Then and now

In the blistering summer of 2014, Egyptians were facing spontaneous electricity blackouts for up to six hours a day, waiting hours in gas station lines often long enough to stretch across entire neighborhoods, and enduring hundreds of terrorist attacks targeting infrastructure.

The energy industry was operating at just 70 percent as a result of a supply shortage that only added to high unemployment figures. Consumption surpassed production, and when the government diverted oil and gas ordinarily allocated for export to the local market, it accrued billions of dollars in debt to international oil companies. The energy crisis of 2013/14 was not the first Egypt had faced; it was just the most recent chapter in Egypt’s long and turbulent history when it comes to energy.

Fast forward six years, Egypt is achieving self-sufficiency in natural gas, there’s an oversupply of electricity, and the country has paid off more than 80 percent of its international oil debt. The discovery of the largest gas field in the Mediterranean, Zohr, in 2015 made Egypt an attractive place for gas investments. This resulted in natural gas investments increasing by 13.29 percent in FY2016/17. Egypt is now investing in renewable energy such as solar and wind as it has diversified the sector and is expected to help pave the way to future investment and prosperity.

With its successful turnaround, strategic location, and extensive infrastructure, Egypt is repositioning itself at a different level that seemed impossible in the summer of 2014 — as a regional energy hub for not only Europe and the Middle East, but also for Africa.

It is useful to reflect on the successful transformation of Egypt’s energy sector while also evaluating where the sector stands today and how it will react to the twin challenges of the COVID-19 global pandemic and the oil price shock.

Reform, reform, reform

From 2014 to 2016, the sector underwent vast reforms that included cutting energy subsidies while also quickly developing the recently discovered Zohr gas field.

In June 2016, the Ministry of Petroleum and Mineral Resources (MoP) launched the Oil and Gas Modernization Project (OGMP). The OGMP’s goal is to liberalize the petroleum market, introduce innovation, and restructure the industry across the entire value chain to meet the needs of the 21st century. With its focus on ministry-wide reform, the project also created a new model for other sectors to follow.

A few months later, in November 2016, Egypt signed a three-year, $12 billion International Monetary Fund (IMF) loan agreement that was packaged with a reform agenda focused on three key areas: monetary, fiscal, and structural reforms.

More specifically, Egypt shifted to a flexible exchange-rate regime. This included floating the Egyptian pound (EGP), which reduced its value by 50 percent overnight. Fiscally, Egypt decreased public debt by cutting fuel subsidies while expanding spending on vulnerable groups. Structurally, it implemented policies focused on simplifying bureaucratic processes as much as possible.

Rapid progress on implementing reforms and its recent natural gas discoveries led to renewed interest among foreign investors in Egypt's energy sector. The reforms also led to a growth in GDP in Egypt of 5.6 percent in FY2019 compared to 4.6 percent in the previous three years. Additional improvements included “generating a solid primary budget surplus, reducing the debt-to-GDP ratio, and replenishing foreign reserves.”

More is needed

It is important to highlight that while what was achieved has been a great success, more reform is necessary for Egypt to fully maximize its potential. It must also be emphasized that while the macroeconomic success of the economy is commendable, it was not without suffering. For this reason, Egypt, with the support of the World Bank, created social safety net programs like Takaful (Solidarity) and Karama (Dignity).

Takaful and Karama are cash transfer programs aimed at shielding Egypt’s most vulnerable citizens from negative economic effects. These citizens receive a monthly conditional payment of anywhere from EGP325 to EGP450 ($20.70-28.65). Karama and Takaful support around 2 million households, which amounts to 10 million individuals, or around 10 percent of Egypt’s population.

While Egypt has become efficient in energy generation, further reform is required in its transmission and distribution capabilities. Outdated transmission and distribution networks continue to cause interruptions. To resolve this issue, the government has invested EGP25 billion ($1.6 billion) between 2019 and 2020, and is also planning on spending EGP12 billion ($760 million) during the current fiscal year. The government and private sector are updating the national grid by increasing transmission lines, replacing overhead lines with underground cables, and extending lines to new areas of the country.

