LNG Market Analysis:
A new dawn in Egyptian gas markets

01 October 2015 | Ludovic Aldersley, ICIS Deputy Editor, Global LNG Markets


The arrival of the country’s second FSRU this week coincides with final preparations for a new gas regulator. The latter has less importance to LNG sellers but would affect Egypt’s return as a potential exporter.

The pace of developments in Egypt’s gas sector could see it swing from LNG exporter to importer and back to net exporter within five years.

It represents a showcase in how LNG can respond quickly and flexibly to gas deficits. A testament to the value that floating storage regasification units (FSRUs) can provide.

The thirst for LNG has been so great this year that Egypt’s EGAS has secured not one, but two FSRUs, on a fast-track basis.  The second arrived at Ain Sukhna on 30 September and has been nominally brought in to cater for the fertilizer sector. The first, meanwhile, continues to be dedicated to power generation. Downstream gas prices across sectors have been affected by ongoing subsidy reform which, although largely irrelevant for LNG participants, would affect the balance sheet of state-owned LNG importer, EGAS.

A shadow gas regulator has been in place within EGAS since the first quarter of this year and Egyptian authorities expect it to shortly become established as an independent institution in charge of overseeing the liberalisation of Egypt’s gas market. While tied to the gradual, and as yet unannounced, next steps in Egypt’s subsidy reform program, the liberalisation of Egypt’s gas market will involve the development and subsequent application of gas network codes, transportation tariffs, and third party access.

The goal is to ensure more efficient energy markets and greater participation by the private sector. Furthermore, by strengthening regional trading links both in gas and electricity, Egypt has sought to enhance its energy security, and take advantage of its pivotal geographical location in the region.

Its domestic gas deficit has not only been the driving force behind the mothballing of three liquefaction trains in Egypt, and the temporary contracting of FSRUs at Ain Sukhna, but it has also driven nearby Jordan and Israel to install their own FSRUs.

The region has been short of locally produced gas as mature fields deplete, and the development of gas discoveries in Israel and Cyprus have taken time. Those discoveries were recently eclipsed by Eni’s find in Egypt at the end of August. The gas from the 30 trillion cubic feet (tcf) Zohr field will also take time to develop but once it, and its Cypriot and Israeli counterparts, start producing, the FSRUs in Israel, Jordan and Egypt will move on.  

Excess gas in the region will then be exported, probably from the idle plants on Egypt’s Mediterranean coast. It’s a challenging transition period for a regulator, according to Leigh Bolton, managing director of Holmwood Consulting.

The allocation of gas to various end markets inside Egypt is already an important issue for EGAS. As the ability for excess Egyptian gas to feed export plants increases, where gas is allocated will only gain in importance. The path towards a total phase out of subsidies can help but needs to be carefully balanced with the needs of Egyptian consumers.

Power outages that have led to black-outs in Cairo, and elsewhere in Egypt, have now become a thing of the past. Infrastructure projects, not just for the import of LNG, but to expand downstream gas networks, have been significant and the implication is that gas demand can continue to grow. EGAS will continue to need LNG imports as a significant, albeit interim, buffer to domestic production. The bigger question is that of varying time-scales for upstream supply and downstream demand and the incentives of different stakeholders.

Thirst for LNG imports

Unable to bring enough LNG into its first FSRU, EGAS has asked for extra deliveries to Jordan until it receives its second FSRU.

Two more deliveries at Aqaba for EGAS are expected in October but by the end of the month, EGAS expects its second FSRU to berth across the jetty from the first in Ain Sukhna.

The readiness of the jetty has been delayed by about a month, meaning that the second FSRU -  named the BW Singapore - will receive its commissioning cargo elsewhere nearby. The first commercial cargo, to be received in a ship-to-ship transfer at the jetty is then expected during the first week of November.

Earlier this year, EGAS awarded five LNG suppliers through a tender process for delivery to the first FSRU - named the Hoegh Gallant - and a further two suppliers through inter-governmental agreements. Delivery prices agreed during the first quarter of this year are understood to have ranged from approximately 12% to 14% of crude oil.

