Liberalise and optimise

Egypt

Khaled Abu Bakr, executive chairman of TAQA Arabia, talks to TOGY about Egypt’s recent economic adjustments, the development of domestic energy infrastructure and regulations, as well as the country’s position in the regional natural gas industry. TAQA Arabia operates assets in Egypt’s E&P, power generation and midstream sectors.

How have recent economic reforms affected Egypt’s energy industry?
When you work with infrastructure, you need to have a medium or medium- to long-term clearance of many aspects that are outside the energy sector itself, like financing, banking, interests, taxes and so on. Although they were painful for some areas of business, the reforms the government started are very healthy for investors to do their planning, especially for infrastructure that will be buried underground and for which they cannot recover on investment before six to eight years.
The financial reforms were absolutely very important. The devaluation of the Egyptian pound and all the adjustments that happened were painful in the first few months, but they helped us adjust and be confident that there will not be another adjustment before seven to eight years.

What are the latest developments regarding the country’s energy infrastructure?
Besides the reforms of the financial sector, the reforms that Egypt has witnessed in the energy sector have been tremendous. The reforms I have personally witnessed in the last five years are much more comprehensive than the reforms I saw in the previous 25 years. We have seen the government gradually remove price subsidies. We see the country has a strategy for the energy mix: not only depending on gas and oil, but trying to have a proper energy mix and implementing that under the new bill for energy and tariffs.
We’ve seen the government very bravely approaching and solving the problem of power shortages. Siemens’ power stations closed a very big gap. Although as a company this was not in our interest, as we build power generation stations too, these are very good moves at the macro level of the industry.
At the same time, the liberalisation that happened in the power sector allowed TAQA Arabia to play a vital role, expand and diversify. The liberalisation of the power sector allows for many players that can generate electricity, use the grid, pay the grid transmission fee and deliver electricity to customers somewhere else in the country. This is a fantastic operation. We can do the same as well by producing renewable energy, using the grid and delivering it to our customers in remote areas.
This is optimisation. It is good for the industry and it is good for the government, because it reduces the burden on the government to deliver all the electricity to the consumer.

How attractive is the independent power producer (IPP) model in Egypt?
Personally, I am not a fan of the IPP [model]. It depends on what you mean by IPP, because some people mean that all the electricity offtake, like at the Siemens stations, is delivered to the government. This is the model I am not a fan of.
I like the model where you keep the production and offer it directly to the market. I like the free-market economy; it is healthy. It’s an upcurve for some consumers at the beginning, as the cost might be high since it is not subsidised, but it’s a very healthy process. I am in favour of an IPP that has the offtake agreement with private-sector consumers, and not with the government itself.

What do you think about the new gas law, and how successfully is it being implemented?
The government and the Ministry of Petroleum were very eager to develop the gas law, and this is a very important step towards liberalising the market. But unfortunately, some fundamental points of the gas law will not make it very efficient at the beginning, like the fact that most of the board of the Gas Regulatory Authority is assigned by the government. You don’t have any representatives of private-sector operating companies. The regulator will have a conflict of interest.
State-owned companies will still enjoy some benefits, while the private sector will have market entry obstacles, mainly financially, like paying for their licences, paying for transmission at a very high cost and so on. It won’t be very easy at the beginning to compete with state-owned companies that are exempt from most of these costs.

How do you see the global gas market evolving, and what role is Egypt poised to play here?
The gas industry is becoming very flexible and dynamic, even if we don’t see long-term contracts as existed before. Twenty years ago you only had six exporting and five importing countries. Nowadays, you can see more than 18 exporting and more than 42 gas-importing countries. This is due to the flexibility technology offers, such as FSRUs, FLNGs and the like. Thanks to this, the industry is becoming very dynamic.
If we look to our region, Egypt is suited and suitable. We are experienced in the utilisation of gas and have the existing infrastructure, which comprises an excellent gas transmission system and two LNG facilities. We are well located to play a major role. Everybody would win from that extra available gas in the region. Developing a gas hub much stronger than the network in the North Sea was the dream for us. There is shared infrastructure in the North Sea; there is a facility that can bring gas from England to the Netherlands or from Norway to England.
Egypt is geographically excellently located, and infrastructure-wise we are the most advanced country in the region. This is our second Suez Canal; we are trading commodities in the Suez Canal and delivering services for people to move their goods south to north and north to south. We are doing the same with the SUMED pipeline with crude oil.
The gas hub is an excellent fit for Egypt and I am very happy with the government’s leading role, starting with the president and the prime minister. The minister of petroleum himself is in the driver’s seat of the energy hub. This should bring lots of economic value to Egypt and major strategic and geopolitical leverage.

Is the country positioned to export natural gas?
Until August 2015, Egypt imported huge amounts of LNG. Discovering the Zohr field was a game changer. Zohr has covered that gap and will continue covering it in the coming few years. Depending on its depletion and ongoing and future exploration, if one of these exploration [campaigns] hits another find like Zohr, we would have another large game changer and we would have additional gas. One day we could play a big role in the global gas market.
Egypt has a large domestic market and local consumption. We have 100 million people and a large industry. The economy is driven by industry, and around 60 bcm-70 bcm [2.12 tcf-2.47 tcf] per year is consumed in the local market.
The objective is not just to export gas; the objective is to secure gas for your economic growth and your industry. Of course, if there are any additional quantities, then maybe in the medium and long term we can export 20 bcm-30 bcm [706 bcf-1.06 tcf]. That would be fantastic.