Updates to the national grid will improve the transmission and distribution of electricity for Egyptians, but the government, with the help of the private sector, plans on taking the updates a step further by creating smart grids that incorporate digital technology with the existing traditional electrical system. Smart grids will maximize efficiency by allowing energy to be stored and thus providing the opportunity for renewable energy to be better used. The smart grid will also provide reliability and personalization for consumers with individual smart meters where energy use can be tracked and regulated.

The private sector: Oil & gas

Oil and gas is one of the most dynamic industries in Egypt, and hydrocarbon production is the largest single industry in the country, representing around 12 percent of GDP in 2019. Outside of OPEC countries, Egypt is the largest oil producer in Africa and one of the largest natural gas producers on the continent.

The most influential reform implemented was opening the previously government-controlled natural gas industry to the private sector, which resulted in market liberalization and increased competition.

Energy hub

Egypt plays a vital role in global energy transit as it operates the Suez Canal and the Suez Mediterranean (SUMED) Pipeline, which are strategic routes for Persian Gulf crude oil, petroleum products, and liquefied natural gas (LNG) shipments to Europe and North America.

Aside from the Suez Canal and SUMED, Egypt’s energy infrastructure enhances its position as an energy hub with its two gas liquefaction terminals in Idku and Damietta, from which it exports gas shipments to global markets. Further infrastructure includes 19 petroleum terminals along the Mediterranean and Gulf of Suez, 29 treatment facilities, and one floating storage regasification unit.

 

Oil rig helipad and support ship in the Gulf of Suez. (Photo by Giles Barnard/Construction Photography/Avalon/Getty Images)
Oil rig helipad and support ship in the Gulf of Suez. (Photo by Giles Barnard/Construction Photography/Avalon/Getty Images)

 

EMGF

In support of its ambitions to become a regional energy hub, the Government of Egypt launched the East Mediterranean Gas Forum (EMGF) in January 2019. The EMGF, composed of Egypt, Israel, Italy, Greece, Cyprus, Jordan, and the Palestinian Authority, met in Cairo and approved the organization’s charter, creating a platform for eastern Mediterranean natural gas cooperation. The forum was officially established as an intergovernmental organization on Sept. 22 after the member states signed its charter and participated in a virtual signing ceremony.

More regional cooperation

Egypt is also strengthening its ties with Israel in a deal estimated to be worth $20 billion. The deal includes a consortium of Houston-based Noble Energy, Israel’s Delek Drilling, and Egypt’s Dolphinus Holdings Ltd. Natural gas started pumping from the Tamar and Leviathan fields in Israel to Egypt in January 2020. In addition, Egypt has concluded an agreement with Cyprus to build a subsea pipeline between the two countries. Egypt plans to use imported gas for domestic use and re-export to global markets through its LNG terminals on the Mediterranean coast.

Renewable energy

In line with global efforts to reduce fossil fuel consumption, Egypt is diversifying its fuel mix to create a more efficient, sustainable energy portfolio. It aims to source 20 percent of its electricity from renewables by 2022, 42 percent by 2035, and 55 percent by 2050. By 2035 Egypt aims for wind energy to provide 14 percent, hydropower 2 percent, and solar energy 25 percent. Similar to the natural gas reforms, the private sector is expected to deliver most of this renewable energy capacity. Reforms have also led to incentivized renewable energy projects for the private sector.

Solar & wind

Solar energy’s potential in Egypt, a country recognized for its sunny weather, has long enticed stakeholders. But because solar infrastructure has been expensive historically, Egypt has had to mainly rely on fossil fuels to power its cities. However, with the price of solar components decreasing in recent years, Egypt looks to greatly boost its power production from renewable sources.

The Benban Solar Park, Egypt’s flagship solar mega-project, consists of more than 32 solar projects across 36 square kilometers of Egyptian desert in the Aswan governate. It will generate over 2,000 MW of power, lighting up around one million homes and businesses. Once fully operational, the solar park will cut carbon emissions by two million tons per year. The first phase of the park was inaugurated in February. The park is led by the private sector and has attracted over $2 billion in investments.

