Photograph by Kamal Osama Elgazzar, via Wikimedia Commons.  Accessed on 28.07.17

 

A politically turbulent six-year period has impacted the Egyptian business environment, adding a new layer of political risks to investments made across the national economy. Despite this, the outlook in certain sectors is largely positive and the gas sector in particular may be one of the first to see profitability.

With the third largest gas reserves in Africa, behind Algeria and Nigeria, and the 17th largest globally, international interest has always existed in Egypt’s gas sector. However, management of gas pipelines has been a controversial issue, leading to concerns over how viable the industry is set to be under President Sisi.

During President Mubarak’s rule, for example, gas deals were brokered by Samih Fahmy (Egypt’s former oil minister) and Hussein Salem (a known business tycoon). Part of their scheme involved selling off gas at a discounted rate of U.S. $3 MMBTU (one million British thermal unit) to the East Mediterranean Gas Company (“EMGC”), also part owned by Yossi Maiman – an Israeli businessman and former intelligence officer.

The gas was then sold on to clients in Jordan, Israel, and Spain - among others - for 4.5 MMBTU, with political elites – including President Mubarak himself – pocketing the difference via kickbacks for helping facilitate the deals (Middle East Eye, 06.12.2015). Since then, Egypt has gone from being an exporter of gas to an importer, which has incurred heavy costs as a result of a rising population and generous state subsidies.

To Zohr and Beyond
The discovery of vast gas reserves in the East Mediterranean basin is generating renewed impetus from the Egyptian government to attract investment into the sector. As a result, steps are being taken, and compromises made, in the name of boosting investment incentives into the gas sector, with Cairo’s political elite laying the groundwork for gas sector development.

Shake-ups to the Ministry of Petroleum have occurred thick and fast in recent years, as is the general narrative in Egypt. In March 2017, the Chairmen of both Egypt General Petroleum Company (EGPC) and Egypt Natural Gas Holding Company (EGAS) were replaced (Energy Egypt, 15.03.2017) in elite level changes to the two most important state energy bodies.

With Chairman of these entities averaging one year in position, investors could be forgiven for showing little interest in the new figureheads. The quick turnover in staff is a worrying sign and one that suggests top level strategic decision-making is somewhat removed from the figures who, on paper, sit at the top of two pyramids.

But for their part, commercial entities have expressed their interest in Zohr, the gas field set to fill state coffers, with business set to pick up at the end of 2017 (Eni, 12.12.2016). Tarek El Molla, Oil Minister, and Sherif Ismail, Prime Minister, are by all accounts the chief decision makers with regards oil concessions and contracts. The two have been working together at high-level for the better part of four years, which is the kind of longevity indicative of stable decision making.

For all intents and purposes, Zohr is set to be a game changer for energy politics in the region. That said, the legal and political ‘lay of the land’ is set to change, and it will be prudent for investors to stay in tune with how this impacts business dynamics.

Privatisation
As confirmed by El Molla in early July 2017, the gas sector is introducing executive regulations to liberalise the gas sector, expected to come in September (Egypt Today, 06.07.2017). This will allow private actors to import and distribute natural gas, with the aim of turning Egypt into a hub for the industry.

A new draft gas law was sent to Parliament in December 2016 (Daily News Egypt, 17.12.2016) and is believed to have come into effect. This is set to alter the dynamics in Egypt’s gas sector and contains some important points of note for energy companies going forward.

Most notably, it establishes the ‘Authority for Regulating the Activities of the Gas Market’ and thereby adds a new government body into the mix when doing business. According to a review of the law by Shawkawy & Sarhan, a Cairo based law firm that specialises in industry specific laws, the Authority is an ‘independent public entity affiliated to the Ministry of Petroleum’.

In particular, investors should be wary of the risks this Authority may pose to transparency and accountability, which will become more evident as and when it appears in earnest. The President is known for taking moves to override government officials and heads of authorities, suggesting that it could yet be beholden to the political elite. Its independence will be its strongest asset, and should this be compromised from the outset, then the body risks being stillborn.

Challenges and Opportunities
Egypt is at a cross roads once again in terms of energy sector management. Politically speaking, the fruits of Zohr bring a two-folded benefit to the political elite in Cairo.

On one hand, the ability to meet domestic energy demand is a huge motivating factor in developing out the necessary infrastructure. Egypt has had problems with electricity shortages since 2011-2012 and currently imports gas from Algeria and Norway in order to meet its electricity needs, with gas generating 75% of the country’s electricity.

On the other hand, harnessing Zohr’s export potential brings much needed inward revenues to the state. Having turned to the International Monetary Fund (“IMF”) almost a year ago for aid, the country’s financial status needs a boost. Cutting subsidies, raising taxes, and scaling back government spending has incurred huge sacrifice and uncertainty – with political stability ultimately at risk.


The full report on Egypt’s gas sector is scheduled for release later this week; it will be available for purchase in the Shadow Governance Intel Store. It discusses the aforementioned issues as well as the gas sector power players and wider political trends at play.