Newly elected President of Egypt Abdel Fattah el-Sisi has prioritised major infrastructure projects for his first term in office but despite the rhetoric, the North African country has a lot to do before it can start to attract significant international investment.

In a recent speech the President set out various initiatives to revive the damaged Egyptian economy. He said that the Dabaa Nuclear project near Alexandria and the Suez Canal Development project were two notable developments due to be kick-started, with an indication that a tender for the 2,500MW Dabaa will be launched before the end of the year.

Nuclear power could be part of the answer to the country’s long term power needs, but in the short term it needs to pursue conventional power developments, and that means addressing it gas supply problems.

Too much gassing

Egypt was at one time one of the largest liquefied natural gas (LNG) exporters in the world and still has significant reserve levels, but its huge budget deficit, which could rise as high as 14% of GDP next year, has all but stopped the production of new gas.

According to industry sources, those operating wells in the country, such as BG, are owed significant amounts of money by the government for purchased gas, while export operations have been mothballed in order to divert gas to domestic power assets. When sold locally, developers are having to accept payment for gas in Egyptian pounds, a highly illiquid currency given its volatility. This in turn has stifled potential new gas developments in the country.

The country is now in desperate need of imported gas but luckily, finds off the coast of Israel could provide part of the solution. Delek Group, Noble Energy and Ratio Oil, the sponsor of the considerable Leviathan field, revealed last month that they are in discussions with BG to supply its liquefaction plant in Egypt with seven billion cubic metres per year for a 15 year period. The Leviathan sponsors decided against a tie-up with Woodside earlier this year, favouring to sell through pipelines to its gas starved neighbours rather than develop a more expensive LNG facility.       

Egyptian Natural Gas Holding Company is also looking to tender LNG import projects, and has signed an agreement with Höegh LNG for the use of its floating storage and regasification units as an import terminal in the port of Ain Sokhna. The Ministry of Petroleum has also been discussing LNG shipments with Russia’s Gazprom, although it is not clear if this deal may be impacted by international sanctions on Russian companies.  

While these deals could help to ease gas supply concerns, Egypt has also taken significant steps to reduce its national gas bill. El-Sisi announced in early July that it fuel subsidies will be cut from E£144 billion last year to E£104 billion in the new budget – cutting the subsidy down from around 20% to just 13% of total government spending. In real terms this will result in a rise in fuel prices for consumers of 78%.

This significant cut in fuel subsidies will help cut Egypt’s debt levels, and should eventually free up government investment for other areas of the economy.

Need more power

Most of Egypt’s 51 power stations are gas-fired, but most are aging, with significant renovation works and greenfield construction required. Despite the new gas supply deals emerging, there is still likely to be a huge fuel deficit in the next few years, which will only be exacerbated by new gas-fired plants. The government may also look to build new coal-fired plants, after approving their use in early April, but these would also require new import agreements, which are being pursued.

No new large-scale IPPs, backed by foreign private investment, are expected to be tendered until the fuel supply situation is resolved but there will still be activity in the power sector through state-sponsored projects. The increasing number of blackouts in the country ensures that energy projects will be prioritised despite the numerous challenges.

Marwan Elaraby, managing partner of Shearman & Sterling’s Middle East practice, said: “Coal-fired, gas imports, renewables – any project with an energy component will be accelerated because of Egypt’s power shortages.”

The World Bank is helping to fund the $2.4 billion Helwan South natural gas and heavy fuel oil-fired power project, which will have a generating capacity of 1,080MW. The project will be undertaken by state-owned Egyptian Electricity Holding Company, and will also feature lending from Arab Fund for Economic and Social Development, International Bank for Reconstruction and Development, Islamic Development Bank, Kuwait Fund for Arab Development and Opec Fund.

The European Bank for Reconstruction and Development is contributing $190 million to government for the expansion of the gas-fired West Damietta and Shabab power plants, projects that are expected to cost around $900 million.

“There is a tremendous amount of support from the Gulf region. That will translate into investment by gulf players, from Abu Dhabi, Saudi Arabia and Kuwait, into major infrastructure projects,” Elaraby said. “They will be the most significant investors in the short term, but there are western corporates which are also taking an interest and just waiting for better visibility in terms of the government’s plans.”

Renewables development had previously been stifled by cheap energy from conventional sources, but with fuel shortages as they are interest in the sector may start to grow. The government said earlier this year that it was planning to invest around $1 billion into several solar power plants. Like all other power developments in the country however, any solar deals will be dependent on the government addressing significant transmission issues across the country.

New parliamentary elections are due at some point during the fourth quarter of this year, and investors will be hoping there will start to be fewer questions and more answers regarding the future of energy security in Egypt come the new year.