Political and social instability have disrupted Egypt's hydrocarbon potential. While operators tend to have the ability to work through political risk, security concerns have prompted force majeure measures, disrupting operations. At time of writing, political risks in Egypt have peaked and security concerns have eased; BMI's Country Risk analysts expect a slight moderation over the rest of the year. We believe that operational risk and lack of policy certainty will affect the country's output for the coming months and possibly years. However, we stress that the country's below ground potential remains extensive, as exemplified by a series of recent discoveries in onshore and offshore concessions. This leads us to believe that Egypt still holds large upside potential, but this will only be monetised over the long term as current woes are alleviated.
We highlight the following trends and developments in Egypt's oil and gas sector:
- A series of recent discoveries by Beach Energy and Apache in their Western Desert concessions and BP Egypt in the deepwater East Nile Delta highlight that below ground potential remains promising.
- We see serious downside risk to our production forecasts for 2013 and 2014 as companies are likely to reduce their exposure to operational risks. Both BG and BP have already announced reductions in their activities. Apache also divested 33% stake in its Egyptian business to Sinopec, for US$3.1bn, reducing its exposure to the country, which - before the divestment - accounted for 20% of total production.
- In addition, U$6bn in unpaid debts to companies by EGAS and EGPC highlight the financial strains of the state owned energy companies. While a repayment schedule has been agreed to, it highlights an additional operational and financial risk operating in the country.
- While political risk is pertinent and certainly the main concern in the short term (at least until 2014 elections, but most likely after that as well), we see the domestic fuels pricing environment as a long term, persistent worry for foreign operators. With the country failing to reach an agreement with the IMF and to implement a rationalisation of its downstream market, producers as they face growing risk that output may be redirected to meet domestic demand rather than their contracted export obligations.
- Although gas production is expected to grow from 60 cubic metres (bcm) to 79bcm in the 2013-2022 period, consumption will rise at an ever more rapid pace, from 50bcm to 79bcm. Net gas exports, especially through liquefied natural gas (LNG), will fall over the forecast period as consumption increases sharply. We have downgraded our 2013 production and consumption forecasts to reflect a fall in gas production and fall in gas consumption (especially from the power sector).
- We expect Egyptian oil production to decline from 709,000 barrels per day (b/d) in 2013 to 653,100b/d in 2020. At the same time, consumption is expected to rise significantly, from 824,800b/d to more than 1mn b/d over the same period, more than quadrupling Egypt's oil import bill.
- Despite several proposals to increase capacity, we do not see refineries advancing over our forecast period. With refining capacity set to remain flat, imports of refined products are set to rise from 184,000/ d in 2011 to over 388,000b/d by 2022. There is a downside risk to these forecasts if the government revises its subsidy regime, which has sustained a high level of consumption of cheap fuels. The import bill will rise from around US$7bn in 2013 to US$14bn by 2022.
- Egyptian General Petroleum Corporation (EGPC) and Egypt's other state companies will continue to push their own licensing rounds, hoping that political challenges will not ensnare investment in upstream hydrocarbons projects. In the June 2012 licensing round (with contracts finally awarded in April 2013) EGAS offered a total of 53,700sq. km of acreage in 15 blocks, 13 of which were offshore. Eight blocks were awarded, including to Petroceltic, BP and Edison.