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Anna Manafova

Expert at the Institute of the Middle East, graduate of International Institute of Energy Policy and Diplomacy at MGIMO

In less than two years, the hydrocarbon sector of Egypt passed two symbolic milestones. In 2014, the used-to-be-gas-exporter first became a net importer of natural gas. At that time, there was little prospect for Egypt’s oil & gas exporting potential. However, the discovery of the supergiant gas field Zohr in August 2015 and the events that followed reversed the situation, reviving hope for Egypt to win back its role of gas exporter. Who will take part in developing the Egyptian hydrocarbon sector, and will this country return to exporting its natural gas?

In less than two years, the hydrocarbon sector of Egypt passed two symbolic milestones. In 2014, the used-to-be-gas-exporter first became a net importer of natural gas. At that time, there was little prospect for Egypt’s oil & gas exporting potential. However, the discovery of the supergiant gas field Zohr in August 2015 and the events that followed reversed the situation, reviving hope for Egypt to win back its role of gas exporter. Who will take part in developing the Egyptian hydrocarbon sector, and will this country return to exporting its natural gas?

Decreased Production and Increased Consumption

In recent years, Egypt has been a net-importer of oil and gas. The North African country began importing crude oil and oil products in 2009. Five years later, Egyptian had to embark on importing natural gas. For eight years, oil production in Egypt stood at 700 thousand barrels per day. The production of natural gas has been decreasing gradually, having fallen 27% since 2009 reaching 45,6 billion cubic meters per year in 2015.

Yet it was not the declining production but the rising consumption – of both oil and natural gas – that constituted a bigger challenge. Over the recent ten years, the demand on natural gas has soared 31%, and the consumption of oil skyrocketed by 34% [1].


The situation that Egypt found itself in (with the demand outpacing the production of petroleum resources), sets a compelling example for the other countries of the Middle East. The increase of domestic energy consumption affects even the biggest oil and gas exporters in that region, such as Saudi Arabia, Iraq, Qatar, Kuwait, and Iran, liming the amount of their crudes available for exports. The scale of the problem only aggravates for the states with lower production rates (e.g. Egypt and Algeria).

Energy demand growth in these states is driven by a number of factors. First, the population is increasing rapidly. According to the World Bank, the population of Egypt has increased by almost 20% in the past ten years, adding another 15 million to the number of people living there. The situation is similar in Saudi Arabia, Iran, Kuwait, Qatar, and many others. Second, the economies of these countries are far from being energy efficient: final energy use per unit of GDP is considerably higher there than, for example, in the developed states. Third, and probably the most important point, Middle Eastern states allocate colossal amount of money on fuel subsidies. Not only does this policy imply great budget expenditures, but also it incentivizes the population to use more energy, as its cost is relatively cheap.

With the oil prices having fallen, many of the countries of the Middle East have embarked on subsidy reforms. The government of Egypt also announced plans to decrease subsidies. When the oil prices were reaching $90-$100 per barrel, reforms of this sector boded greater implications for the local governments, as they would have had to deal with higher increases in domestic fuel prices, and consequently with the public disapproval. Cheap oil helped Egypt decrease the amount of money allocated to fuel subsidies. However, further action is needed. In fact, the IMF has reiterated that the states of the region should abandon fuel subsidies altogether. The tentative attempts of reforms taken in Egypt a few years ago failed miserably. The public dissatisfaction with the incessant electricity shortage was one of the factors behind the fall of the governments of H. Mubarak and of the “Muslim Brotherhood”. The decline in oil prices and budget revenue contraction pushed the countries to take action.

Subsidy reforms have commenced, yet this does not mean that in the foreseeable future energy demand will slow down in Egypt or in the region in general. The population will continue to grow, and energy efficiency is unlikely to change for the better. In spring 2015, probably accounting for these assumptions, the government of Egypt contracted two floating regasification terminals to import LNG. Since then, LNG has become an important item of import on the national balance sheet.

It is worth noting that Egypt got appreciable help from its allies – the GCC countries with Saudi Arabia taking the lead. Until recently, the Saudi kingdom not only provided financial aid for Egypt, but also supplied it with petroleum and petroleum products.

Dependence on foreign energy resources, however, proved to be an onerous burden for the Egyptian economy. Foregone earnings from gas imports, a large energy bill, and the reliance on occasionally unpredictable partners did nothing but exacerbat the difficult economic situation in the country. This led Egypt to running up a bigger external debt and plunging it into a financial crisis.

As for the unpredictable partners, the recent decision of Saudi Arabia to discontinue supplies of petroleum products to Egypt should not be left unnoticed. The Saudis halted exports in October 2016 providing no notice or explanation, with the supplies being not mere grant aid, but part of a contract signed in April 2016 Saudi Aramco agreed to supply Egypt with 700 thousand tons of petroleum products monthly for five years). Under the consequent circumstances, Egypt had to buy additional amount of products on the spot market and rush into signing new supply contracts with other exporters (e.g. Iraq).

A Pleasant Surprise

The supergiant gas field Zohr was found by Italian Eni in August 2015, only a few months after Egypt acquired its first LNG importing facilities. Situated 120 km off the coast of Egypt, the field contains an estimated 850 billion cubic meters of natural gas. The production on Zohr is to start by the end of 2017, and the production is to reach as much as 54 million cubic meters of gas per day by 2019.