The prices to be concluded in an ongoing tender for delivery to the second FSRU are likely to be lower on the back of a lengthening global market. Up to 45 cargoes were initially sought in this tender for delivery between October this year and December 2016. The delay to the jetty has pushed back the delivery start date, as well as the award date. An expected award on 15 October, for delivery starting November, is likely to involve up to 42 cargoes out to the end of 2016. That would equate to, on average, three deliveries every month, but the nameplate capacity for the FSRU would be nearer to five. EGAS could come back to market with smaller tenders, particularly if it awards fewer than 42 cargoes, but an earlier supply agreement with Russia’s Rosneft should cover most of EGAS’s Ain Sukhna capacity. The companies finalised a 24-cargo supply contract at the end of August when Egyptian President al-Sisi visited Moscow. It marked Rosneft’s entry to the traded LNG market, with the supplier said to have been in talks with various counterparties to source supply over the summer. The first Rosneft delivery to Ain Sukhna is scheduled over the fourth quarter.

An earlier inter-governmental agreement with Russia led to Gazprom signing a supply agreement for 35 cargoes to EGAS for the first FSRU. While EGAS has concentrated on LNG procurement for delivery in 2015 and 2016, it has contracted to charter both FSRUs for five years up to 2020. Although some deliveries were said to have been earmarked from 2017, since the 30tcf gas discovery at the end of August, there have been indications that EGAS has refused to approve or commit to anything in or from 2017. A source in EGAS declined to comment.

Egyptian gas supply

The speed with which the estimated 30tcf of offshore reserves in the Zohr field can be brought to market is critical in determining how long Egypt will continue to depend on LNG. It is in the best interest of both offshore operator, Eni, and the Egyptian authorities to develop the resource as quickly as possible. First gas could flow to idle liquefaction plants in late 2016 or early 2017, according to an Eni spokesman, adding it was still too early to give precise targets.

That timeline is deemed very ambitious by independent consultants. A number of significant engineering and commercial challenges will need to be overcome to keep the development on any sort of fast-track.

There may be some scope to tie-back into under-utilised existing pipeline infrastructure offshore which could save some time, according to Bolton, but Eni still needs to drill appraisal, delineation and then production wells. This process alone could normally take at least 24 months. The discovery covers an area of 100 square kilometres in deep water. That equates to a surface area of about 10 times the size of Eni’s Area 4 block in Mozambique.

Commercially, Eni will want an attractive gas sales price in order to justify capital investment. While the price may be more attractive if the gas is liquefied and sold on global LNG markets, Egyptian authorities will want to secure their domestic energy security. In the longer term, it would not make sense for EGAS to continue paying for expensive LNG while domestic gas is used for export, Bolton said.

Most opinion from various market sources on the start up of Zohr points to at least five years. It should not be ruled out that EGAS could still terminate their FSRUs before their five-year expiry dates, according to Bolton. Not approving deliveries past 2017 would be a strong signal as to when EGAS expects domestic production to pick up.

Away from Zohr, UK-based BP expects production from an untapped 5tcf resource in the West Nile Delta (WND) to start in 2017. The company agreed the final commercial terms for its $12bn investment in March this year. It expects production to reach up to 1.2bn cubic feet (bcf)/day, equivalent to about 25% of the country’s total current gas production. The production will feed straight into the Egypt’s national gas grid. This extra production expected in 2017 is about the same as Egypt’s LNG import capacity. The standard regasfication rate for the Hoegh Gallant is 500mcf/day while the peak regasification rate of the BW Singapore is 750mcf/day. Combined that makes for about 8mtpa of nameplate LNG import capacity that is matched by a single, but important, domestic gas development under construction.

Egyptian gas demand

Domestic gas demand is not expected to stay still.

The Egypt Natural Gas Connection project, partially funded through a World Bank loan secured in 2008, is expanding the gas grid to an extra 2.5m households over 2014-2017. Its purpose is to switch consumption of liquefied petroleum gas (LPG) to natural gas across 11 of Egypt’s 27 governorates. The implementation of the World Bank’s part of the project has already been completed at the end of October 2014. It surpassed its target of 300,000 household connections within Greater Cairo by 33,000, thereby reducing LPG demand by 132,118 tonnes/year, according to a 2015 World Bank Results Report.

Gas is also widely used outside of the residential sector, particularly in the power generation and fertilizer industries. A range of other industries from cement to brick production to metals and glass and ceramics also use gas from the grid, each with different pricing arrangements set by the government.

