Egypt is too optimistic on oil revenue
Egypt reported a $450 million trade deficit in the petroleum sector on the same day that the new budget - containing far rosier forecast - was enacted.According to the budget, the petroleum sector will generate a surplus of $755 million. However, judging by the actual performance of the petroleum sector over the past year, the government's oil revenue forecast appears overly optimistic.
Asked by a foreign investor how contracting oil revenues can be expected to bolster Egypt's seriously dwindling foreign currency reserves, Minister of Petroleum Sameh Fahmi said this would be answered, "later, not now."
With oil imports on the rise, due to declining reserves and rising domestic consumption, the answer will probably come much later. Recent financial setbacks in the oil sector indicate that the hoped for revitalization will probably not occur in the foreseeable future.
The Egyptian General Petroleum Corporation (EGPC) has said it would reduce the price of crude oil exports in response to the OPEC decision last month to raise their production ceiling to 25.4 million barrels per day. Compounding this fiscal setback, revenue from the Suez Canal declined in the first quarter of this year.
In particular, the volume of oil passing through the canal dropped 938,000 tons between January and March. In May, in an effort to bolster foreign currency reserves, which currently stands at a little over $15 billion, butane imports were reduced. However, domestic demand made this policy unsustainable.
In order to generate the projected revenue surplus, Egypt's oil and gas sector must simultaneously meet burgeoning domestic demand while increasing export revenue. Ideally, Egypt's estimated 70 trillion cubic feet of untapped natural gas reserves would become an engine of export-led growth.
However, market and infrastructure realities may make this problematic. To date, Egypt has not finalized any export agreements for its natural gas. Although a memorandum of understanding was signed with Turkey in 1996, the Turkish government is seriously considering an Azerbaijani bid. Europe should be a prime candidate for Egyptian gas, but there are no economically viable means of delivery.
Recent negotiations to export gas to Europe via a Libya based pipeline have proved disappointing. Yet, Spain has expressed interest in Egyptian gas. The Ministry of Petroleum has announced "informal" plans to begin exporting natural gas to Israel.
Across the Mediterranean region, the gas trade is expected to rise to 3.3 trillion cubic feet annually over the next two decades. It will mostly serve EU demand. However, if Egypt seeks to enter the European market it must overcome stiff competition.
Algeria alone has the capacity to satisfy a substantial portion of the EU's energy needs. The success of Egyptian export plans depends on how efficiently it can compete in relation to giant competitors such as Algeria and Qatar.
In a drive to make the oil sector more efficient, the government is planning to privatize oil distribution this year. It is also seeking greater private investment in state-owned fields. Tenders from large multinationals to develop untapped deep-sea reserves are also being investigated. Throughout the sector, ventures are being undertaken to foster much needed export-oriented activity.
Indeed, the petroleum sector must continue to maximize efficiency or else the petroleum minister will never be able to answer that pesky question.
© 2000 Mena Report (www.menareport.com)