Performed by: Al Ahram Center for Oil and Energy studies
The Ahram Center for Oil and Energy studies prepared a study concerning the Egyptian Natural Gas which is considered one of the main issues that concern the public opinion, the study was published in Al Ahram News paper on 9/2/2008.
Introduction:
the issue of maximizing the utilization of the Egyptian wealth of Petroleum and Gas and adapting an efficient economic scheme in its use is an issue which is gaining tremendous importance taking into consideration that this wealth is the main source of energy and generates foreign currency which supports the National economy in achieving the targeted rates of growth economically and socially.
So, we all have to work on finding answers for the current questions concerning natural gas production and prices and its sufficiency to meet the domestic needs as well as the exports.
To answer such questions- the Ahram Center for Oil and Energy Studies prepared this study analyzing international Energy markets fluctuations specially after the increase in the prices of crude oil which reached a new level approaching 100$/barrel.
These changes in the international Oil market, affects the prices of Natural Gas inspite of the absence of an international Natural Gas stock market. For all these reasons the Ahram Center for Oil and Energy Studies prepared this study to determine the Egypt's position on the world natural gas map and the impact of the international changes on Egypt. In addition to finding clear answers regarding Egyptian natural gas exporting contracts.
The International Market of Natural Gas Till Mid of the Current Decade:
§ There is no international natural gas market similar to that of the crude oil where there is maximum prices for different types, like; Print, Light Arab, Middle, Heavy and West taxes and it is all used as indicators to determine the buying and selling prices of crude oil which is not associated by long term contracts.
On the other hand, Natural gas prices is still determined through long term contracts which ensures the adequate finance and the retrieval of export huge investments whether it was through pipes or liquefaction, while natural gas prices in some of the markets like the United States "Henry Hub", U.K, and Belgium's Zeebruge markets is considered as indicators of Natural Gas spot cargoes which represent five percent of the International Market of liquefied gas.
§ Natural gas exporting prices differ according to exporting projects economies and the location of the market, also according to the available alternative fuel and the level of competition in the different areas of the world.
That's why the exporting contracts in any of the natural gas producing countries doesn't reflect a unified international price, but the price is determined through the negotiations between the parties ( companies & institutions ) according to the production costs, transportation, treatment, distribution, profit margins and acceptable buying prices.
These negotiations are bound to the state of the market at that exact time like the supply and demand, the return on investment, alternative opportunities and the risk, so the conditions vary from a contract to another.
Gas pricing depends on price equations related to other indicators which include the maximum price of crude oil or other petroleum products like Mazut and Gas Oil or any other indicators agreed upon like the electricity price.
§ the International Natural Gas Market (as well as crude oil market) was a buyers market Till the year 2004 which means that the buyer was more influential in this market than the seller as the buyer had many other alternatives on top of it, was the crude oil and its products due to the price of Mazut during this period which was ranging from $100 to $130/Ton while the prices of the liquefied Natural Gas delivered to Europe and the USA was about $2.75/million BTU for Europe and about $3/ million BTU for the USA, after deducting the cost of transportation and liquefaction and loss the net revenue ranges between $0.8 and $1.15/million BTU.
Petroleum Markets were relatively stable during the last two decades reaching an average price of $20/barrel and there were no indications that the prices will increase dramatically so the gas contracts with a period of 10 to 20 years were relatively secure, taking into consideration the historical events and the experts' vision.
The Domestic Market and Gas Export Circumstances:
Early 1994 crude oil production started to decrease gradually for several reasons on top of it was the natural decrease in the production and the old infrastructure and the lack of achieving huge crude oil discoveries like Morgan , October and Ramadan plants.
At the same time consumption of Petroleum products increased which indicated the existence of a deficit in the Petroleum Sector balance of payments as a result of the consumption of most of the crude oil in the domestic market and so decreasing crude oil exports which generates foreign currency used to meet the petroleum sector's liabilities to the foreign partners according to the petroleum agreements.
§ The crude oil exports decreased from 9.5 million tons during the year 1993-1994 to reach 2.9 million tons in 1998/1999. and decreased again afterwards to range between 2 and 2.5 million tons/year, at the same time petroleum products consumption increased from 7.4 million tons during the year 1993/1994 to reach 23 million tons during the year 1998/1999 then it reached about 28 million tons during the year 2006/2007.
§ In 1997 many new significant natural gas discoveries started in the Mediterranean especially in the deep water like the west Delta discoveries for British Gas, as the company drilled 17 successful wells successively. This indicated that Egypt entered a new phase of huge natural gas discoveries and a boom in Natural Gas reserves which was achieved during the following years.
§ During the period from year 98/99 till year 2003/2004 most of the power stations connected to the National gas grid were transformed and all the fertilizers plants and cement mills near the gas sources were fed to operate totally using natural gas, it became clear that Egypt will achieve a surplus in the Natural gas production in case the North port said and west delta deep water plants and the new discoveries were appropriately developed, so it was important to use this surplus because if it remained in the reservoirs and without developing the discovered gas plants a signal will reach the international companies to stop exploration and searching activities in Egypt moving to another locations.
