Is North Africa running out of gas?

Is North Africa running out of gas?

Big changes are under way in the North African gas sector. A planned pipeline from Algeria to Italy is under threat; the recovery in the Libyan oil and gas sector has slowed down; and now Egypt looks set to become a net gas importer in the near future.

Just five years ago, Egypt was being considered as a piped gas supplier to the European Union (EU). It already exported liquefied natural gas (LNG) across the Mediterranean Sea from two separate schemes, in addition to its gas pipelines to Israel, Syria and Jordan.

The Arab Gas Pipeline (AGP), which runs from Egypt as far as Syria, was mooted for extension to Cyprus, Lebanon and then Turkey, so that Egyptian gas could make use of Turkey’s existing gas transmission grid with the EU.

Yet the situation now looks completely different. The Egypt-Israel pipeline has been closed down, partly under political pressure, and the country has struggled to maintain supplies to the LNG plants. Plans to extend the AGP have been quietly dropped and the country looks like becoming a net gas importer in the relatively near future.

There are two main causes for this reversal of fortune. Firstly, domestic gas demand has continued to increase steadily, even during the ongoing political and economic crisis. Although the country is developing its wind power resources, most new power generating capacity has been supplied by gas fired power plants, while the fertiliser and cement industries have placed even more strain on supplies. In the rather difficult year of 2012, domestic gas consumption increased by 5.8% to 39.2m tonnes.

Secondly, oil and gas companies have been deterred from investing in new projects by the government’s inability to pay for oil and gas that has already been supplied. Egyptian General Petroleum Corporation is forced to sell the gas that it buys from upstream operators at a loss because of low state regulated prices. However, the government’s reserves of foreign currency have been eroded during the long economic crisis and it now owes the operators about $5bn.

At the same time, the post-Arab Spring Egyptian governments have favoured domestic needs over export revenue in order to calm popular discontent. Reduced LNG exports have therefore cut the government’s foreign currency income.

Majid Jafar, the managing director of Dana Gas, said: “It’s important to break out of the vicious circle of payment delays leading to reductions in investment, production and government revenues. It is hoped that the fiscal support from the Gulf countries will help with this, and our own production has been steadily rising.”

Egypt to seek gas imports
As a result, Cairo is now considering its import options. LNG has been widely discussed but piped gas would be a cheaper alternative. Large gas reserves have recently been discovered off the coast of Israel that should be sufficient to satisfy Israeli needs for decades to come, with plenty left over for export but Israeli imports would probably be political unpalatable within Egypt. The best option appears to be to extend the AGP into Iraq and to reverse the direction of supply. The government of Iraq is already keen to pursue the project.

Further west, Algerian gas export ambitions may have to be downsized. The country already exports gas via three LNG plants and three sub-sea pipelines: one to Italy and two to Spain, including the new Medgaz line.

However, the development of the planned fourth pipeline has been repeatedly delayed. Weaker than expected European demand may have deterred the construction of the Galsi Pipeline from Algeria to northern Italy via Sardinia but Algeria’s own investment environment is also likely to have played a role.

Since 2009, foreign investors have been restricted to acting as junior partners alongside state owned Sonatrach on any new oil and gas projects. As a result, licensing rounds for new blocks have attracted very little interest over the past four years and the lack of upstream development may now be affecting production volumes.

The government responded by offering improved tax arrangements in February, plus guaranteed pipeline access but Sonatrach retains 51% ownership of all joint ventures. On a more positive note, the Tiguentourine gas field, which accounts for 12% of Algerian production capacity and which has been out of production since the January terrorist attack, is scheduled to come back on stream by the end of this year. Another suggestion involved retaining the national carriers for regional duty and farming out long-haul flights to a major international carrier. A third suggestion was to create a regional airline belonging to all the countries that would undertake all flights, including intercontinental ones.

Yet another view was to create a regional airline but retain the national carriers and the final suggestion was for the establishment of a low-cost carrier restricted to serving the region.

Since a regional air strategy appears essential to the sustainable development of each country of the Indian Ocean, the conference adopted a decision to call for a meeting of region’s civil aviation ministers to work out a road map. It was made clear that a coherent regional and open air policy contributes to economic development.

Hannah Messerli from the World Bank put forward projections showing that Singapore will double its tourist arrivals between 2004 and 2017, tripling its tourism receipts and adding two or three economic growth points. Air connectivity has in fact got a real stake in economic development.


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Written by African Business Magazine

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