Austerity in Egypt
Egypt finds itself in an unexpectedly precarious situation. As 2016 draws to a close, it faces the prospect of sourcing new oil imports in what is turning out to be a critical economic juncture for the country.
As late as September 2016, Egypt was the recipient of fixed oil imports from Saudi Arabia (KSA). The Egyptian General Petroleum Corporation (EGPC) and Aramco signed a five-year oil deal in April 2016, with the North African country reliant on 700,000 tonnes of petroleum imports per month (p/m) from KSA. The deal, valued at U.S. $23 billion (Reuters, 11.04.2016), was concluded quickly and cost effectively for Egypt, with payments staggered over 15 years to aid the government’s efforts to re-stabilise the national economy. It provided a political lifeline to the Sisi regime during what has been a tense year for state-society relations.
However, Egypt’s renewed search for petroleum, only six months into the agreement, is an indication that all is not right between the two nations. In fact, reports suggest that EGPC is considering launching a tender for 700,000 tonnes of petroleum supplies, covering the exact amount needed to meet Saudi’s commitment (Egypt Oil & Gas, 09.11.2016).
Aramco’s oil shipments were first suspended for the month of October, with the Egyptian Ministry of Petroleum issuing a statement clarifying so on October 7th. A full week into November saw no update or announcement on the situation from official channels in Egypt or KSA. Tarek el-Molla, Egypt’s Petroleum Minister, then told reporters on 7th November in the United Arab Emirates (UAE) that KSA has suspended oil products to Egypt “indefinitely” (Bloomberg, 07.11.2016). El-Molla was in Abu Dhabi attending the ADIPEC conference between 7-10th November, where he was thought to be promoting petroleum investment in Egypt.
What Are the Consequences?
Firstly, there is the economic cost involved in brokering new oil deals. With a currency depreciation of almost 90% since the pound was floated on 3rd November, imports have become significantly more expensive. Concluding gas deals will likely pose a higher financial burden than they would have before the floatation, which admittedly wasn’t something the state needed to consider prior to its currency move.
Additionally, it will be difficult to match the favourable terms and conditions accompanying the Saudi deal, as most international oil producers are seeking to protect themselves as the industry continues to stagger. Compounding the state’s burden, domestic fuel subsidies were lifted the same day as the floatation, so inflation is likely to put the government under a period of high-pressure as it seeks to settle its domestic energy woes.
This leads to the second key point, which is the political cost incurred.
In short, the suspension is a telling insight into diverging agendas between KSA and Egypt. Saudi’s decision to cease oil shipments not only reneges on a pre-agreed deal between the two nations, but is also a sucker punch for the Egyptian government. Having recently implemented across the board austerity measures, at the very least Egypt will be counting on continued political support from its regional allies. Although bilateral relations with Saudi Arabia are defined by more than just oil agreements, the Kingdom’s handling of this situation sends a clear message that it is willing to treat Cairo as a second rate ally. Regardless of whether this move stems from incompetence or intent, it doesn’t fit the mantra of “cooperating hand-in-hand” (Ahram Online, 30.07.2015) nor is it the kind of continued political support Egypt may have come to expect in the period ahead.
The April oil deal came as part of wider Saudi sponsorship of the Sisi regime characterised by billions of dollars’ worth of aid, supporting Sisi’s regional military strategy and Saudi-led investment in Egypt (Carnegie Endowment, 15.10.2015). The ‘Cairo Declaration’ of 30th July 2015, embodied the renaissance in relations between the two, following a period of relative upheaval since January 2011 (Ahram Online, 30.07.2015). In this context, the energy row may potentially undo efforts enhancing Saudi-Egypt ties over the past few years. An on-going assessment of regional trends will determine to what extent this relationship is unravelling.
Plugging the Hole
It was speculated that El-Molla had talks planned in Tehran following the ADIPEC conference, and may still be interested in brokering oil deals with Iran to secure Egypt’s longer term energy needs. However, this has been played down by Egyptian officials and public interest has reportedly thwarted the trip, according to Daily News Egypt (07.11.2016). If this were to materialise, it would be a low blow to Saudi as it has an intense political, economic and religious rivalry with Iran.
This being said, Shadow Governance sources in the petroleum sector in the Gulf have explained that Iran is desperately after cash in hand. So as lucrative as Persian oil fields are for Egypt, there is very little incentive for Tehran to conclude any deals with its Ministry of Petroleum (MoP). Iran certainly is not in a position where it could grant favourable concessions like the Saudis did with regards to oil deals at the moment. Given that Iran is preoccupied with rebuilding infrastructure and investments in its economy, it is unlikely to be in a strong enough position to use oil as a foreign policy tool in the region.
However, Egypt has already made successful forays into securing new oil deals. El-Molla was in Baghdad on 29th October, where he held a meeting with PM Haider al-Abadi on potential oil deals (Middle East Monitor, 31.10.2016). A Memorandum of Understanding (MoU) was subsequently signed with Iraq’s oil minister, Jabar al-Luaibi, on 1st November, although details of the agreement have yet to be released. As such, it is unclear whether this is a short-term or long-term agreement.
Furthermore, on 6th of November, EGPC head Tarek El-Hadidi signed an MoU with Socar, Azerbaijan’s state owned oil company. Egypt will receive 2mb of gas and has agreed to a number of other points on bilateral cooperation (Egypt Oil & Gas, 06.11.2016). This builds on an existing partnership between the Egyptian and Azeri state oil companies, dating back to March 2016, in which EGPC agreed to refine 500,000 barrels of crude oil p/m and swap naptha for Petrol 95 (Egypt Oil & Gas, 03.03.2016).
Egypt’s return to the gas market is a timely reminder of the connection between oil and politics in the Middle East. It is a major source of ‘soft power’ for wealthy countries in the Gulf to use vis-à-vis their regional counterparts, as well as the international community. As such, it is unusual to exercise this power over close allies, let alone allies already dealing with a tense public backlash.
Both sides have been relatively tight-lipped over this episode, perhaps as a move to quell the furore that would no doubt emerge from an open disagreement. In any case, the Egyptian government will be reeling at both the timing and impact of this suspension. A resumption of oil shipments to Egypt from Aramco within the next few months may resolve the situation, but with each passing month Egypt’s MoP will be securing new deals with other partners.
A Political Pipeline Running Dry?
Austerity in Egypt