It has been a tumultuous year for the global oil and gas sectors, with political upheaval and government changes across the globe that no one could have anticipated; from the Fukushima Dai-ichi nuclear disaster to the Arab Spring that toppled regimes across the MENA region. These events rattled investors and raised questions about the stability of oil and gas supplies and transportation security in the region.

“Widespread instability across the Middle East and Africa region has raised important questions about the long-term impact on upstream investments, oil and gas production and hydrocarbon exports in the region,” Abdalla Salem El-Badri, Secretary General of the Organization of Petroleum Exporting Countries (OPEC), wrote in an op-ed in The New York Times in October.

Egypt, which has an observer status with OPEC, also faced an uncertain future early last year when the industry came to a complete halt for a period of six weeks following the toppling of former President Hosni Mubarak’s regime.

Several major foreign companies tested their contingency plans and evacuated their staff temporarily.

Throughout the year there have been at least 10 major disruptions to gas supplies as many worried at the time about the security of Egypt’s transit routes through the Suez Canal and the SuMed oil pipeline from the Gulf of Suez to the Mediterranean. There are also worries that prolonged instability could disrupt global supply, prompting OPEC to increase supply or put additional pressure on the price of oil.

The latest crisis also highlighted Egypt’s waning significance on the global energy map and transportation routes, driven by Asia’s growing demand and changing global supply dynamics. The volume of oil transiting Egypt via the Suez Canal and SuMed pipeline was about two million barrels per day in 2010 — roughly 5% of global seaborne oil trade — compared to 15.5 million barrels transiting through the strategic Strait of Hormuz, which is the only exit from the Persian Gulf. At the end of 2010, Egypt’s proven oil reserves represented only 0.3% of the world’s total.

“The Egyptian crisis has not spurred the sort of oil disruptions that occurred in 1956 (when Cairo blocked the Suez Canal to protest British and French attempts to seize it) or between 1967 and 1975 (when Israel occupied the Sinai),” Simon Henderson, director of the Gulf and Energy Policy Program at the Washington Institute for Near East Policy, points out.

Domestically, the removal of Mubarak’s regime has had profound impact on all economic sectors. Egypt’s energy industry comprises one of the most critical sectors, contributing about 14% of GDP according to the most recent Ministry of Planning data.

In a highly charged political climate where former supporters of the Mubarak regime are routinely charged with corruption, many government agencies chose to tread carefully, which has resulted in a slower decision-making process across all industries.

The Egyptian General Petroleum Corporation (EGPC) is the government arm in charge of the country’s exploration and production activity through joint ventures with several foreign exploration companies. EGPC is now paying closer attention to any potential violations of existing agreements and is a lot less lenient, according to industry analysts.

The ongoing political transition offers opportunities to reassess many of the existing challenges, from the controversial issue of government subsidies for the energy sector to the price of natural gas. It also offers opportunities to map out new ways for the oil and gas sector to remain regionally and globally competitive.

Business as usual
For the most part, leading oil and gas companies and energy analysts maintain Egypt’s energy sector has weathered the economic strain over the past year since the revolution began and the concession process as well as most operations continued as planned.

Minister of Petroleum, Mohamed Abdallah Ghorab, who was appointed last March, acknowledged publicly that the oil and the gas industry was one of the most important foundations for the Egyptian economy, not only for meeting internal demand but also securing foreign investment, as reported by the Egypt State Information Service.

“Work and investment in the petroleum sector has not been affected by the January revolution,” he said. “Foreign partners did not change their mind about investing in that sector.” Ghorab said that foreign investments in the sector reached $7 billion (LE 42.21 billion) since the January 25 Revolution.

From large international players working in joint ventures with Egyptian government agencies to smaller Egyptian exploration companies, most believe current period of political uncerstainty is temporary.

Shamel Hamdi, a former First Deputy Minister of Petroleum, is now the Vice President at Trident Petroleum Egypt, a small exploration group. “I thought that during these turbulent days [we wouldn’t] find investors, but, on the contrary, people [know] that Egypt [has been] here for 7,000 years and it will stay for another 7,000,” he says.

