Egypt - Energy

Energy

Egypt produced from domestic sources practically all the energy it consumed. Electricity was generated from oil-powered stations and hydro-powered turbines on the Nile, especially those of the Aswan High Dam. Oil and, increasingly, gas and their derivatives supplied other types of energy, and in 1990 Egypt was about to begin mining coal in Sinai. Solar energy, an abundant resource, had not been tapped because technology was not sufficiently developed to enable it to compete with other energy sources.

Oil increasingly dominated the energy sector after the mid1970s . In 1986 petroleum constituted about 90 percent of production and about 75 percent of consumption, in addition to being one of the major foreign exchange earners. The first oil well was drilled in Egypt in 1886, but commercial production began only in 1913. Output remained minimal until the 1950s, when the government entered into joint ventures with foreign oil companies for exploration and development. Through the Egyptian General Petroleum Company (EGPC), which was established in 1962, the government pushed for production expansion after the 1974 oil price rise; by 1976 Egypt had an oil trade surplus. Production continued to grow in the 1980s, from nearly 29.4 million tons per year (1 ton = 6.6 to 8 barrels depending on density) in 1981 to an average of 42.7 million tons per year between 1984 and 1988. The average was lowered somewhat by the drop in output in 1986 when oil prices plummeted from US$22 per barrel in the previous year to US$12 per barrel. Egypt became an observer member in the Organization of Petroleum Exporting Countries (OPEC) in 1984, but its production policy was dictated less by OPEC's limits than by market conditions.

About 75 percent to 80 percent of oil output in the 1980s came from the Gulf of Suez fields, and the rest from scattered sites in the Western, Arabian (or Eastern), and Sinai deserts and the Delta. The major foreign oil company in Egypt was Amoco, which operated in Egypt through its subsidiary, the Gulf of Suez Petroleum Company (GUPCO). The firm produced about one-half of the country's oil output. In 1987 it leased 19,000 square kilometers in Sinai for oil exploration. Other concessions were given to companies such as Shell and the Italian Azienda Generale Italiane dei Petroli (AGIP). The drop in oil prices in 1986 compelled the EGPC to agree to production sharing based on a sliding scale tied to the price of crude oil. Egypt's recoverable reserves were put at 4.5 billion barrels or the equivalent of less than fourteen years of production at the rate of the late 1980s. At the end of the decade, however, oil companies were confident that there was more oil to be discovered in the Western Desert and possibly in Sinai. If more oil should be found, it was likely that recovery costs would increase because of the greater depths at which deposits might be located, especially offshore.

In addition to oil, important natural gas discoveries were made during the 1970s and 1980s, and gas was projected to gain greater significance in the 1990s. Natural gas, condensates, and butagas output increased steadily between 1980 and 1988, from 1.8 million tons to 6.8 million tons (oil equivalent), or at an annual rate of 18 percent. Gas was expected to be used mostly domestically, as an oil substitute, thus extending the period during which oil would be available for export. Gas reserves were estimated at about 0.28 trillion cubic meters and could be as high as 1.12 trillion cubic meters. In the Second Five-Year Plan (FY 1987-91), gas output was projected to increase by more than 76 percent over the 1986 level.

In 1989 the government signed thirty-five contracts for gas exploration and development, mainly in the Western Desert. Many of these had awaited signature for some time. The government at first thought itself capable of producing gas on its own; however, the debt pressure, the fall of oil prices, and the large investment needed for the task forced it to reconsider its position. Moreover, the government offered contracting firms better terms than previously, including payment in cash and oil (which the companies preferred) at international market prices, with a 15 percent discount for the government as a compensation for building the pipeline network. The company investing the most was Shell.

Egypt's electric power capacity grew substantially between 1952 and 1969 and leveled off for the next ten years. It increased from 21,000 megawatts in FY 1981 to 35,200 megawatts in FY 1986. Nearly 20,000 megawatts of the latter was power supplied by the Aswan Dam and the Aswan High Dam; the rest was thermal power. The country was in near panic by 1988 because the long drought in Ethiopia, where most of the Nile water originates, lowered the water in the Aswan High Dam's Lake Nasser to levels that threatened complete stoppage of the turbines. Fortunately, the rains came before this happened, but the event pointed to the danger of heavy reliance on a single source of power. The government planned to increase power capacity to 40,500 megawatts by 1992.

A final source of energy in Egypt was coal from the Magharah mines in northeastern Sinai. The mines were thought to contain 25 million tons of recoverable reserves. They were closed in the 1960s but were expected to produce 600,000 tons per year from 1989 onward. The fuel would be earmarked mainly for the 2,500-megawatt Zaafaranah complex on the Gulf of Suez.

Overall energy consumption grew rapidly after the mid-1970s. The growth was estimated at 10 to 13 percent annually beginning in the mid-1970s and throughout the 1980s. Energy consumption per capita was estimated at 588 kilograms of oil equivalent in 1987, commensurate with Egypt's status as a low-middle-income country in World Bank classification. Industry was the largest energy consumer; its share, for example, stood at 55 percent of total consumption in the 1970s and probably higher in the 1980s. The electric grid reached practically all villages by 1984.

The high growth of energy consumption was attributed to rising incomes, the price subsidy, and the building of an aluminum smelting plant. The implicit subsidy was estimated at US$3 billion in FY 1983 and at double that amount in FY 1986. In spite of two price hikes, electricity prices in 1988 were put at about 23 percent of the cost of generation, transportation, and distribution. Fuel prices were set at about 25 percent of international market prices. Both private domestic consumers and public industries received the subsidized rates.

The price issue clouded negotiations between the government and its creditors. In 1988 the World Bank held up a US$800-million loan for building power stations because of the issue. The government did, however, raise prices more than once. In 1985 prices were raised by 40 percent, on a graduated basis so as to protect lowincome consumers. They were also pushed up drastically in 1986: 276 percent for fuel oil, 67 percent for kerosene, and 73 percent for diesel. The capacity of the government to raise private consumer prices to anywhere near their economic prices in the near future was limited; the government said that in 1987 the energy bill constituted about one-quarter of the average civil servant's salary.

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