Energy subsidy reform not stalling Egypt's IMF deal - Minister
Egypt's fuel subsidy reform programme is moving ahead on schedule and is not the reason why a deal with the International Monetary Fund (IMF) has stalled, Minister of Petroleum Osama Kamal told Ahram Online.
Negotiations over a proposed $4.8 billion loan from the IMF have hit a rough patch, with the international lender unsatisfied with the economic reform programme that the government has put forward.
Specifically, the IMF was unimpressed by Egypt's fuel subsidy reform plan, doubting the government's ability to implement the 'smart card' system designed to ration diesel fuel. Under the new system, consumers will be provided with limited amounts of subsidised fuel, beyond which they will have to pay market prices.
Despite the IMF's doubts, Kamal confirmed that the system would be up and running starting in July 2013.
"We now have a project manager, a contractor and an implementation programme," the minister said in an interview with Ahram Online. "The job was awarded to a specialised company, E-Finance, which is fully owned by the ministry of finance."
"The new system will begin in July as planned. Part of the infrastructure is already in place in the ministry of finance; they have already built it for the supply ministry," Kamal added.
He said that the ministry had given all information needed in the negotiations with the IMF, slamming leaks suggesting that the IMF technical team had called Egypt's fuel subsidy system a "black box."
"We provided all details needed. What they [the IMF] asked for were assurances about the programme's implementation," he added. "This is why they met with different political parties in Egypt trying to get their approval and confirmation that this programme was going to be implemented."
The minister expected the smart-card system to save some $30 billion out of Egypt's fuel subsidy bill in the coming 2013/14 fiscal year, which the government expects to reach LE99.6 billion – some 15 percent of total forecast public expenditures.
This is a significant drop from the current fiscal year – ending 30 June – in which fuel subsidies are expected to exceed LE120 billion ($17 billion), according to Kamal.
Part of the drop is attributed to the removal of the bulk of subsidies granted to heavy industries.
"Energy provided to industries is largely not subsidised now, except food industries and pharmaceuticals," Kamal said. "All in all, subsidies given to industrial establishments do not exceed 15 percent of the total subsidy bill."
Kamal declined to reveal the exact amount of debt Egypt owes to foreign oil companies. Reuters earlier in April estimated the figure to be at least $5 billion, half of it overdue.
"The real figure is much lower than this; none of the numbers reported are correct," Kamal said. "It is a revolving figure and we managed to reduce what we owe to foreign companies month by month over the past 15 months."
He confirmed that Egypt repaid some of its debts in Egyptian pounds, which they mainly used to finance their operating expenses for their local investments in Egypt. "But obviously, they cannot accept full payment in Egyptian pounds."
According to Kamal, Egypt has repaid some $1 billion of its debts to foreign oil companies.
Egypt has been suffering from a sharp drop in foreign currency inflows following the uprising that unseated Hosni Mubarak in 2011. Egypt's foreign currency reserves were heavily tapped to provide the oil sector with needed hard currency to meet its obligations.
But Kamal dismissed the notion that Egypt's financial troubles might discourage foreign companies from investing in Egypt.
"Companies know the potential in Egypt; this land has a lot of gas and oil yet to be found," he explained. "We had three bid rounds for new concessions in the past six months, and they were very successful. Twenty concessions are under the bidding process right now."
Egypt is Africa's top oil producer outside OPEC and its number-two gas producer after Algeria.
Nevertheless, some companies have moved to insure their business in Egypt. Apache, the largest oil producer in Egypt, has purchased a multi-year political risk insurance from the Overseas Private Investment Corp and other insurers to cover Egyptian risks, Reuters reported.
"Egypt's country risk increased in the past two years. So companies are insuring against that, not the business risk," Kamal said.
A black summer?
Kamal seemed confident about Egypt's ability to supply the needed energy to keep the nation's power stations running through the summer.
"Some people have been crying over a 'black summer,' but I don’t think this will happen," the minister said, referring to worries expressed in the media about anticipated summertime power cuts.
He said that the government plans to increase the quantities of fuel supplied to power stations through importing LNG directly, or carrying out "swap" deals with local producers.
"Swapping means that we take the share of foreign companies extracting gas locally, and swap it with LNG from abroad to their users directly," he explained. "This is better because we will get gas directly from the wells to the network; this is much better that importing LNG, building facilities or renting the floating vessel. Swapping is a cheaper alternative."
Earlier in April, Qatari Prime Minister Sheikh Hamad bin Jassim Al-Thani pledged that his country would supply natural gas to Egypt in the summer when it was needed. Kamal revealed that swap deals would be done in coordination with natural gas-rich Qatar, along with other foreign suppliers.
Foreign currency worries
The minister attributed the recurrent shortage of diesel fuel and petrol to pricing and smuggling rather than the government's inability to pay for supplies.
"So far, the ministry of petroleum has not faced problems in getting foreign currency needed to pay for imports," the 54-year-old minister said. "I don't know how they [the central bank and the ministry of finance] manage their business, but so far, whatever [foreign currency] we asked for, we got."
Central Bank of Egypt data shows that some $9 billion were made available to the Egyptian petroleum sector during 2011 and 2012. This is nearly a quarter of all the foreign currency the central bank injected into the Egyptian market during that period.
Egypt is currently in talks with the International Monetary Fund over a $4.8 billion facility that is expected to unlock more than $14 billion in aid and investment.
As for the long queues that have appeared in front of petrol stations across Egypt in the past 15 months, Kamal blamed the phenomenon on fuel smuggling caused by an ongoing security vacuum.
He estimated that smuggling and black markets account for not less than 20 percent of all fuel that the ministry provides to the market. He also blamed users' consumption habits. "Fuel is not consumed rationally because it is sold at very cheap prices," he said.
Shielded by government subsidies, fuel prices in Egypt remain among the cheapest in the world. The government last increased fuel prices in 2008. A litre of diesel oil, used mainly in commercial vehicles, is sold at $0.15 per litre, while petrol 92 octane – used in private cars – is priced at a just above $0.25
Iran and Israel
Recently, several reports claiming that Egypt would import oil from Iran have ignited controversy, but the minister pointed out, "Iran has never been an exporter to Egypt."
Iran has been looking for new buyers for its oil as western sanctions over its disputed nuclear programme squeeze sales to long-time customers.
In September, Egypt denied comments attributed to Iranian Oil Minister Rostam Qasemi that it was in talks to buy Iranian crude oil.
"I hope I can provide Gaza with fuel; but we can't because we are suffering from a shortage locally," the minister said, regarding relations with the besieged Gaza Strip. "We are not in a position to offer spare quantities to our friends and family in Gaza."
UK daily the Financial Times has reported that a leading investor in Israel's natural gas sector said initial talks were underway to export some of the country's abundant offshore reserves to Turkey, Jordan and Egypt – along with a proposed power plant in the West Bank – after Israel's new Tamar gas field started production.
"I didn't know or hear about this," Kamal said. "I don't read the Financial Times."
By Ahmed Feteha and Bassem Abo Alabass
- First it was the US and shale, but now, Saudi Arabia's toughest oil contender is emerging right next door
- Self-sabotage: Israel's fleeting natural gas revolution
- Saudis have a lot on their mind nowadays, but oil will always be their biggest worries
- King Abdullah's death and the 'fear premium' in Saudi oil markets
- Mixed signals: why King Abdullah's passing could not have come at a worse time for Saudi's oil sector