Apache Corporation, a leading foreign exploration company that operates in Egypt through a number of joint ventures, shares this view.
Thomas Voytovich, the Vice President and General Manager for Apache Egypt cites minimal stops in production, very fleeting shortages in diesel fuel and difficulties in delivering provisions for a few days early on in the year.
“Other than that, it’s been business as usual,” Voytovich says.

The concession process, which is secured in the legislative framework spanning decades, has also been relatively unchanged. The oil and gas sector makes up about 14% of the country’s GDP, with natural gas contributing 8.3% and oil 6.2% of GDP during FY2010/11 according to the Ministry of Planning data.

“The subsidies have to change and the price of natural gas has to change in order for the supply of gas to change, which is required because the demand continues to increase,”

Industry analysts say the government is not focusing on changing any of the terms and conditions because the exact makeup of the government has not been finalized.

Consumption surpasses production
Before the revolution began, the petroleum sector passed a landmark phase: For the first time in 10 years, oil consumption surpassed production in 2010, according to BP Statistical Review of World Energy, released in June 2011.

Oil production reached 736,000 barrels per day (bpd) in 2010, a 0.6% decrease from a year before. It comprised 0.9% of the world’s total production. Egypt’s oil production has been declining gradually since 2000, with a brief spike in 2007 before declining again in 2010.

On the other hand, consumption and Egypt’s internal demand for energy continued to grow over the last decade, consistent with the worldwide trend. Global consumption growth across all energy types rose by 5.6%, the highest rate since 1973, according to BP data.

As these dynamics continue, the new government will have to boost production and devise a new aggressive strategy to meet growing domestic demand for both oil and natural gas as well as other sources of energy.

It can be done. In an impressive feat, Apache Egypt, operating through a joint venture company, has been able to pursue an aggressive exploration strategy and boost production to 331,871 bpd in May 2010, from 163,038 bpd in July 2005.

“Apache’s approach was a very intelligent one,” says Hamdi. “They invested a lot and were very aggressive in their search for oil. They did not leave one drop of oil. Other companies don’t have this approach, they just go for the big volumes. Apache went into 10, 20 and 30-barrel wells.” Hamdi says Apache’s understanding of the geology of the region is more robust than other companies’.

“We have spent a lot of money here because we wanted to spend a lot of money here and we still want to spend money here,” Voytovich says, acknowledging some decisions are more difficult now. “Apache operates around the world and currently there are more attractive places to invest in gas projects.”

As one of the leading investors in Egypt’s energy sector for years, Apache expects to maintain the same level of spending. “We have been investing about one billion dollars per year for some time, and would expect that pace to continue into 2012.”

Apache has had at least five new oil and natural gas discoveries in the Faghur Basin this year and received approval for a number of development leases during 2011 with more on the way.”

How much oil does Egypt have?
Over the past 20 years, Egypt’s proven reserves have grown to 4.5 million barrels from 3.5 million barrels of oil at the end of 1990, according to BP data.

More tellingly, Egypt’s reserves-to-production (R/P) ratio is among the lowest in the Africa subgroup at 16.7, surpassed only by Tunisia at 14.6. The ratio represents the time for which the reserves would last, given the current rate of production. For comparison, Libya’s R/P ratio was 76.7 at the end of 2010, which explains the mad rush to secure contracts with the new government following the ouster of Qaddafi’s regime.

While there is no mad oil rush going on in Egypt, there is a quiet certainty in the industry to continue producing as well as more potential discoveries on the way.

“Maybe it will not produce big fields like it used to,” says Hamdi. “In the Gulf of Suez, we used to have huge offshore fields like El Morgan produce 300,000 bpd — now it’s producing less than 20,000 bpd. Hamdi says there is still “very good potential” in the Gulf of Suez and the Red Sea areas, which could still produce more oil. With the price of oil currently balancing around $100 (LE 603) per barrel, Egypt’s economics are still favorable for oil exploration.

