March 11, 2012
By Farah Halime
CAIRO // Egypt’s addiction to energy subsidies has come to a head. After years of debate, cutting one of the state’s biggest bills has become essential to balancing the nation’s financial books.
The government spends two thirds of its total subsidy bill of 150 billion Egyptian pounds (Dh91.3bn) on fuel. Much of the spending goes to keeping natural gas below market prices.
Officials, however, have been forced to reassess these subsidies after the economically disruptive uprising that led to Hosni Mubarak’s removal from power just over a year ago.
At the beginning of the year, the government said it would increase natural gas and electricity prices paid by heavy industries by a third to help to close the budget deficit, which is equivalent to about 8.6 per cent of GDP.
The higher rates would be applied to steel, cement and ceramics industries and were part of a plan to cut 20bn pounds off the deficit.
Natural gas prices would be raised from US$3 per million British thermal units to $4, while electricity prices would climb from 0.24 pounds to 0.30 pounds per kilowatt hour, said the finance minister, Momtaz El Saieed.
But subsidies across the energy sector persist, especially in petrol, where a litre of the fuel costs as little as 15 US cents.
“Subsidies for energy commodities and natural gas in Egypt [are] at the expense of health, education, and other daily requirements of citizens like housing, food and water,” said Abdullah Ghorab,the petroleum minister.
The trend to higher prices is good news for energy companies that would benefit from higher margins on their oil and gas production in Egypt.
“There needs to be a lot more thinking about this subsidy story. The cheap gas goes to heavy energy-intensive industry which could easily pay a higher price,” said Jeroen Regtien, the head of Shell Egypt. Royal Dutch Shell is one of the international energy giants that dominate oil and gas exploration in the country, along with BP and Italy’s Eni.
“The government needs to re-look at this whole subsidy debate.”
Mr Regtien said that if domestic industry paid more for its energy, it would lead to faster development of exploratory drilling.
That would raise foreign direct investment from international energy companies, in turn boosting government revenue. “I’m not talking about an increase for everybody but related to a fairer market price.
“It would position Egypt better for the future,” he said.
Shell, like other international energy companies, forms joint ventures with the state oil company, Egyptian General Petroleum Corporation, to explore for oil and gas. The finds are then shared between the state and the company.
Cheap petrol is popular on the Cairo street, making cheap natural gas a boon to industry. Low prices for natural gas in particular have attracted huge investments in energy intensive industries over the past decade. In cement, for example, Egypt has gone from a net importer to one of the world’s top 10 exporters thanks to the fuel subsidies.
The Federation of Egyptian Industries, which represents many of the top energy-intensive companies, said the subsidies should be cut over five to seven years, with a transition from fossil fuels to renewable energy, to ease the impact of higher prices.
There are signs this is already happening, with Italgen, the energy-generation arm of the Italian cement giant Italcementi, investing €140 million (Dh675m) in Egypt to build a wind-power station to be used in the production processes of Suez Cement, a Egyptian Exchange-listed company owned by the Italian group.