The gas price is not right, so what's next?

Sherine Nasr, Al-Ahram Weekly, Friday 8 Apr 2011

Calls are growing for a renegotiation of Egypt's gas export agreements, but analysts say a long-term lack of transparency might hamper quick reform

Egypt has tough negotiations yet to raise gas prices.

In his first appearance as minister of petroleum, Abdallah Ghorab was affirmative that while Egypt respects its natural gas export agreements signed with different countries, the Ministry of Petroleum (MP) will activate certain mechanisms that will enable the country get a better return on its gas exports abroad.

Quoted by the Middle East News Agency (MENA), Ghorab underlined that a growing demand in the local market for natural gas ought to take priority over the need to export gas to Israel. "The people are the true owners of these resources," said Ghorab. However, the new minister indicated that the decision to stop gas exports does not fall within his jurisdiction, adding that the amount exported to Israel does not exceed four per cent of Egypt's total gas production.

Public disapproval of exporting gas to Israel below market prices had been escalating years before the eruption of the 25 January Revolution. Now that principles of accountability and transparency are being advocated, is it possible to thoroughly review the terms of different gas export agreements?

"I cannot see why not. There are no legal or political precautions that would not allow for a comprehensive adjustment to Egyptian gas export prices either to Israel or any other country, particularly as many of these export agreements have legal loops that need to be amended," said Amr Kamal Hamouda, energy consultant and director of Al-Fustat Centre for Developmental Studies.

While adjustments to gas agreements can be negotiated if one party so requires, a major obstacle to the amendments is the fact that these agreements are highly confidential.

According to Amr Mohsen, a former Shell employee and a specialist in the economics of oil agreements, gas agreements are typically long-term and the secrecy of prices is highly guarded by both parties or penalties can be imposed.

Mohsen explained that a typical feature of gas export agreements is the indexing clause through which gas is linked to the price of crude oil so that adjustment to gas prices can be introduced in accordance with the price of oil in the international market. "These adjustments are done automatically. However, further negotiations of the prices can be deliberated in cases where major changes occur," said Mohsen, who explained that the situation in Egypt at present is typical of a force-majeure that rightfully advocates a fairer price of a depleting natural resource as gas.

According to British Petroleum's Statistical World Energy review 2010, Egypt sold liquefied natural gas (LNG) to 16 countries on top of which came the United States (4.54 bcm), Spain (4.1 bcm) and France (1.63 bcm) in 2009. In the meantime, Jordan and Israel topped the list of clients for Egyptian natural gas through pipelines with 2.85 bcm and 1.7 bcm respectively in 2009. Egypt's total natural gas exports during 2009 amounted to 18.32 bcm, according to the same review.

The terms under which Egypt is selling gas to Israel have been underlined by energy experts and activists as the most flagrant. According to Hamouda, the first contract was signed in 2008 under which East Mediterranean Gas (EMG), a privately owned consortium formed in 2005 to sell gas to Israel, sold 250 mcf daily at a price of $1.75 per Btu for a period of 15 years.

Three more contracts were signed later, the latest of which was signed by the end of last year. Although the Egyptian government has dealt with gas rates to Israel as classified information, reports in the Israeli media have shown that prices in the different contracts range between $2.6 and $4.5 per Btu. At present, EMG supplies Israel's electric utility with 45 per cent of its gas needs.

While marginal prices for Egyptian gas remain at the core of debates demanding a real market price, an energy expert who spoke in terms of anonymity declared that the bonanza of selling gas at peripheral rates started in the mid-1990s and was associated with building electricity generating plants under the BOT (build, operate and transfer) system.

"International companies received local gas at minimal prices and sold electricity to the country at market prices. They made huge profits for an extended period of 20 years," said the source who added that while these companies bought Egyptian gas at $0.54 per Btu, Oman was selling gas to Japan at $3.25 per Btu.

In an attempt to heed against the escalating public anger against these malpractices, the Ministry of Petroleum in 2009 renegotiated contracts signed with a number of countries including Spain and Jordan with an aim to introduce adjustment clause to these contracts for a fairer price of Egyptian gas.

"Although they succeeded to do so, the re-adjusted prices, nevertheless, remained far below market prices. The main question with the Israel contracts remains: why similar mechanisms have not been introduced to these contracts as well?" inquired Hamouda.

News on increasing gas prices sold to the Spanish Union Fenosa was reported by Al-Masry Al-Yom only a few days ago.

"There was no mention of what the price was, what it has become and for how long. This gives the impression that the MP still operates in the same old fashion where transparency remains out of question," said Hamouda.

However, re-negotiating the terms of Egypt's export gas agreements has been underlined as a must.

"It is no secret that the economic situation is deteriorating rapidly. Egypt is undergoing an exceptional circumstance and trading gas at market prices should be a major concern of the current government who is gasping for additional resources," said Hamouda.

In the 2009/10 budget, energy subsidies ate up most of those allocated for other sectors such as health and education as it mounted to $67 million. "It remains ridiculous, though, to import two million tonnes of butane at a market cost of $1,000 per tonne, while continue to sell gas at minimal prices," said Hamouda.

Moreover, the latest statistics released by the Ministry of Electricity have shown that some 24 bcm of gas have been consumed to generate electricity in 2009/10.

"What has been propagated by the energy sector as a major achievement, I consider to be a major disaster," said Mohsen who laments the depletion of a natural resource, namely, gas, while an abundance of solar energy, particularly in upper Egypt, could not only cover the local needs but can also be exported to highly potential markets in the EU.

"It is about time to reconsider the means by which we handle our energy resources," said Mohsen.

Although all gas agreements, except those signed with Israel, had been approved by parliament, it goes without saying that these agreements include several technicalities that need an expert eye to scrutinise.

"A good suggestion is to form an independent national committee of petroleum experts, legal and academic experts from outside the sector to review previous agreements and examine future ones," said Hamouda.

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