Sunday, July 28, 2013

Egyptian oil and bread


Here are a couple of articles about Egypt, and the challenges of running a country which used to  rely on oil exports to fund subsidies oil and bread for the local population, but which now does not has enough oil production to support any  export oil, or find other means to continue the subsidies.

The turmoil in the Middle East shows little sign of ending in the near future, and the potential lack of enough cheap fuel for the population is a warning that the levels of unrest may continue and even get worse. There is, however, some hope for enough local supply in the near term to help with some of the indigenous problems. Consider, for example, Egypt, which has the largest population of the countries in its immediate vicinity, a population that has grown 200% in the last 50 years.

Figure 1. Growth in Egyptian population (Trading Economics)

By last December Egypt was populated by some 83.66 million folk, with little sign of change in the growth rate. Over that time, energy demand has grown, while domestic supplies of fuel have not kept up.The most significant change, perhaps, is in oil consumption, with recent data, as previously noted, showing that the country has now switched to one that must import oil to meet demand.

Figure 2. Egyptian oil statistics (Energy Export Databrowser)

The EIA puts consumption at 811 kbd, set against a production of 555 kbd of petroleum products and, for natural gas, the country produced 2.1 bcf , which can be set against a consumption of 1.8 bcf, but the balance there also is trending downwards as recent levels of discovery and development have failed to match the increase in domestic demand.

Figure 3. Trends in Egyptian natural gas statistics (Energy Export Databrowser)

The developing need for oil imports is made more difficult by the subsidies that have become an accepted part of the Egyptian economy, including not only fuel, but also bread. Fuel subsidies are reported to be at around $17.4 billion and about a fifth of total state spending. Bread subsidies, though a similarly critical part of picture, run only at about 20% of the fuel cost. To help manage costs and encourage domestic production, the Morsi government had cut back on foreign purchases of wheat, but this has now been reversed with the take-over even as the new government works to transition away from the subsidy burden. With the change, foreign governments are now also more willing to provide fuel, the United Arab Emirates (UAE) will send around a million barrels of oil this month, and Kuwait, Saudi Arabia and the UAE are promising more aid packages.

This may help with the short–term problem, which has too many political entanglements to allow any solid predictions for longer term help from outside the country, but there are potential sources of increasing domestic supplies from both the Western Desert and the Nile Delta itself.

Egypt has been supplying natural gas to Jordan, Syria, Lebanon and Israel through the Arab Gas Pipeline, with flow starting in Arish, and the leg to Ashkelon being underwater.

Figure 4. Route of the Arab Gas Pipeline with projected extensions (hydrocarbons technology)

Because of the connection to Israel, the pipeline has been the subject of a number of terrorist attacks (the latest a couple of weeks ago). However, these more often affect the flow of gas to Jordan, rather than to Israel, because of the pipeline locations, with the pipeline being vulnerable in the Sinai where it is flowing south to Taba. This problem has led Jordan to consider importing natural gas from Israel and the recently found offshore natural gas deposits being developed in that country. Flow from the Tamar field started on March 30th tapping into the estimated 8 Tcf therein, while flow from Leviathan is anticipated in 2016.

The possible presence of oil-bearing strata at a lower depth in the Levant Basin has led Noble to plan an offshore well to go down 31,200 ft to a potential field holding perhaps as much as 1.8 billion barrels of oil. However, Noble estimates the chance of success at 25%.

The recent success in finding these resources within the Levant Basin suggests that the potential for other discoveries in future years, with significant possible impacts on the local economies.

Figure 5. Location of some of the discoveries and developments in the Levant Basin (USGS)

The problems limiting future exploration in the region tie in with the conflicts and internal disruption that seems to spread to most of the countries in the above map. But in the more immediate short term, Egypt is reducing exports in order to meet the growth in domestic demand, while importing natural gas, currently as a gift, from Qatar.

In the longer term, as the Israeli fields come on line, it might be possible to change the direction of flow of the Arish-Ashkelon pipeline to carry Israeli gas into Egypt. There are thus potential technical solutions to getting fuel to Egypt to meet their growing need.

However,this does not address the underlying problem of how Egypt is going to be able to pay for that fuel (not to mention the bread). Even with a potential glut in global natural gas prices, without a stable economy Egypt is not going to be able to pay its import bill. This was evident towards the end of the Morsi government, when a lack of cash, or hard credit made it more difficult for the country to assure itself of enough imported oil to meet demand. The continued turmoil will keep away the tourists that could provide the economy with enough funds, while the lack of international recognition of the current regime is currently keeping the IMF from providing any help.

A couple of hundred years ago, deriding the people's need for bread reputedly led one ruling family to the guillotine. In the time since the people have also come to expect that they can also get fuel. Until both demands are satisfied it may be more likely than not that rule in Egypt will remain unstable, with the presence and influence of the competing mobs making rational decisions less achievable and the situation worse. (And they are also blowing up pipelines in Iraq.)


Egypt’s future crude oil import requirements for 3 population scenarios

by Matt Mushalik, originally published by Crude Oil Peak  | JUL 19, 2013

Egypt sits on a key strategic location between North Africa and the Middle East, where almost 4 mb/d of oil transit through the Sumed pipeline and the Suez canal.

