Saturday,18 August, 2018
Current issue | Issue 1315, (13 -19 October 2016)
Saturday,18 August, 2018
Issue 1315, (13 -19 October 2016)

Ahram Weekly

Saudi oil halted

What were the reasons behind Saudi Arabia’s decision to halt oil shipments to Egypt in October, asks Sherine Abdel-Razek

Al-Ahram Weekly

While Egypt is struggling to implement the tough new reforms needed to get its much-sought-after IMF loan, a new burden has been added to its worries.

Saudi oil company Aramco informed the Egyptian General Petroleum Corporation (EGPC), Egypt’s state oil company, earlier this month that it would be unable to supply Egypt with shipments of petroleum products for October, Hamdi Abdel-Aziz, a spokesperson for the Egyptian Petroleum Ministry, told a CBC prime time talk show on Sunday.

The company neither gave a timeline nor a reason for the suspension.

Senior Aramco officials told the Saudi newspaper Al-Mantiq that there had been no official decision to stop providing Egypt with oil. They added that Saudi Arabia was reconsidering its production quotas in the light of the last OPEC meeting that might see the Saudi daily production quota decrease by 0.5 million barrels a day.

Saudi Arabia agreed to provide Egypt with 700,000 tons of refined oil products per month for five years under a $23 billion deal between Saudi Aramco and the Egyptian General Petroleum Corporation (EGPC) during a state visit in April by Saudi Arabia’s King Salman.

According to the deal, Aramco would provide Egypt with petroleum products for five years starting from May, and EGPC would pay for the shipments at an interest rate of two per cent and a grace period of up to three years.

Abdel-Aziz told CBC that the Aramco deal was “purely commercial” in nature, meaning that while there were eased conditions on payment due to Egypt’s foreign currency shortage, the value of the petroleum product shipments would be paid according to international prices at the time of supply.

“The decision is political,” said Hossam Arafat, head of the Oil Products Division at the Cairo Chamber of Commerce. “No one can deny the tensions of recent months due to differences in the political stances of the two countries regarding Libya, Yemen and Syria.”

On Syria, Egypt is looking for a political solution that would include Syrian President Bashar Al-Assad, while Saudi Arabia is not. In Libya, Cairo is for a military solution, while Riyadh wants to see a political one.

Egypt has showed little support for the Saudi-led Coalition in Yemen. Commentators from both sides have criticised the leadership of the other on social media and in TV programmes.

But the confrontation reached its peak on Sunday when Saudi envoy to the United Nations Abdullah Al-Muallami rebuked Egypt after it voted against a Saudi-backed French resolution on Syria.

“The adverse effects of the Tiran and Sanafir Islands problem on relations are also undeniable,” Arafat said.

A decision by President Abdel-Fattah Al-Sisi in April to relinquish control of the two Red Sea islands to Saudi Arabia triggered the anti-government protests since he took office in 2014, and the decision is currently being contested in court.

Oil expert Ibrahim Zahran agrees that the main trigger behind the Saudi move is political, but points out that the Saudi economy is under pressure and is implementing austerity measures at home. It was only to be expected that the terms of contracts would be reconsidered, he said.

“Earlier this month, Saudi Arabia switched from the Hijri to the Gregorian calendar to make the working month longer as a way of cutting spending on salaries. This says a lot about the magnitude of the economic problems in the kingdom,” Zahran noted.

With Saudi Arabia having to implement austerity measures and expectations of weak growth due to depressed oil prices, the temporary halt of the oil products supply to Egypt was not surprising, said a Pharos note on Tuesday.

However, the time is critical because of Egypt’s foreign currency shortage when the country is trying to accumulate dollar liquidity in preparation for a currency devaluation.

“The crucial issue in this case is whether Egypt will still receive the promised $2 to $3 billion in deposits from Saudi Arabia within the next two weeks, which are much needed for the international reserves pre-devaluation,” it added.

Saudi Arabia, the United Arab Emirates and Kuwait gave Egypt billions of dollars after the ouster of president Mohamed Morsi of the Muslim Brotherhood in 2013. However, the Saudi support started to take a different approach last year by preferring investment to aid. Saudi Arabia’s financial support for Egypt would no longer involve “free money” and would increasingly take the form of loans that provided returns to help it grapple with low oil prices, a Saudi businessman told Reuters in April.

To compensate for the decline in supplies, the state oil buyer has increased tenders over the last two weeks. On Tuesday, Abdel-Aziz, of  the Egyptian Petroleum Ministry, said that the quantities contracted to make up for the Aramco shipments had arrived to ensure that the needs of the domestic market and maintain strategic stocks of petroleum products, stressing on the availability of all types of petroleum products in markets

Egypt imports 2.3 million tons of petroleum products and natural gas a month to meet local market needs. Local consumption amounts to 6.5 million tons monthly, 4.2 million tons of which are secured from domestic production.

The EGPC plans to allocate more than $500 million to purchase petroleum products, and Egypt plans to launch tenders to buy the fuel needed for local consumption.

In the light of the dollar shortage and growing arrears to oil producers, having to buy in the market and pay on the spot is a heavy burden for Egypt. 

“The oil import bill will be very high, keeping in mind that we import 25 per cent of our needs of diesel, 15 per cent of octane gas, and 40 per cent of butane gas. This amounts to $1.3 billion of imports per month,” Arafat said.

Both Arafat and Zahran said Egypt was lucky that the oil price was still relatively low at $53 per barrel compared to over $100 in earlier years. But they expressed concerns that in the light of the limited foreign currency there might be an oil shortage.

Egypt is also preparing for an oil subsidies cut required by the IMF to obtain a $12 billion loan facility. “Reducing subsidies might help, as Egypt can direct its savings from subsidies reduction to buying more oil from abroad,” Arafat commented.

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