From The Wall Street Journal

Egypt’s government is taking an unconventional approach toward becoming the Middle East’s next big energy exporter: Its own citizens are footing the bill.

President Abdel Fattah Al Sisi’s government has coaxed some big oil companies back to Egypt in part by paying foreign companies more for natural gas and by raising the price of electricity and gas for consumers, who also face rising costs for transportation, water and other basic goods. In June, electricity prices rose 26% overnight while natural-gas prices rose as much as 75%.

As a result, Royal Dutch Shell PLC, BP PLC and Eni SpA have invested billions of dollars in Egypt in recent years, including the Mediterranean Sea’s biggest natural-gas field off the Egyptian coast. Egypt hopes to be a net exporter of natural gas by the end of 2018 and eventually a Mediterranean natural-gas hub, potentially importing from Israel and Cyprus and then re-exporting to Europe and elsewhere—a prospect Mr. Sisi calls a “dream.”

Egypt’s strategy for building its natural-resources industry contrasts with big energy producers from Saudi Arabia to Norway, where oil and gas sales underpin social safety nets and electricity prices are cheap compared with most energy importers. Egypt’s large debts to oil companies, high budget deficit and the conditions of loans from the International Monetary Fund forced it to invert the petrostate model, raising energy prices for the public while hailing a series of major hydrocarbon discoveries.

Rising prices of gas and electricity have contributed to an undercurrent of resentment among ordinary Egyptians, who are paying more even as their wages remain stagnant.

“Even if Egypt becomes a gas exporter, the government would continue to pick our pockets through electricity bills,” said Engy Ezz, a 32-year-old homemaker in Cairo. She recently moved to a new apartment where she says she is required to pay 200 Egyptian pounds ($11) every two days in prepaid electrical bills. She estimates she spends 10% of her monthly income on electricity.

The economic squeeze has given a fresh talking point to Mr. Sisi’s opposition, which has criticized his handling of the economy.

“There’s repeated announcements of new gas discoveries, new oil discoveries, and at the same time, for the majority of Egyptians, we get increases in oil prices, gas prices, water prices,” said Khaled Dawoud, the leader of the opposition Constitution Party.

The price increases have led to widespread public complaints and brief flashes of protest. In May, rowdy demonstrations took place in Cairo metro stations after the government imposed a surprise fare increase, but the government quickly snuffed them out, deploying riot police.

Mr. Sisi’s government has arrested thousands in a political crackdown in recent years, closing off nearly all avenues for dissent.

Egypt’s petroleum ministry referred The Wall Street Journal to the government’s Foreign Press Center, which didn’t respond to an interview request. A spokesman for Mr. Sisi didn’t respond to a request for comment.

The price increases come as part of a broad economic overhaul urged by the International Monetary Fund.

The IMF extended Egypt $12 billion dollars in loans in 2016 but required the government to cut its oversize spending on subsidies to reduce its budget deficit. Since then, Egypt’s overall economy has grown, but inflation, stagnant wages and persistent unemployment have made daily life harder for most Egyptians.

After decades of decline, Egypt’s energy-production industry received a jolt in recent years with massive new natural-gas discoveries. The largest of those, a field called Zohr, was found under the Mediterranean sea floor in 2015 by Eni, containing more gas than the entire U.S. consumed in 2017, according to the U.S. Energy Information Administration.

Mr. Sisi said at a conference in July that he prays to God every morning asking for “10 or 12 more” discoveries like Zohr. In a step toward establishing a gas hub, an Egyptian company in February signed a $15 billion agreement to import gas from Israel.

Even if government predictions come true, the benefits of new gas discoveries wouldn’t be enough to solve the Egypt’s financial problems, according to analysts. The country is deeply in debt, with the state owing 86% of its gross domestic product to domestic and foreign lenders, according to the central bank.

There are obstacles that could stymie the government’s energy goals or keep the benefits from trickling down to regular people.

Egypt’s energy sector is still recovering from the turbulent years following the country’s 2011 uprising that ended the rule of President Hosni Mubarak. When Mr. Sisi became president in 2014 following a military coup a year earlier, Egyptian cities plunged into darkness in part because of an acute gas shortage.

During the crisis, the government diverted gas supplies to address the shortage and, in the process, Egypt’s debt to international energy firms swelled to over $6 billion.

Egypt still owes more than $1 billion to companies such as the United Arab Emirates’ Dana Gas, according to the Petroleum Ministry. Dana says it is holding off on some investments in Egypt due to the “lack of regular and predictable repayment,” slowing the country’s energy plans.

Egypt says it will repay foreign oil companies by the end of 2018. It also has increased prices paid to the companies. For instance, the government in 2015 agreed to increase the amount it pays Eni to between $4.00 and $5.88 per unit of gas, the head of the national oil company said at the time, up from the previous price of $2.65.

“It was as if the government was giving them higher prices so they could start producing and not mind the high levels of debt the government owed. It was a tit-for-tat sort of thing,” said Karim Ezzat, an oil and gas analyst with Pharos Holding, an investment firm in Cairo.

Regulatory reforms that were intended to open the gas sector to private competition are expected to take years to complete. A delicate set of international negotiations remains before pipeline becomes available to import gas from Cyprus and Israel and export it.

“There’s no gas miracle,” says Robert Springborg, an expert on Egypt’s political economy at the Italian Institute of International Affairs and Simon Fraser University in British Columbia.


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