Post-crisis opportunities in EgyptJuly 22, 2020
Arshad Sufi, chairman of METAS Energy, talks to The Energy Year about post-crisis opportunities in the Egyptian gas industry and the fate of the green energy transition. METAS Energy is a consulting and advisory company specialising in oil and gas exploration and production, LNG solutions, gas and power, organisational development and stakeholder management.
What opportunities might the local energy industry see after the downturn?
The East Mediterranean gas hub was a great concept but it came at a time when LNG prices were strong. The plan was to use Egypt’s export facilities to move excess domestically produced gas, as well as to capture other producers’ gas in the East Mediterranean and bring it into Egypt for re-export. However, for the coming years there will be a huge oversupply of LNG, primarily from the US, and as a result, LNG prices, which have dropped significantly, will remain low.
The situation has been further impacted by lower global demand as a result of the pandemic. In a sign of the flexibility Egypt has shown in dealing with the changing environment, the government has stressed it will not simply export gas at low prices. Instead, it is looking at creating other value from use of the gas – like in the petrochemical sector, and recently for use as vehicular fuel. Later, as global LNG prices recover, Egypt always has the option of exporting additional gas to capture greater value.
As Egypt uses this period to become even more flexible and tap its domestic industry more for value-added products, an interesting question is how long it will take for things to go back to normal. A range of outcomes have to be considered as things might not go back to normal for an extended period. For example, people have seen how easy it is to do a conference via Zoom, rather than travelling to another location. What impact will this have on long-term use of fossil fuels? As demand patterns change, it is Egypt’s flexibility that will differentiate it from other countries. Local energy industries need to capitalise on this flexibility.
We have looked at our own operations in this regard. We have experts who have been advising our clients, and we constantly ask whether there will be a fundamental change in how people are doing business. If so, is there a role companies like ours can play to help international companies in doing business in Egypt?
How will the green energy transition be affected by this crisis?
People have very divergent views about this issue. When we talk to people who are in the extractive industries, they generally believe the crisis will slow things down temporarily, but will recover quickly, especially for gas, which is better than oil from an environmental perspective. Others, however, say that with the emergence of the environmental movement, there will be a greater and faster expansion for renewables post-pandemic.
In Egypt, renewables development has been very active, along with other countries in the Middle East. To give an example, Egypt’s solar potential is very good, and the cost of solar panels has gone down a lot. But development of solar energy is cheap only if you don’t consider storage. This impacts the availability of solar energy.
Globally there are two ways forward in this regard: batteries and concentrated solar power. Technology developments in both these areas can enhance the overall efficiency of solar energy, which could spur another wave of renewable developments. With the current lower oil and gas prices, it will be interesting to see how solar technology development moves forward.
How well has Egypt coped with the crisis so far?
In general, Egypt has coped with the crisis reasonably well. There has been a gradual increase in Covid-19 cases but there has not been the massive ramp-up that we’ve seen in Europe and the US. The government was in a good financial position at the start of the pandemic, with steady foreign reserves that were put to use quickly. More significantly, the government was able to take decisive measures. The IMF also approved a standby facility for Egypt of USD 2.8 billion along with an additional package.
While I think Egypt has weathered the economic storm quite well, it is of course connected to the rest of the world and issues like reduced remittances will be a big issue. Going forward, things will continue to be uncertain globally. The aim should be to be flexible and have plan A, plan B, and even plan C. I think this is what Egypt is focusing on, which is good. The country has been a net importer of oil, so the low oil price helps. However, it is also affecting the budget of many countries that were going to make investments in Egypt.
Because of these factors, I see the exploration pace in Egypt slowing down somewhat, as companies readjust their budgets. A factor to consider is that Egypt is known as a gas-producing country. Gas has the advantage of having a longer-term perspective, particularly with current supply in Egypt exceeding demand. The government should be focusing on this advantage as it has some time to adjust the energy balance. Again, this helps with Egypt’s ability to be flexible.
By comparison, oil producers try to maximise the peak to accelerate production, so every time you don’t make investments, production drops quickly. Production of gas also drops, but not as severely, which again buys time to adjust.
How flexible is the local service industry for working with reduced rates throughout this period?
I think Egypt has proven to be very flexible as it has attracted investment and as a result, the industry has developed and is able itself to adjust rapidly. Until the end of 2019, Egypt was the place to be and this has not changed. I expect Egypt will be the only country in this region to have a positive GDP growth in 2020/21. The oil majors and other investors are not going to turn their back on these factors. The question that we as an organisation are focusing on is how to position ourselves to help the industry as it picks up post the opening. In that, we have reached out to multiple companies to discuss how best they can use our services in the changed environment.