Shipping firms brace for Suez disruption as Egypt turmoil mounts

20 years after its oil peak this country is now embroiled in a serious energy crunch. Crude oil production will decline between 3 and 4 % pa while population may grow from 80 million to 100 million by 2030. It is in the world’s interest to make sure that Egypt does not descend into chaos which will impact not only on global oil markets but also on neighbouring countries. This will require to help Egypt with importing crude oil. Here are some simple calculations what kind of quantities would be involved:

In this graph we have plotted

3 population scenarios (LHS scale) for  3 different fertility levels from the UN Population Division

actual crude oil production (dark blue line, RHS scale)
crude oil production projection from Jean Laherrere (red line)
2012 production level (horizontal dashed line)

and calculated until 2050

Cumulative domestic production of 4.2 Gb
Crude imports to offset decline and maintain current levels: 3.7 Gb
Additional import requirements of 1.7 Gb for the lowest population scenario in order to keep current consumption levels
Further additional import requirements of 0.7 Gb each for the higher population projections

We translate this into daily oil requirements:

In the next years increasing quantities up to 200 kb/d by 2020 are needed.

This graph shows uneven distribution of population and crude oil production in Egypt and neighbouring countries between Libya in the West and Iran in the East. Egypt with the highest population is more vulnerable than Iran. Note that the total population of this group of countries is 266 million.

Oil production per capita is an important parameter for wealth creation.  The most populous countries Egypt and Iran are at the bottom of the scale. Yemen is the last in the list.

So where will the oil come from to help Egypt? This article gives us a foretaste of what is to come:

Egypt closer to sealing $1 billion Libya oil deal

CAIRO — Egypt is inching closer to getting a letter of credit to back a $1-billion much-needed oil supply contract with Libya, but the deal still faces a stumbling block in Tripoli, which fears being dragged into Cairo’s economic woes, officials said.

State-owned Egyptian General Petroleum Corp. (EGPC) has asked the National Bank of Egypt for a $1 billion guarantee that will allow it to complete its side of the oil deal with Libya, a bank official said. However, the Libyan government has yet to decide that a letter of credit from that bank is strong enough to overcome the risk of any losses if EGPC is unable to pay for the oil, said a government official.

Failure to agree the deal would be a significant blow for Eqypt because it is seen as vital for easing the country’s fuel shortage. An even bigger oil supply deal with Iraq has faltered due to similar concerns over financial guarantees.

“We have asked EGPC to give us first a guarantee from the finance ministry before we study its request since its loans have exceeded 20% of our capital base, or about 22 billion Egyptian pounds ($3.13 billion),” Mahmoud Montaser, NBE’s corporate banking and syndicated loans senior group head told The Wall Street Journal

“We got the guarantee from the finance ministry and hopefully the letter of credit will be issued soon,” Montaser, who is also a board member of the state bank, said.

Egypt has been facing a diesel shortage since last year, leading to rising food costs, long queues at filling stations and electricity blackouts. Egyptians have also taken to the Internet and streets to protest daily power cuts that they say are getting more frequent and lasting longer.

Neighboring Libya, an OPEC member, had agreed in March to supply Egypt with up to 1 million barrels a month of crude oil, with a generous credit term of up to a year, which would help Egypt with both its fuel shortage and its cash flow problems.

Egypt has so far been unable to provide a guarantee for the payments to Libya, which is concerned about the political and economic turmoil in the country. Even with a letter of credit from the NBE, Libya is still reluctant to give a stamp of approval.

“The National Bank of Egypt. It’s not a triple A bank,” said a Libyan official familiar with the deal. This means that going through with the deal on that basis, “will require…guarantees from the central bank of Libya,” the official said.

The official said the Libyan Foreign Bank–in charge of providing a $1-billion credit line for the country’s National Oil Co.–was concerned that exposure to such large risks in the EGPC deal would impede its own financial flexibility, especially when it comes to issuing letters of credit to other commercial partners.

The Egyptian fuel crisis has compounded broader economic problems in the country, which in 2011 overthrew the government of President Hosni Mubarak in a popular uprising. Egypt’s current government, which is dominated by Islamist party the Muslim Brotherhood, is short of funds and has been negotiating a $4.8-billion loan with the IMF, which analysts and investors say is critical for the country. IMF officials left Cairo in April without agreeing on the terms of the loan.

Iraq has also offered 4 million barrels of oil a month to Egypt, with payment deferred for three months with no interest incurred. However, the country’s oil minister, Abdul Kareem Luaiby, said last month the deal will be completed only if the North Africa country provided a letter of credit “opened in internationally recognized banks prior to the supply, but Egypt has so far [been] unable to open such letter of credit.”

Egypt’s energy import needs are rising because of a drop in its own hydrocarbon production, stemming from a slowdown in exploration over several years of civil unrest. EGPC has also been paying hefty premiums to import fuel because of the weaker Egyptian pound. It is struggling to pay debts of about $5 billion to foreign energy companies, according to officials familiar with the situation.

Whoever comes to power now faces the same situation. If the problem of fuel shortages in Egypt cannot be resolved by oil imports, violence may impact on other countries and there is the prospect of one the world’s chokepoints in serious danger. In the end there will be no other choice than OPEC supplying as much oil as is needed to keep Egypt going, on credit or at discounted rates. That oil of course will not be available to those who thought they can always buy oil for their pleasure.

Related posts:
4/7/2013 2/3 of Egypt’s oil is gone 20 years after its peak

31/1/2011 Egypt – the convergence of oil decline, political and socio-economic crisis

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