2005, the price of gas was $6 per million Btu at that time. When the time for implementation of the agreement came, international price levels exceeded $9 and have now reached $11.50 per million Btu, according to the Henry Hub indicator for gas prices, which is used by the Egyptian General Petroleum Authority.
Further, over the past few weeks a second agreement to export an equal quantity of gas to Israel but at a higher price has been reported by the media.
As has continually been the case, the news has not been confirmed by the Egyptian government, and the price at which Egyptian gas is sold remains open to speculation. While some reports indicate that the price is in the vicinity of $4 per million Btu, other sources have indicated that the price is around $3.5. According to Adletic, the Israeli company that signed the agreement with the East Mediterranean Gas (EMG) company, Egyptian gas is bought at $5 per million Btu in the context of a 17-year agreement with a total value of $1.5 billion.
It also appears there is another agreement between the Israeli company Dorad and EMG at the same price for the supply of 12.5 billion cubic metres for a period of 17 years, subject to renewal for another five years and at a total value of around $2.5 billion.
The quantities of Egyptian gas covered by both the first and second agreements will go to supply Israeli power plants, among them new plants, four of which will be established by Adletic in southern Israel during the coming two years.
Now, if the price according to the second agreement is $5 per million Btu between EMG on the one hand and Adletic and Dorad on the other hand, then most probably it is less between EMG and the Ministry of Petroleum to allow for EMG's margin of profit as an intermediary entity in these deals. As such, the most probable price for the sale of Egyptian gas to EMG would be around $3.5 per million Btu. This price is still very far from international levels. It would appear that overall, there is no clarity in the relationship between the Egyptian government and EMG, which is responsible for exporting gas to Israel.
Minister of State for Legal and Parliamentary Affairs Moufid Shehab has previously stated that exporting gas to Israel was a commercial issue, while government lawyers underlined that such agreements should be understood as an exercise of sovereignty.
Amid such opacity, over the past year there has been widespread public discontent and opposition against the first gas export agreement to Israel. In addition to the unfair pricing of Egyptian gas, other flaws in the first agreement include a fixed price over a period of 20 to 25 years. With the absence of adjustment clauses, normally included in all long-term agreements, the reassessment of the price remains unforeseeable. It is worth noting that Egyptian losses estimated by independent experts resulting from the implementation of this agreement are as high as $9 million per day.
What is even more striking here is that the Egyptian natural gas reserves are limited, raising many question marks regarding the conclusion of a second and third agreement. Also surprising was the announcement made by the Egyptian General Petroleum Corporation (EGPC) that it had laid down a plan for increasing Egyptian gas exports through the submarine pipeline that extends to Israel to 120 trillion Btu. This is a 137.5 per cent increase from quantities exported during 2008/2009.
Egypt is not such an energy-rich country that it can justify such large gas exports. It appears we have doubled gas exports to Israel, while there are new agreements to supply gas to Lebanon during the coming months, and another commitment to export 1.2 billion cubic metres to Bulgaria starting 2011. In addition, there is a plan to support the Nabucco gas pipeline in Eastern Europe with Egyptian gas.
All this leaves analysts and observers wondering, and without clear data or indication, whether all this is to be considered an excess in agreements aimed at making up for the shortage in investments in the oil sector and the decline in crude oil production. Is it also an attempt to repay the sector's debts to foreign partners, which total LE600 million per year over a 10-year period?
If that is the case, it is hard to believe that this strategy alone will make up for current losses because it will only weaken the position of future reserves, especially if we know that current reserves will suffice for only 19 years. The price of crude oil has again risen to $72, and it is estimated that it may rise to $200 during the coming two years, despite the current international crisis, given that the world production of crude oil has remained relatively constant.
It is therefore imperative to preserve the natural gas that is available today in Egypt and to halt exports, especially if we consider the increasing annual rates in domestic consumption. It is estimated that domestic consumption of gas during the period 2007-2020 will reach 1,100 million tonnes. If officially proven oil and gas reserves are around 16 billion barrels -- among which 12 are gas -- which is equivalent to 2,200 million tonnes, then Egypt's share of these reserves after deducting the foreign partners' share, may in fact be depleted by the year 2020 or shortly after.
No doubt that we face a true dilemma. We know we are exporting large quantities of gas to Israel at considerably low prices while our reserves are being depleted. This casts a shadow on the energy situation in Egypt and adds to its precariousness. Furthermore, it underlines our belief that there is an absence of a clearly defined and effective energy strategy that takes into consideration both present and future needs.
* The writer is an oil analyst.