Oil News Egypt/NA
By  Dr. Cyril Widdershoven
Middle East specialist and consultant

    As oil prices stayed on their course of unexpected highs, even after the temporarily dip to $27.11 per barrel for Brent, the Arab Oil Exporting Countries are still enjoying a renewed confidence in their capabilities. Not only developments in the so-called oil-belt (the Arab Gulf region) are of the utmost importance for European and American oil-consumers. There is growing concern among industrialized countries that the cartel’s intention to keep output curbs and maximize export revenues could put a dent in world economic growth. European Central Bank Chief Economist Otmar Issing said there was a danger that a temporary rise in inflation due to surging oil prices would become more permanent if it led to higher wage settlements. “We face a dangerous, fragile situation as wage negotiations are just starting in Europe.” Analysts also warn that the longer the OPEC delays raising output, the more volatile the price of the strategic commodity will become. Arab states however do not react until now.

    Especially  North-Africa and Egypt are striking back. Several new finds and increasingly competitiveness of local production is promoting this region now with renewed force. Two players are (re-) emerging in this field. Libya, as a well-known but for years an outcast, and Egypt are becoming major players in the Mediterranean region.

    Several international news agencies have reported a doubling of Egypt’s oil reserves with a new discovery. A huge oil and gas discovery has been made in deepwater off Egypt’s Mediterranean coast, the country’s oil minister has claimed. Sameh Fahmi said that on the basis of seismic surveys, the find, by three international companies that he did not name, amounted to reserves of 4.5 bn barrels. If confirmed, this would increase the country’s oil reserves from 3.7 bn to 8.2 bn. Gas deposits lying beneath the oil were also some 23.5 Tcf, the minister said, boosting Egypt’s gas reserves from 36.5 Tcf to 60 Tcf. Oil production from the new field would be scheduled to begin after June next year. BG, the most prevalent operator in Egypt, declined to comment on any discovery.

    In the same time, the Egyptian cabinet, which has been ordered by President Hosni Mubarak to revitalize export programs during the coming year, has granted approval for the export of natural gas. Some of the most important targets for Egypt’s gas exports will be the Turkish and Israeli markets, largely due to the expected increase in demand in both countries. Egypt’s competitiveness in the international oil and gas markets, with specific relation to the European markets, is still questionable. It has to compete increasingly with the already intricate relations between North African producers, such as Algeria, Tunisia and Libya, who are all interconnected to the Italian and/or French pipeline structures.

    The reemergence of Libya as a full-fledged producer and competitor will have an increasingly negative influence on the position and attractiveness of the Egyptian Exploration and Production sectors. Production costs in Libya are still lower, revenues on investments and possible new finds are more promising in the Libyan environment than the sometimes extremely closed Egyptian market. The lure of six figure salaries are tempting thousands of European oil workers and specialists to work in Libya. For the companies themselves the attraction is that Libya is a significant oil producer – its is a member of OPEC. But oil resources in the country have been under exploited in the past – and it also has a massive gas potential. Libya is a major gas supplier to Italy.”

    Like an Associated Press analyst stated “It is difficult these days to find a seat on flights to Libya. Chances are, they are taken up by European business executives searching for deals in the Arab world’s newest market.” Baghat Moussa, American University in Cairo states “Libya may need privatization, but I don’t think the government is serious.” Up till now, investors are uneasy about the opening of the Libyan market, but profits and revenues on investment are too high to forget. Libya needs to diversify its oil-based economy and reduce 10 percent inflation and an unemployment of 30 percent. Until now Libya has yet to sign a major deal outside the oil and gas sector, which earned the country $6.5 billion last year. As is expected, Libya is courting the Europeans, to act as a counterweight and pressure on the Americans. The latter are the major suppliers for its oil and gas sector technologies. The next months will show an increased competition in Libya, focusing on the oil and gas E&P sectors, with as a direct result very high production-raises with possible reductions in Mediterranean oil/gas prices and futures.

    On 20 January, International Petroleum Libya (IPLL), a subsidiary of Lundin Oil AB, announced that the En Naga North and West Oil field has been declared a “commercial Discovery’. It contains an estimated proven and probably recoverable reserve of 90 million barrels. Production is scheduled to commence in the first quarter of 2001.