§ Taking into consideration the above mentioned circumstances Egypt decided to export Natural gas as a tool to generate foreign currency revenues specially after the decrease in crude oil exports, this enabled the Petroleum Sector to meet its liabilities to the foreign partners according to the foreign agreements also, such revenues allowed Egypt to import the rest of the domestic markets needs of LPG and gas oil, at the same time it insured the continuity of the exploration and searching activities which are reflected in more investments in the Sector.
§ During year 2000 the Ministry of Petroleum succeeded in its negotiations with the Foreign Partners to set a maximum limit between $2.5 and $2.65/million BTU for gas prices in the Petroleum agreements, this success played a major role in setting a maximum limit for the cost of the produced Natural Gas which was indicated by studies at that time by $0.65 to $0.70/million BTU.
§ Total investments in Damietta liquefaction plant reached about $1.3 billion while the total investments in EDCO liquefaction plant ( first & second units ) reached about $2 billion, such huge investments exceeds the capability of the Egyptian Petroleum Sector which required the contribution of huge international companies with high credit limits which allows it to obtain the needed finance for these projects. On the other hand, the Petroleum Sector and the Egyptian companies executed the Arab gas pipeline obtained the needed credit facilities from the Arab funds and the European Investment Bank, such finance required the availability of long term export contracts.
Implemented Procedures Prior to the Exporting Agreements
§ Negotiations with foreign partners to set a maximum gas price aiming at determining gas costs in order to suit the domestic market needs, exporting agreements and to protect Egypt from price fluctuations in the international markets.
§ Estimating Gas production average cost which was between $0.65 and $0.70 /billion BTU aiming at putting a suitable minimum in gas exporting contracts.
§ Studying the international markets and the gas prices as well as determining both the minimum and the maximum of gas prices in order to protect the petroleum sector in case of price reduction, also achieving a competitive price for Egyptian gas taking into consideration the limited number of the international markets at that time.
§ Studying producing countries' prices taking advantage of the limited information available through communications with some of the consultants around the world.
§ Obtaining the approval of the Council of Ministers' on the average prices of different projects and exporting gas.
§ Restructuring the Petroleum Sector by establishing Egyptian Natural Gas Holding Company (EGAS) to be responsible for the contracts beside the Egyptian General Petroleum Corporation (EGPC) to follow up implementing the contracts and projects of gas exporting whether it is liquefied or in pipelines.
Gas exporting critical situation
Whether Natural gas is produced accompanied to crude oil or produced solely from its fields, it does not stored after production and processing operations except in special cases and in limited quantities using expensive technologies. Thus, selling and production operations must be done simultaneously in order to guarantee the continuous investment operation in the fields of exploration and the development of natural gas reservoirs, taking into consideration that there are limited alternatives whether selling in domestic market or exporting when there is a surplus.
The Advantages of Exporting Natural Gas:
§ Increasing the Egyptian income of foreign currency to fulfill the petroleum sector's commitments towards foreign partners as well as meeting the domestic market needs from solar and imported LPG, taking into consideration the decrease in exported crude oil.
§ Maximizing searching and exploration activities as well as developing the discovered natural gas fields and increasing the production whether to meet the domestic market needs or the exported amounts.
§ Achieving a strategic objective of increasing the Egyptian reserves of Natural gas within the minimum period in order to insure the Egyptian energy sources.
§ Attracting searching and exploration investments to increase Egypt's reserves from natural gas (which was achieved later).
§ Creating a place for Egypt among investment attracting countries which resulted in attracting investments in different sectors other than oil and gas.
International markets of Oil and Gas during the period of 2005-2007
§ the international markets of crude oil and natural gas witnessed for the first time during the period 2005-2007 an increase in crude oil prices which reached almost $100 /barrel at the end of 2007. While the prices of natural gas witnessed great jumps during the year 2005, in addition to the continuous fluctuations in natural gas prices to reach $10 /billion BTU at the end of year 2007 in Europe.
§ On the contrary ,the prices in the American markets were stable ranging from $7 to $7.5 /billion BTU taking into consideration that these indications are specified for the immediate shipment and that gas prices is still tied with long term contracts. While 2007 witnessed instability in natural gas markets as the prices in Europe fluctuated between $3.5- $ 11/billion BTU.
§ The increase in the demand for natural gas and the growth in the market are due to many significant reasons:
- The role of the natural gas as a real alternative to petroleum products in generating electricity in addition to the increase in the international demand for energy with unprecedented rates as a result of the economic boom in China and India.
- The increase in demand for certain natural gas related industries such as fertilizers, petrochemicals, iron, steel and the methanol.
- The huge development of LNG and transporting it as well as reforming it back to the gaseous phase.
- Inspite of the dramatic increase in crude oil prices, natural gas prices did not witness the same increase.
- The environmental requirements and the activation of the Kyoto Agreement.