Egypt’s efforts to achieve its renewable energy goals are also illustrated by the Kom Ombo power plant, another solar project currently in progress in Aswan. The plant will consist of double-sided solar panels, and construction is expected to be completed in early 2021. Once operational, it will meet the electricity needs of 130,000 homes.

Egypt also has abundant wind power resources, especially in the Gulf of Suez and the Nile Valley. It has increased its total wind power generation capacity through the Zafarana, Gebel el-Zeit, and Hurghada wind farms.

Construction on a new wind power plant, West Bakr in the Gulf of Suez, began earlier this year. It is expected to produce 250 MW of power and increase wind capacity by 18 percent. The wind farm is being built in co-operation with Lekela Egypt and is planned to begin operating in 2021.

Egypt is in need of substantial additional power capacity. Although its capacity has increased greatly in recent years, the country may require up to 100 GW of new power over the next 15 years to keep up with its growing population and economic growth. The success of the Benban solar complex shows Egypt’s commitment to energy diversification, but renewable energy still accounts for less than 10 percent of overall installed capacity. With the government’s goal to source 42 percent of power from renewables by 2035, solar and wind capacity needs to be greatly expanded.

The twin shocks

In recent months, the region has been affected by a confluence of two major shocks: the COVID-19 global pandemic and the collapse of oil prices.

The collapse of oil prices, combined with the pandemic, lockdowns, and supply chain disruptions, has resulted in the lowest oil demand in history. Due to these low prices, multinational companies have paused investment targets.

Egypt’s previous reforms and substantial international reserves will alleviate some of the impact of COVID-19 and the collapse of oil prices on the country’s credit rating. Experts predict capital outflows can be filled by foreign currency liquidity in the short run.

After dropping from $45 billion at the end of February to $36 billion in May, foreign reserves bounced back slightly to $38 billion in June and remained around that level in July and into August. Investors withdrew cash from emerging markets and Egypt’s tourism industry, a key source of foreign revenue, suffered heavy losses. Remittances, which accounted for $25 billion in foreign revenue in 2019, were expected to be adversely affected by both shocks. However, due to interest rate differentials, remittances haven’t been as negatively impacted as experts initially predicted.

Prior to the shocks of early 2020, Egypt had made great strides on the macroeconomic front. With the aim of preserving this growth as much as possible, the government has put forth numerous measures, including introducing a comprehensive economic stimulus package of EGP100 billion ($6.4 billion, or 1.6 percent of GDP) in March and an EGP10 billion ($640 million) extension approved by its House of Representatives in late April.

Despite its largest sectors of tourism and remittances taking major hits, Egypt has been forecast to be one of the few countries in the Middle East and North Africa to see positive economic growth in FY2019/20 by both the World Bank (3 percent) and the IMF (2 percent).

Egypt continues to embrace successful reform as demonstrated in its relationship with the IMF. Egypt has secured two loan agreements worth a total of $8 billion: a rapid finance instrument worth $2.8 billion and the standby agreement mentioned worth $5.2 billion. Both agreements have helped shore up foreign reserves for the first time in four months since COVID-19 hit the Egyptian economy. Investor confidence has also been stirred, with the government selling unprecedented Eurobonds and T-bills to foreign investors. Combined, this has also resulted in the Egyptian pound reversing its previous trend of depreciation.

With the energy sector at the helm, Egypt has navigated its way through a difficult and fruitful economic transformation, but it has yet to reach its final destination. Further reform and adaptation are on the horizon and are essential for Egypt’s future success. It’s difficult to determine exactly what the world and Egypt will look like in the face of COVID-19’s “new normal,” but it’s safe to say that the lights aren’t likely to go out anytime soon.

 

Hisham Fahmy is CEO of AmCham Egypt Inc., a mirror organization for AmCham Egypt based in Washington D.C.; advisor to the AmCham Egypt Board of Governors; and a Non-Resident Scholar with MEI's Egypt Program. The views expressed in this piece are his own. 

Research support provided by Lauren Griffith.

Photo by Oliver Weiken/picture alliance via Getty Images