When Egypt inaugurated its vast Zohr gasfield in 2018, the government hailed the project for helping it achieve its ambitions to become energy self-sufficient and save an annual $2.8bn in gas import costs.
But instead of the expected energy bonanza, a gas shortage has left the country mired in daily blackouts this summer that have disrupted economic activity and everyday life for millions of Egyptians and sparked public anger.
Cairo has now been forced to resume LNG imports as declining natural gas output, surging demand for electricity and a fast-growing population stretch its power generation system.
“I would argue the power outages have caused more damage to the economy than the price of the gas shipments,” said an Egyptian businessman with investments across a range of sectors. “The crux of the matter is, what are the priorities of the state?”
To alleviate the crisis, Egypt has allocated $1.2bn to fund initial energy imports, including 21 LNG cargoes that have begun to arrive, mainly from the US. The blackouts, which began in April, ended at the beginning of August but could resume in mid-September, according to the government.
Until recently, Egypt supplied LNG to Europe and harboured ambitions to become a gas trading hub, exporting its own output as well as gas piped in from Israel and potentially from Cyprus. But it has now also “temporarily” halted gas exports, officials say.
According to Farouk Soussa, Middle East and North Africa economist at Goldman Sachs, Egypt’s net oil and gas imports cost $6.3bn in the year to March 2024, compared with a peak net export surplus of $4.4bn in the year to September 2022. “That’s a swing of $10.7bn,” he said.
The outages, which came as soaring summer heat ramped up demand for air conditioning, have embarrassed a heavily indebted regime that has poured billions of dollars of borrowing into infrastructure projects over the past decade, including new power stations.
“No one expected the heatwaves we have been experiencing and the continuously high temperatures that have lasted not just for a day or two but for weeks on end,” said Egypt’s prime minister Mostafa Madbouly in July. “We are in a constant state of emergency every day.”
After being hit by a foreign currency crunch in 2022, when foreign investors pulled some $20bn out of the country in a flight to safety amid the Ukraine war, Cairo has also fallen behind on payments to international oil and gas companies. Its arrears are estimated at around $6bn, slowing investment in exploration and production and exacerbating the gas shortages, analysts say.
“East Mediterranean gasfields have tended to have fairly rapid rates of decline,” said David Butter, an oil and gas specialist and associate fellow at Chatham House, a UK think-tank. “They get to a peak and then start to fall off, which requires new exploration and development and means companies have to maintain investment levels. They’ll only do that if it’s worth their while.”
Madbouly said in March that the country would pay up to 20 per cent of the arrears this year. The move followed Egypt’s $55bn international bailout deal with the IMF, World Bank and United Arab Emirates, which eased the foreign currency crunch.
A spokesperson for Italian oil group Eni, which operates Zohr, said the credit situation was improving, adding: “We are confident of recovering outstanding dues.”
The power cuts also follow a decline in Egypt’s gas output. Total annual production at all its gasfields has dropped from 70bn cubic metres (bcm) in 2021 to a forecast 53 bcm this year, according to Norwegian energy consultancy Rystad.
“The initial announcement was that [Zohr] contained 30tn cubic feet [tcf] of gas,” said Peter Stevenson, east Mediterranean editor at the Middle East Economic Survey newsletter. “That now appears incorrect — they think it is closer to 10-11 tcf.”
Cairo has denied reports that Zohr is facing technical problems, including allegations that water has leaked into its reservoir after it was damaged in an attempt to extract more gas.
“Eni is an international company and there is no excessive exploitation,” oil ministry spokesman Hamdy Abdel Aziz said earlier this year. “This is wrong.”
The Eni spokesperson denied Zohr’s output was less than expected. “Production from Zohr is in line with what we projected . . . and with what has been agreed with our partners and institutional counterparts,” they said.
Industry figures and energy consultants have consistently confirmed the operator’s view on Zohr’s recoverable reserves.
The government said last year that total investment in the field stood at $12bn and would rise to $15bn in three years.
But for now, Egypt’s gas trading hub ambitions have been dealt a blow as exports cease and it consumes Israeli supplies.
Butter said the prospect of Israel increasing its gas production could boost supplies for Egypt in late 2025 or 2026. Last year, Israel’s export capacity was around 15 bcm, which is projected to rise to 25-30bcm by the end of the decade.
“There could be a lot more Israeli gas that doesn’t really have anywhere else to go. Egypt is the only really large market that’s easily accessible for Israel,” said Butter.
But escalating hostilities between Israel and Hizbollah could curb Egypt’s supplies in the short term, as the Lebanese militant group has threatened to target Israel’s offshore gas output.
“Hizbollah has the capability to damage [Israel’s offshore gas production],” said Butter. “These are foreign-operated rigs and the people on them are not sticking around in a war zone.”
Egypt last month launched a new bid round for oil and gas exploration in 12 blocks in the Mediterranean and Nile Delta. The government said incentives would be offered to international companies to ramp up exploration and production.
Madbouly said Cairo planned to return output to “normal levels” from 2025, adding: “There is a very clear plan to bring the production of oil and natural gas with foreign partners back to previous levels, and also to increase it.”
https://www.ft.com/content/b86c9f85-715e-4b12-a19a-9776c6251c9e