    In a period of new stability, increasingly high international crude oil prices, new finds and new field recovery technology will become the instruments that possibly will effect the international oil market structurally. Higher oil prices are proponing a tendency to promote over-production. Higher revenues are putting the high costs-high risk areas of the deepwater areas and the Caspian again on line. When the oil prices started to roar higher than the expected $16-18 per barrel, new perspectives and total re-evaluations of investments had to be made. This month oil prices even reached the nine-year high of $28 per barrel, this was the first time since 1991. The last gain came after OPEC removed virtually all doubt it will extend its agreement on lowered production for several more months. Frigid weather conditions in the Northern Hemisphere also have contributed to the unexpected rise. Meeting in Vienna, the market monitoring committee of the Organization of the Petroleum Exporting Countries agreed to strongly recommend that the 10-month-old production cutbacks be continued beyond their scheduled March 31 expiration. The extension could be longer than expected, which helped accelerate the price run-up. “Thirty-dollar oil is going to have be inventory-driven. The news is out on OPEC – that’s known quantity. The unknown is what happens in the near term with supply,” an analyst stated as a reaction. According to the Center for Global Energy Studies in London, oil prices this summer are likely to rise above $30 a barrel for benchmark Brent if producing nations decide in March to extend an agreement on output limits. “By delaying its much needed output increase for another quarter under the rollover scenario OPEC causes the price to rise beyond the $30 a barrel level sometime this summer.” The center already said stock over was already “at extremely low levels.”

    In a different interview, Egypt’s new petroleum minister, Sameh Fahmy, has stated that their will be huge challenges ahead for the Egyptian oil and gas sectors. The harsh reality is now that Egypt , for the first time since the 1970s is running a deficit on its oil and gas balance of payments. The reasons are that crude production has fallen, petroleum products consumption is rising and the rapid increase in gas production incurs a heavy costs as EGPC must pay for the foreign companies share of this output. His new target is to restore the balance of payments to a surplus in 2001, and achieving a major revival in foreign exchange earning from 2003. Egypt is now producing about 780,000 barrels a day of crude oil, mainly from the Gulf of Suez. Output has been steadily declining from a peak of almost 900,000 bpd in 1995. Reserves, without the above mentioned unspecified and non-quantifiable find, have been kept at 3,500 million – 4,000 million barrels thanks to the active exploration efforts of foreign operating companies which have maintained a sufficient new oil to replenish reserves. Natural gas production is now about 2,300 million cubic feet a day (cf/d), more than 50 per cent higher than at the end of 1998, and is projected to exceed 3,500 million cf/d in 2003 as a series of large new fields off the Delta coast are brought on stream. Until now the official figure of gas reserves is now 37 trillion cubic feet (tcf).

    To deal with the ongoing revenue crisis of the Egyptian oil and gas sectors, according to Fahmy “the only thing we can do is to start exporting gas!” On the 3^rd of January, the Egyptian ministry of Petroleum stated “to start immediately to make preparations for the export of gas whether by pipeline or in liquefied form.” Prospects for early progress with the gas export strategy have been lifted by the 23 December 1999 announcement by Israel that a pipeline link had received official approval from Cairo. Gas should be flowing to Israel within two years, an Israeli spokesman said, though pricing and other details remain to be negotiated. All gas supplies in this deal will come from Agip Italy operated fields. Other markets to be targeted are Italy, Turkey, Greece but competition there is harsh. Egypt will have to become more focused on productivity and possible increase the consumer prices in the domestic market of petroleum and gas related products. Consumption, increasing with at high speed, will become Egypt’s major problem. Expectations are, without the new field, Egypt’s consumption will force Egypt within the next 6 years to become a net-importer of petroleum and gas, causing an increasingly higher government deficit, with all its known negative repercussions. Making use of the gas and oil revenues has still to be learned in Egypt, spending the golden eggs without feeding the hen, is a huge mistake. Egypt’s oil specialist and economists should talk to specialists in countries such as Norway, the Netherlands or the Gulf-region to have some ideas about spending money to retain sustainable development. Until now Egypt has been going the path of the older OPEC countries, spending it as if the sources will always be replenished, no in-depth investment and keeping its people quiet with low energy costs. This will definitely not be sustainable.

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Reprinted as submitted.