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No quick fix in sight for Egypt's energy chaos

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(Globalpost/GlobalPost)

By Julia Payne and Oleg Vukmanovic

LONDON (Reuters) - None of the new ministers to be appointed by Egypt's military-backed leaders faces an easy task, but perhaps special sympathy should be reserved for the brave soul who takes on the energy ministry.

Long lines at fuel stations and power cuts were among the main grievances of protesters who prompted the army to overthrow the elected president last week.

The lines have since shortened a little but are still there, and few will easily give up on the 1.85 Egyptian pounds ($0.26) a liter gasoline which, along with other energy subsidies, eats up a fifth of the state budget.

Even with the economy on life support since the revolution of 2011, a growing population has kept energy demand increasing so that it now outstrips the production of oil and gas from fields in the Western Desert, Nile Delta and offshore.

Yet the state of flux in government and state-owned firms since the fall of Hosni Mubarak has thwarted projects intended to tackle the problems. And the jailing of Mubarak's veteran energy minister over a gas export deal has sent a chill through the ranks of officialdom, discouraging initiative.

Beyond the immediate problems that energy chaos poses for Egypt and those working there - including big oil companies which reckon Cairo owes them more than $5 billion - the disarray plays a major part in holding back investment in a range of industries that Egypt badly needs to create jobs and prosperity.

Failure to correct it could prolong a vicious cycle of unrest and insecurity. The omens of the immediate past are poor.

Both the military authority that replaced Mubarak and Mohamed Mursi, the Muslim Brotherhood member elected president a year ago, pressed international firms to sell oil and gas on credit as foreign reserves dwindled.

As a result, these firms stalled their exploration and drilling projects. Talk of cutting fuel subsidies costing $15 billion a year has gone nowhere. Imports from friendly Arab states remain on a hand-to-mouth basis, some of them gifts, while Egypt remains unable to import liquefied natural gas (LNG) for lack of equipment.

"It's a total mess," said an industry source involved in one of Egypt's most important energy infrastructure projects.

"It seems like no one is making decisions."

TERMINAL PROBLEMS

A $250-million project to install a floating terminal to import LNG was launched last year. It should have been finished. Egypt can export LNG but cannot import it without the terminal.

The misadventures of the import terminal reflect a broader story of mismanagement in the energy sector, industry experts say. Two initial tenders for work were issued by state gas firm EGAS. These were later cancelled after confusion over terms. Now state oil company EGPC has taken over the process.

An EGPC official said the tender it issued had closed on June 24. But the official could neither say what the result of the bidding was nor say when it would be available.

Egypt must act quickly to charter a floating terminal, of which there are only two now available globally. And even if a tender is awarded immediately, it would probably not be ready to import for a year. That will leave Egypt buying more expensive fuel oil as a stop gap.

Some in the industry think the new administration, backed by the army, can get the LNG project moving - though the military made little notable progress in the energy sector during the 17 months they were running the country before Mursi took office.

Egypt became a net oil importer in 2008. Its population is growing at more than 2 percent a year and now stands at 84 million. It is also moving rapidly to become a net importer of natural gas after years of being a large exporter via ventures with oil majors, such as BG, GDF Suez and Eni.

"Starting from 2004-2005, a lot of heavy industry was built-like cement, steel factories, which the country needs," said Mohamed Shoeib, ex-chairman at EGAS and currently managing director at private equity firm Citadel Capital.

But with average gas demand rising about 8 percent annually, reforms were held up by paralysis in decision-making.

Large projects, such as BP's massive offshore West Nile Delta fields, have been delayed and output goals have been pushed back.

Last year, Sameh Fahmy, Mubarak's oil minister for 11 years until the revolution, was convicted along with other senior officials who were sentenced to up to 15 years in jail for their roles in selling gas to Israel too cheaply.

"People are afraid of being taken to court," said Shoeib. "It's a problem when a decision must be made."

Strains were on show earlier this year at EGPC, when a new round of staff changes and dismissals was announced by the Muslim Brotherhood-led government. A diplomat who was present saw angry officials bang on the chairman's door.

With a new cabinet expected next week, there is sure to be a purge.

The overthrow of the Muslim Brotherhood has opened the way for aid this week from Saudi Arabia, Kuwait and the United Arab Emirates, some of it in the form of fuel cargoes.

A flurry of energy deals that the Muslim Brotherhood signed over the past year with its closest allies and friendly states, such as Qatar, Libya and Iraq, were all stalled for months as the sides struggled to agree final terms.

(Additional reporting by Patrick Werr in Cairo, Maha El Dahan in Abu Dhabi and Dmitry Zhdannikov in London; editing by Alastair Macdonald and Philippa Fletcher)

http://www.globalpost.com/dispatch/news/thomson-reuters/130711/no-quick-fix-sight-egypts-energy-chaos