Natural gas
While Egypt’s natural gas production levels are still able to meet internal demands, natural gas production has been declining since 2009. There are serious questions raised about the country’s long-term ability to meet domestic demand.

Egypt has seen an increase in proven gas reserves over the last 20 years, to 2.2 trillion cubic meters (tcm) in 2010 from 0.4 tcm of natural gas at the end of 1990.

The R/P ratio is much healthier for natural gas at 36, but it is still the lowest in the Africa region. The BP Statistical Review groups Egypt along with African producers.

In 2010, production reached 61.3 billion cubic meters, a 2.2% decrease from 2009.

As overall demand for energy increased, alternative sources of energy received a boost. Egypt’s hydroelectricity sector had a 10% increase in consumption at 3.2 million tons of oil equivalent from 2.9 million tons a year before.

Consumption of renewable energy rose 38% to 0.3 million tons of oil equivalent compared to 0.2 million tons of oil equivalent, the largest increase in the Africa region.

While the investment climate remains precarious throughout the region and many remain skeptical about long-term renewable prospects in Egypt, there are opportunities in niche markets and practical applications for renewables in Egypt, according to Cherif Barakat, founder of GreenLight Solar.

What the new government can do
Given the changing supply and demand economics, the new government will have to address a slew of increasingly urgent questions.

While the reserves are there, more work has to be done to explore these areas. “We have to develop these areas, we have to have balanced concession agreements to attract the big players,” Hamdi says.

One critical issue is the question of energy subsidies.

“The problem is that the fuel subsidies consume a large portion of the national budget every year,” Voytovich explains. “The demand for fuel continues to increase, but the price that the government [EGPC] can pay for their gas supply is heavily limited by the fact that they have to bear the burden of that subsidy.”

The other question is the prevailing price of natural gas.

“In the case of natural gas, the easiest way to ensure foreign investment and to encourage development of gas reserves is to offer a higher price so it’s competitive with the rest of the world market,” Voytovich says. “The only way they can manage that is to try to balance supply and demand with increased prices to stimulate supply and create programs to improve the deficit in subsidies. “

2012 outlook
As geopolitical uncertainty looms ahead of the presidential elections in June, most investors remain cautiously optimistic.

Hamdi assesses the current climate as a ripe time for investment opportunities in Egypt, but he acknowledges that most investors view it as a good time for “investment research, not decisions” until the political landscape is stabilized.

“A lot of foreign investors have disappeared from this country until they see more stability and the oil and gas companies are doing they same,” says Andrew Singh, Chief Risk Officer for EFG Hermes investment bank. “But we do see that changing towards the end of the first half of next year.”

It remains to be seen whether the government will renegotiate existing contracts and the prices of gas with Jordan and Israel, as the petroleum minister had indicated earlier in 2011.

In response to political pressure, current Minister of Petroleum Abdallah Ghorab said last March the original contracts with gas-importing countries are revised periodically, and contain “a mechanism to increase the prices in the contracts between Egypt and the countries who import the gas,” as reported by Al-Ahram newspaper.

Just as importantly, the new government will have to reevaluate its approach and overall energy strategy and tackle these increasingly urgent issues.

 “Economics drive investment and in this case, gas price drives economics.” Voytovich says.

Apache’s exploration approach and strategy of introducing new technology to recover hard-to-reach hydrocarbons may be a good strategy to pursue on a national scale. “Apache has recently begun a program aimed at applying horizontal drilling in a couple of different settings,” Voytovich notes. “We are not ready to discuss details yet, as these projects are ongoing, but our success in other places around the world gives us reason to be optimistic about horizontal opportunities in Egypt.”

In the absence of a comprehensive, aggressive strategy to address declining natural gas production, Egypt could face a domestic energy crisis within the next decade, according to industry analysts.

Others are skeptical about overnight changes. “A serious, focused energy policy is going to remain a third-tier issue rather than a first-tier issue given our current political and economic environment,” says Cherif Barakat “At the end of the day, you cannot grow an economy and raise standards of living without energy.” bt