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Abu Dhabi, UAEFriday 21 September 2018

Egypt opening its gas market will fuel growth

Foreign investment is expected to climb after the country opens its natural gas market

Egypt moves forward with its privatisation efforts as it vies to attract investment and revive its economy Amr Nabil / AP Photo
Egypt moves forward with its privatisation efforts as it vies to attract investment and revive its economy Amr Nabil / AP Photo

The decision by Egypt, north Africa’s largest economy, to open its natural gas market will help fuel growth and investment from exploration and production.

Egyptian president Abdel Fattah El Sisi signed a new law this week that established a natural gas regulatory authority to oversee licensing and development of opening the gas market – a step that fits in with Egypt’s reform narrative.

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This has been more than two years in the making and while expected, "still long overdue," said Allen Sandeep, director of research at Cairo-based Naeem Brokerage.

The push towards a more open market will be a boon to the country which was rocked by the 2011 Arab uprisings and led to the end of former president Hosni Mubarak's rule. The turmoil unsettled investors, exacerbated unemployment and augmented capital flight. The Egyptian pound lost half its value against the US dollar after the central bank devalued the currency last November in order to secure a US$12 billion loan from the International Monetary Fund. As part of the country's rebound, its adhering to a structural reform programme, which through subsidy cuts and new taxes will help check the government's fiscal deficit.

From an industry perspective, the move to a more open gas market translates into winners across the board from upstream to mid and downstream.

The exploration and production companies have historically negotiated contract prices with the government in advance, which adds a layer of risk as unforeseen circumstances could increase the price to drill or extract. If this happens, a company could still be required to executive activities at a deficit. “That definitely makes a lot of flexibility which will increase foreign investments,” Mr Sandeep said.

Sharjah-based Dana Gas is one company that stands to benefit from the new law with first quarter output from its El Wastani onshore gas processing plant at nearly 41,000 barrels of oil equivalent per day. Dana Gas said that this was a welcome development keeping in line with recent reforms in Egypt’s hydrocarbon sector.

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There had been a degree of liberalisation of gas pricing or “at least a pragmatic realisation that gas prices had to be increased to stimulate domestic exploration and production, with successful results”, according to Dana Gas chief executive, Patrick Allman-Ward.

“This is the logical next step to allow market forces of supply and demand to come into play in the domestic market,” he said. “I would expect this to also be a healthy and successful development for both suppliers and consumers.”

Companies were getting a standard price from the Egyptian Natural Gas Holding Company (Egas) at US$2.65 per million British thermal unit (btu), though there had already been some variation for pricing structures based on individual cases. This was particularly true for offshore assets that have recently come online, requiring higher prices to justify the economics. But instead of the government dictating the structure, now the market will determine the true prices on a case-by-case basis.

The other opening is for private companies to supply natural gas to households through their own mechanisms, providing customers the ability to bargain for better pricing.

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Though president Sisi’s decree also includes the ability for private companies to import natural gas, Mr Sandeep said this was likely further off in the future.

"To import liquefied natural gas, companies will need to gain access to the national grid,” he said adding that it wouldn’t be a simple process. “And the pricing tariffs charged on the pipeline should also be flexible as a result,” he said.

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