Most power generation capacity in Egypt is gas-fuelled. In times of gas shortage, fuel oil has been used, where possible, as a substitute. Authorities say this substitution peaked in 2014 and, through LNG imports, gas has been reaffirmed as the cornerstone of Egypt’s power sector. But there is a desire to reduce reliance on gas by introducing more renewables into the power mix. Oil and gas makes up 91% of the power mix currently, but last year’s launch of a feed-in tariff programme aims to add 4.3GW of solar and wind capacity by the private sector by 2019. More renewables can also mean more gas-fired combined cycle power units. Germany’s Siemens and the Egyptian government reached firm agreements earlier this year to build the 4.4GW Beni Suef power plant, south of Cairo, alongside the installation of 2GW of wind power capacity. Under the agreements, Siemens will propose to build additional combined-cycle power plants with a capacity of up to 6.6GW, in effect potentially increasing Egypt’s power generation capacity by up to one third mostly by 2020, according to Siemens.

The extent of gas demand growth in Egypt has even underpinned talks for a third FSRU. Although these were at preliminary stages before the Zohr discovery, and the project’s economics may be impacted by the changing prospects for domestic gas production, the demand outlook particularly from the private sector is bullish. The firm availability of gas through LNG imports, as well the prospect of a more liberalised market with third party access, are key to companies such as Cairo-based energy distributor TAQA Arabia.  

Liberalisation and the regulator 

Contracts for the supply of regasified LNG to the fertiliser market and elsewhere from the second FSRU are still ongoing, according to sources close to the buy and sell side in Egypt. While EGAS may not recover the cost of LNG procurement through downstream sales, the opportunity for buyers to secure firm gas supply can mean a willingness to pay EGAS a higher price for regasified LNG than domestic gas. As recently as last summer, during the peak season of power generation demand, most urea exporters had to shut down as gas was diverted to other sectors deemed to have higher priority. Higher feedgas costs for firm supply can, to varying degrees, be passed on to end consumers, while the cost of not producing at all simply means zero export revenue.

Affordability across different sectors varies but the key to a more efficient market is to foster the development of numerous sellers to cater for different buyers. Egypt has already undergone various early phases of liberalisation with the introduction of private local distribution companies (LDCs) from 1997. International oil companies brought in over $1bn of foreign investment as a result of that early phase to develop gas infrastructure and integrate across the value chain, according to TAQA. From one state monopoly emerged seven privately owned LDCs and two state LDCs using gas networks that cover 16 governorates. However, the extent of embedded subsidies and the monopoly, held by EGAS, of upstream supply to the LDCs, means the market is still currently far from liberalised. But this too is changing as the moves to reform the Egyptian Energy Sector from 2012 start to bear fruit.

At an international economic summit held by the Egyptian President at Sharm El Sheikh in March, news that a shadow gas regulator had been set up within EGAS was announced. After an interim period of 6 months, the plan was to have a “fully independent regulator established”, although as of today, a source within EGAS said it is still sitting in EGAS as a shadow regulator. 

While it is expected to be shortly transferred from EGAS, it may take a further two years before it is fully set up as an independent regulatory body. The EU has provided technical assistance to the reform programme which is due to end in December but a possible extension is currently being studied, according to a European Commission spokesperson.

The shadow regulator was envisaged to be transferred to the Ministry of Petroleum for two years after its 6 month incubation period in EGAS, the spokesperson continued. The regulator’s role, when active, would be to license and monitor market operation and performance as part of a new legal and regulatory framework, in order to promote competition and facilitate the additional gas supplies, needed to sustain Egypt’s demand growth.

A key aspect to this is third party access, allowing independent suppliers to directly enter supply agreement with gas buyers without the need for a state-owned intermediary. This would likely happen first through pipeline infrastructure but a source within EGAS said it also applies to LNG.

“I can’t say when it will happen but the idea is that there is room for private companies to stand by EGAS and import LNG independently,” the source said, “and eventually also to supply their regasified LNG to customers.” At the moment that may not appear attractive given the way downstream subsidies are structured.

A new government was appointed over the summer with a new minister of petroleum sworn in on 19 September. The new cabinet is hoped to build on the first steps of subsidy reform introduced in the summer of 2014. The new petroleum minister has already affirmed his commitment to increase gas delivery rates to 1.2m residential units over the current fiscal year.

About ICIS

ICIS is the world's largest petrochemical market information provider and has fast-growing energy and fertilizer divisions. Our aim is to give companies in global commodities markets a competitive advantage by delivering trusted pricing data, high-value news, analysis and independent consulting, enabling our customers to make better-informed trading and planning decisions. We have more than 30 years' experience in providing pricing information, news, analysis and consulting to buyers, sellers and analysts.

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