- Inspite of the great development in natural gas markets and prices as well as the transformation of the market to be similar to the crude oil market in terms of spot cargoes and decreasing periods of the contracts , the terms of the gas exporting contracts lacked the flexibility to cope with the great development in the international markets of Energy, it did not allow any unexpected changes .
This resulted in several conflicts between exporting and importing countries for example the following gas contracts:
· The gas contract between Russia and Ukraine.
· The gas contract between Algeria and Spain.
· The gas contract between Russia and France.
· The gas contract between Algeria and France.
· The gas contract between Iran and Turkey.
· The gas contract between Turkmenistan and Iran.
These countries faced the previously mentioned major changes in the international markets of energy which was not reflected in sufficient flexibility in the signed contracts.
· The Egyptian petroleum sector started its efforts to renegotiate the exporting contracts a year ago, these efforts resulted in amending natural gas buying and selling contracts and increasing the exporting prices. This was implemented with two companies; the Spanish "Union Fenosa" and the French "Gas de France".
· This represented the first phase of negotiations and the rest of natural gas exporting contracts are being revised currently. Taking into consideration the current prices and the expected ones.
The performed amendments up till now are estimated by $230 million till the end of the year 2007/2008 to be added to the revenues of Egypt and the expected added revenues during the rest of the contract period is estimated by $18 billion, through such amendments the average price of the exported Egyptian liquefied natural gas is expected to increase reaching approximately $6 / billion BTU during the year 2008 if the international prices remained at its current level.
The Egyptian Share and the Gas Exports
· The total natural gas produced from the Egyptian plants reached about 2135 billion CF during 2007. 1519 billion CF (71.2%) of this were used to meet the needs of the domestic market,168 billion CF of which were used for Gas lifting and injecting operations in the plants and in extracting natural gas derivatives , 615 billion CF (28.8 %) were exported.
· The Egyptian Share of the total production during year 2007 was about 57%while its share of the expenses return was 24%and the share of the foreign partner was about 19%.
· SO we can conclude that the natural gas exported is not from Egypt's share but it is from the expenses return share and the foreign partner's share which is bought in a maximum price of $2.65 /billion BTU according to the current petroleum agreement, while it is exported with a price of $4.65 /billion BTU according to the average exporting price during year 2007.
· This resulted in a profit to the Egyptian petroleum sector reaching about $2/billion BTU which means that the petroleum sector succeeded to obtain the foreign partners' share with a special price at the same time when the crude oil prices were $22/barrel, it was resold with the international prices which increased the Egyptian revenues and at the same time Egypt's share was kept to meet the needs of the domestic market, on the other hand in some contracts the foreign partner exports its share directly for example, EDCO contract.
Results of the Study
· The important thing is not the discovery of new natural gas reserves, but it is the development of such reserves to meet the needs of current generations through developing the natural gas plants, also meeting the needs of the coming generations through increasing the amount of natural gas reserves. The Egyptian decision to export natural gas contributed positively in the frequent development of natural gas plants and in increasing the production.
· Exporting the Egyptian natural gas motivated the strong international companies operating in Egypt to increase its exploration activities which resulted in increasing the reserves from 36 trillion CF to more than 72 CF.
· Natural gas export is not an Egyptian invention as there are many of the natural gas producing countries which export natural gas based on long term contracts and according to the available international markets indications which are the same rules adopted by the Egyptian petroleum sector in pricing natural gas exports for example of the exporting countries Russia, Qatar, Iran, Brunei, Turkamestain, Canada, Austria, Norway and Netherland.
· Setting a maximum natural gas buying price from the foreign partner through the petroleum agreements to be between $2.5 and $2.65 / million BTU achieved an economic advantage for Egypt as this amendment resulted in saving $13.5 billon since its application in July2000 till the end of December 2007 which was supposed to be paid by the petroleum sector to the foreign partners in case the agreements were not amended , such amendments are expected to achieve more savings during the coming five years estimated by $30 billion. The above mentioned amendments are considered the corner stone in exporting natural gas in Egypt as it was not possible to sign any gas exporting contracts without accurate and definite calculations of the cost of buying natural gas from the partner during the next 20 years after signing the contract, while the amended agreements set a maximum price for the natural gas bought from the partner ($2.5 -$2.65 ) which is suitable with the prices agreed upon for exporting natural gas.
· Without the results of the exploration , production and reserves increasing operations achieved by the petroleum and gas sector it was impossible for the ministers of electricity and production to set their plans targeting an annual 10% growth rate ,in addition to meeting the needs of the rest of the Egyptian sectors from natural gas and petroleum products which reached a value of $22 billion during the year 2006/2007 according to the international prices.
Also, the petroleum sector succeeded to cover the value of subsidizing petroleum products and natural gas from its net revenues as it is expected to reach a value of 60 billion EGP during the current fiscal year.
· The amendments which was achieved or in progress to the prices of gas exporting contracts is an added value to these contracts and it is not amending the low prices, taking into consideration that amending the petroleum agreements by putting a maximum limit for the cost of buying gas from the foreign partner achieved an improved balanced economies for the signed natural gas exporting contracts.