Noteworthy is that the good news kept coming, as the Zohr discovery was followed by many other findings. Over the past year, several gas fields were found including significant gas reserves. For instance, the fields discovered on the North Alexandria block could produce up to 35 million cubic meters per day by 2019. There were other, smaller findings as well.

Oil and gas exploration is not stopping; if anything, Egypt is attracting more international companies to exploration projects. Such energy giants as BP, Eni, and Total were recently awarded new exploration licenses.

Moreover, the success of Egypt has triggered other processes. The companies mentioned above entered licensing the round for exploration blocks in Cyprus. The third bidding round would not be possible if not for the right conjuncture in the form of the discovery of Zohr – a fact acknowledged by Cypriot officials the field is located close to the Cypriote licensing blocks). In addition, Zohr gave impetus to the Eastern Mediterranean states with newly explored hydrocarbon reserves – Egypt, Israel, and Cyprus – to strengthen their cooperation.

By 2019, the government of Egypt is planning to increase natural gas production by approximately 70 million cubic meters per day. This figure is sure to rise after taking into account the reserves discovered in the last quarter of 2016. In fact, many experts believe that there is a great amount of both onshore and offshore hydrocarbon reserves yet to be discovered there. This makes Egypt drift away from the image of being a state doomed to be a net energy importer, to that of a country with exporting potential.

Where is Russian Business?

Russian business is not staying on the sidelines. In December 2016, Rosneft announced an unexpected deal of buying a 30% share in the Shorouk block, which includes Zohr field.

Before that, only Lukoil expressed interest in investing in upstream projects in Egypt, where it had already had some investment in oil and gas production. Lukoil reportedly negotiated with Eni about buying a 20% stake in the Zohr field. There was no information about any other Russian companies’ interest in Egyptian projects. It is worth noting that the deal with Rosneft allowed the Italian firm to get close to its goal of reducing their share in the Zohr project to 50% [2]. Russian reluctance to enter exploration projects in Egypt is a logical choice on the one hand, yet indefensible on the other.

On one hand, this is because unlike European companies, Russian oil and gas business has little experience of exploration in Egypt. Traditionally, the European BP, Eni, and Total have the strongest positions in North Africa. These companies have more information about the geology of Egypt. Besides, Russian companies are generally not active abroad. Foreign projects are not and have never been a priority for Rosneft, Gazprom, or the previously independent Bashneft. The decision of Rosneft to enter Zohr project is not an exception, as the company is investing in the project on the production (not exploration) stage. With the decline in revenues and the necessity for companies to optimize their business, foreign investment is losing its momentum. This is true even for Lukoil, which is the most experienced and successful Russian corporation in terms of foreign upstream projects. Finally, doing business in Egypt entails certain financial risks. The economy is in poor shape: the debt to foreign companies has not decreased and has been 3,5 billion dollars for more than a year. Egypt is indebted to both exploring and producing companies, and to LNG suppliers. In summer 2016, traders reportedly reversed the direction of tankers heading to Egypt, instead directing them to other buyers because of the failure of Egypt to pay them.

On the other hand, recent events have proved that Egyptian mineral wealth are underexplored, and the country has considerable potential. Moreover, Egypt is distinguished by relatively simple geology, simplicity of production, high development of industrial and exporting infrastructure, and consequently, cheap resource production costs. It is possible that Russian companies would have expressed more interest in Egyptian projects, had the oil and gas prices been higher and the profits been greater.

However, Russian companies have begun supplying oil and gas to Egypt. Rosneft and Gazprom signed contracts to supply LNG there. Rosneft’s LNG cargos of are delivered in accordance with a two-year contract, as well as bought on the spot market. It is worth noting that despite new gas discoveries, exporting natural gas to Egypt is still relevant. It is, however, telling that in December 2016, the government of Egypt decided not to hold a tender for rental of its third floating regasification unit (for LNG imports). The reason provided by the officials is the lack of need for such facility. This signals to Egyptians that the government counts on an increase in national gas production. It also comes as an indication of how fickle the situation in the oil and gas sector of Eastern Mediterranean is, with the Egyptian government having been planning to rent the new LNG importing facility no longer than two months earlier, in October 2016 and for the contract to be signed in late 2016 - early 2017.


In general, the oil and gas sector of Egypt is still full of ambiguities. In 2016, the production continued to fall, but this trend will change in a year or two, as the chances are high that new major upstream-projects will not face difficulties. However, local demand growth will keep negatively affecting Egypt’s export capacity. If subsidy reform will result in slower growth in energy demand, there is hope that Egypt will return to exporting its natural gas in the next seven years. International business seems to be positive about the future of the Egyptian energy sector. The proof is that the biggest European companies were awarded new exploration licenses. Russia, however, stands in the sidelines, expressing little interest in entering exploration projects. The main reason for such reluctance is the traditional focus on local upstream-projects and the need to cut investment, especially in relatively risk high projects.

1. BP Statistical Review of World Energy. June 2016.

2. In November 2016, BP signed a deal with Eni to buy a 10% stake in the Zohr project with the option to buy further 5% stake in the next year by a fixed price.

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