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 Sisi, who toppled Islamist leader Mohamed Mursi in July and
promised to bring calm to Egypt, is expected soon to stage a
triumphal run for the presidency in elections due within months.
His first big challenge is likely to be power cuts and fuel
shortages — the same issues that plagued Mursi and helped spur mass
protests that enabled the army to oust him.
"Sisi is still very popular, but he realizes that Egyptians can go
to Tahrir Square tomorrow if his administration is seen as not being
as efficient as promised," said Justin Dargin, a Middle East energy
expert at the University of Oxford.
Cairo's Tahrir was the hub of protests that ended three decades of
one-man rule by President Hosni Mubarak in 2011.
To many Egyptians, Sisi is all-powerful, but industry experts,
foreign oil and gas companies and Western diplomats doubt he can
take bold steps to tackle Egypt's energy nightmare.
Successive governments have failed to develop a sound strategy to
tap major natural gas reserves even as an exploding population
boosted demand for the fuel.
Egyptian gas exports began in the mid-2000s, but more than halved
from 2008 to 2012. They have now slowed to a trickle, contributing
to a global decline in liquefied natural gas (LNG) supplies.
Production from maturing gas fields is declining. The government
forecast this month that consumption will outstrip output for the
first time in the fiscal years starting in July.
The army-installed government is in a bind.
Gulf Arab donors have propped it up with aid that includes $4
billion in oil products from Saudi Arabia, Kuwait and the United
Arab Emirates, but their diesel is not compatible with Egypt's
gas-based power plants and big factories.
NOWHERE TO TURN
Qatar bailed out Egypt with extra gas during Mursi's rule, but his
ouster badly soured ties with Cairo. Like its predecessor, the
interim government has failed to secure a means of importing LNG
directly, so Egypt has nowhere to turn for gas.
A tender for a floating LNG import terminal has been pending since
October. Even if it was in place, experts say nothing can match the
favorable swap deal Qatar gave Egypt last year.
"We have enough installed capacity but the problem is with fuel,"
said Aktham Abouelela, spokesman for the Electricity Ministry. "It
is not good for power plants to run on diesel."
Egypt's energy troubles are rooted in fuel subsidies that cost the
government $15 billion a year, a fifth of the state budget. The
money keeps pump prices well below market values, giving Egyptians
no incentive to curb their consumption.
The subsidies, in place since the era of socialist President Gamal
Abdel Nasser five decades ago, drains foreign currency that could
instead be used to pay off debts to foreign energy companies and
improve payment terms to encourage investment.
Ask any Egyptian minister about the subsidies, and he will say they
must be reformed. But fuel, along with food, is a powderkeg issue in
the most populous Arab state. In 1977, a cut in bread subsidies
ignited riots against President Anwar Sadat.
People power has helped topple two presidents since 2011.
Like others, Sisi may take stop-gap measures to get through the hot
summer months, when demand for fuel soars — although outages are now
occurring even in winter. Fearful of public anger over blackouts,
the government will probably reduce gas feedstock to
energy-intensive cement and steel factories.
"The situation is one of duress, of survival," said Dargin,
predicting Sisi will maintain the costly status quo even if it means
breaking international commitments.
Companies forced to cut output in periods of peak electricity use in
recent years will "have to consider if it's even profitable to stay
in Egypt for the long term", he said.
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Industry experts also predict that Sisi will keep breaking contracts
with foreign companies such as BG and diverting gas promised for
export to satisfy domestic demand.
BG's problems in Egypt have affected its LNG unit so much that it
issued a profit warning last month. Blaming political turmoil in
Egypt, BG cut production forecasts for the year and served "force
majeure" notices to affected buyers and lenders.
SUPPLY SHORTAGES
Since the beginning of this year, Egypt has been diverting the
maximum amount of natural gas produced by BG and its Malaysian
partner Petronas based on pipeline capacity constraints, said
Martijn Murphy of Wood Mackenzie.
"The government priority will be on guaranteeing power generation,
which accounts for the bulk of supply, so it will try and minimize
shortfalls to this sector," said Murphy.
"Industry is likely to bear the brunt of supply shortages."
Companies will not press ahead with new development unless they get
guarantees on future export volumes.
Egyptians expect miracles from Sisi. Foreign companies will look for
signs he is willing to reform the energy sector.
The stakes are high.
If Egypt can't persuade companies to exploit its gas reserves, it
will be forced to spend more hard currency on energy imports,
creating the same dilemma it faces with wheat.
Egypt is the world's biggest importer of wheat because inefficiency
and corruption undermine farming along the Nile.
Oil Minister Sherif Ismail hopes Egypt can satisfy its ever-growing
energy demand from own resources, but acknowledges the government
will have to resort to imports.
Until Egypt deals with issues obstructing gas output by foreign
firms, it "will have to cover all its energy needs with imports,
either gas or crude oil", he told Reuters last week.
Doing so while keeping prices artificially low domestically will
doom attempts to improve Egypt's finances. Although foreign reserves
have been boosted by Gulf aid, they are only half pre-2011 levels,
limiting the government's scope to buy fuel.
Energy imports would also send a discouraging signal to foreign
companies, which are becoming increasingly reconciled to the
prospect of LNG exports halting entirely this summer, said Peter
Hutton, an analyst with RBC Capital Markets in London.
He said Egypt was locked in a vicious circle given its inability to
import LNG. "If you can't get gas in, some tough choices will have
to be made. The easiest is not to export."
(Editing by Michael Georgy and Alistair Lyon)
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