Egypt’s journey from gas boom to blackout

When Egypt inaugurated its vast Zohr gas field in 2018, the government hailed the project as helping it achieve its ambitions to become energy self-sufficient and save $2.8 billion annually in gas import costs.

But instead of the expected energy bonanza, a gas shortage has left the country mired in daily blackouts this summer that have disrupted economic activity and daily life for millions of Egyptians and sparked public anger.

Cairo has now been forced to resume LNG imports as falling natural gas production, rising electricity demand and a rapidly growing population strain its power generation system.

“I would argue that the blackouts have caused more damage to the economy than the price of gas shipments,” said an Egyptian businessman with investments in a number of sectors. “The heart of the matter is, what are the state’s priorities?”

To ease the crisis, Egypt has allocated $1.2 billion to finance initial energy imports, including 21 LNG cargoes that have started arriving, mainly from the US. The lockdowns, which began in April, ended in early August but could resume in mid-September, according to the government.

Until recently, Egypt supplied LNG to Europe and had ambitions to become a gas trading hub, exporting its own production as well as gas transported from Israel and potentially Cyprus. But it has now “temporarily” stopped gas exports, officials say.

According to Farouk Soussa, Middle East and North Africa economist at Goldman Sachs, Egypt’s net oil and gas imports cost $6.3 billion in the year to March 2024, compared with a maximum net export surplus of 4 .4 billion in the year to September 2022. “That’s a change of $10.7 billion,” he said.

The outages, which came as sweltering summer heat increased demand for air conditioning, have embarrassed a heavily indebted regime that has poured billions of dollars in loans into infrastructure projects over the past decade, including new power plants.

“Nobody expected the heat waves we faced and the continuously high temperatures that lasted not just for a day or two, but for weeks,” Egyptian Prime Minister Mostafa Madbouly said in July. “We are in a constant state of emergency every day.”

After being hit by a currency crisis in 2022, when foreign investors pulled some $20 billion out of the country in a flight to safety amid the war in Ukraine, Cairo also fell behind on payments to companies international oil and gas companies. Its arrears are estimated at about $6 billion, slowing investment in exploration and production and exacerbating gas shortages, analysts say.

“Gas fields in the eastern Mediterranean have tended to have fairly rapid rates of decline,” said David Butter, an oil and gas specialist and associate fellow at Chatham House, a UK think-tank. “They peak and then start to decline, which requires new exploration and development and means companies have to maintain investment levels. They’ll only do it if it’s worth it.”

Madbouly said in March that the country would pay up to 20 percent of its arrears this year. The move followed Egypt’s $55 billion international bailout deal with the IMF, the World Bank and the United Arab Emirates, which eased the currency crisis.

A spokesman for Italian oil group Eni, which operates Zohr, said the credit situation was improving, adding: “We are confident we will recover outstanding dues.”

The blackouts also follow a drop in gas production in Egypt. Total annual production at all its gas fields has fallen from 70 billion cubic meters (bcm) in 2021 to a forecast of 53 billion cubic meters this year, according to Norwegian consultancy Rystad.

“The initial announcement was that (Zohr) contained 30 tonnes cubic meters (tcf) of gas,” said Peter Stevenson, Eastern Mediterranean editor at the Middle East Economic Survey newsletter. “Now it seems incorrect – they think it’s closer to 10-11 tcf.”

Cairo has denied reports that Zohr is experiencing technical problems, including allegations that water leaked into its reservoir after it was damaged in an attempt to extract more gas.

“Eni is an international company and there is no overexploitation,” oil ministry spokesman Hamdy Abdel Aziz said earlier this year. “This is wrong.”

Eni’s spokesman denied that Zohr’s production was lower than expected. “The output from Zohr is in line with what we designed. . . and with what has been agreed with our partners and our institutional counterparts,” they said.

Industry figures and energy consultants have consistently confirmed the operator’s view of Zohr’s recoverable reserves.

The government said last year that total investment in the field was $12 billion and would increase to $15 billion in three years.

But for now, Egypt’s gas-trading hub’s ambitions have taken a hit as exports stall and eat into Israeli supplies.

Butter said the prospect of Israel increasing its gas production could increase supplies to Egypt in late 2025 or 2026. Last year, Israel’s export capacity was about 15 billion cubic meters, which is expected to increase to 25-30 billion cubic meters by the end of the decade.

“There could be a lot more Israeli gas that doesn’t really have anywhere to go. Egypt is the only really big market that is easily accessible for Israel,” Butter said.

But escalating hostilities between Israel and Hezbollah could cut Egypt’s supplies in the short term, as the Lebanese militant group has threatened to target Israel’s offshore gas production.

“Hezbollah has the ability to damage (Israel’s offshore gas production),” Butter said. “These are alien-operated platforms, and the people on them don’t stay in a war zone.”

Egypt last month launched a new round of bids for oil and gas exploration in 12 blocks in the Mediterranean and Nile Delta. The government said incentives would be offered to international companies to step up exploration and production.

Madbouly said Cairo plans to return production to “normal levels” from 2025, adding: “There is a very clear plan to bring oil and natural gas production with foreign partners back to previous levels and also increase it.” .