How has the perspective on natural gas’ significance as an energy source changed recently?
In the world where we now look at sustainability and [lowering] CO2 emissions, gas has been proven to be less of a hydrocarbon pollutant. Natural gas is one of the most important commodities that will keep fuelling the world’s energy demand.
Even in an era where renewable energy is growing, natural gas is fundamental to integrate with renewable energy. When you don’t have the sun shining or the wind blowing, gas is always there. In addition to that, gas is a different commodity that can fuel things like heavy engines that cannot be fuelled simply by renewable energy. I see natural gas as one of the most important sources of energy for the coming 30 years.

What role will natural gas play in Egypt’s petrochemicals sector?
It will play an important role. Petrochemicals and fertiliser production are a major element here. On the petrochemicals side, it has a huge value addition to the value chain. In Egypt, the government and think tanks like the Egyptian Gas Association are doing lots of brainstorming about prioritising the utilisation of natural gas to have the highest value addition.
Prior to the 2011 Arab Spring, economic growth was mainly driven by industry and real estate. Since 2011, we haven’t seen large-scale investment in the energy sector. Now, with the aforementioned economic reforms, we have started to see large investment institutions exploring the market again, mainly in the petrochemicals, refinery and fertiliser industries. In the coming four years, we can expect huge investments in these industries that will require additional quantities of gas.
The beauty of Egypt being a hub is that other neighbouring countries can transmit their gas to the global market through Egypt, but if any consumers in the local market need that gas, they can have easy access to it. The supply security will be there and available in Egypt, and then with the proper liberalisation through the new gas law, the private sector can have direct access to their own energy, not depending on whatever is available through the government.

What is the financial sector’s appetite for financing energy-related projects in Egypt?
Over the last 12 months, we have noticed a very large appetite from international financial institutions as well as global funds, to invest in Egypt’s energy-related projects.
When you have challenging financial restrictions or reforms like the one that happened over the last four years, not all the players can continue. This will reduce the lists of reliable customers for the banks to keep the most reliable, but thanks to our efforts, we have been on that shortlist.
We see there is a strong appetite, but in every project we have very strong governance checks between the banks and our investment team. We work very closely with the banks; we consider them partners and stakeholders. My conclusion on that point is that for any investor in Egypt, banks are not a problem and financing is not a problem, so long as you are a reliable investor or operator that has substance to your business.

What is the outlook for Egypt’s hydrocarbons industry?
I see this sector booming. All these reforms have been laying the groundwork for it. I forecast tremendous development in industry and, in turn, tremendous growth in the demand for energy. Upstream businesses see Egypt as very attractive and lucrative for exploration and production, but I see as well that it’s going to be a very lucrative sector for midstream and downstream players in infrastructure and providing services in energy efficiency and other areas.

What are TAQA Arabia’s latest milestones?
We had a fantastic run in 2019 on all fronts, starting with the new joint venture with BP concerning Castrol lubricants. For over a decade, TAQA Arabia has been the sole distributor of Castrol products in the Egyptian market. With the new JV, Castrol Lubricants Egypt, we will be handling everything related to Castrol in the local market, from production, export, and marketing.
This is considered a huge step especially that Castrol is not just about lubricants, it is engineered lubricants, which means new technologies and advanced innovation that will bring a new quality of lubricants to the Egyptian customers. Also, this JV reflects the confidence in the stability of the Egyptian economy.
On the retail business, TAQA Arabia has reached 55 operating fuel stations and we are aiming to add 10 new stations to our portfolio prior to the end of this year. And in order to reach this, we are also investing in storage facilities, which is essential to keep delivering the most premium quality of service and top-notch performance. This will allow us to deliver fuel to our stations in an optimal time and enable us to cover peak times.
Another milestone earlier in 2019 was reaching our 1-millionth gas customer. We are aiming to increase that figure to reach 1.1 million customers by the end of 2019. We are really proud to be delivering a world-standard service of safety and security and bringing gas to commercial, residential, hospital, school and industrial customers.
As part of the Ministry of Petroleum’s national project to bring natural gas to residential customers, TAQA’s objective for the upcoming five years is to add an additional 150,000 customers per year.
TAQA Arabia currently has seven CNG stations. We have successfully delivered mobile CNG in Q4 2018 through virtual pipelines. You cannot lay pipelines everywhere, so we use mobile CNG stations to deliver gas to different customers. We will continue increasing investments in mobile CNG to deliver gas to customers in remote areas. This is a new development in Egypt’s gas tradition. I am very proud that Egypt is at the forefront of this, and that TAQA is at the forefront of this project.
Moreover, TAQA Arabia for solar power’s project at the Benban Solar Park in Aswan is another remarkable milestone. “The project is in collaboration with the IFC and the World Bank and we were able to deliver the project on time with a total capacity of 50 MW. For sure, this project affirms the continuous contribution of TAQA Arabia in the development of Egypt’s infrastructure.
Besides that, and after the great success of the Benban project, we are now delivering different tailor-made services to our customers. Most of these customers are in remote areas, far away from the electricity grid. We are tailoring services to them and delivering more power for their businesses.
Lastly and on the investments front, we might be looking for an IPO in 2020. Actually, the market has been very interested in TAQA and the wide range of activities it offers. As a company that provides a one-stop shop for services in the energy sector, our uncommon business model has allowed us to be pioneers in this field across North Africa and Egypt.

What are TAQA’s international activities and ambitions?
Besides the excellent track record we achieved in the Gulf, mainly in the UAE, nowadays we are very focused on Africa, especially with Egypt’s leadership in the African Union. Africa was always on our radar, but this year we started getting involved in East and West Africa. We are very focused on Mozambique, Tanzania, Côte d’Ivoire and Ghana. Several of our teams are doing studies right now on these four countries, and we intend to invest heavily in their gas infrastructure.

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