IN THE WEEK OF THE WORLD ECONOMIC Forum (Middle East) in May 2008, the Egyptian government was in the throes of a major overhaul of its energy pricing policy. Gasoline prices had been raised, by 50%, in part to reduce subsidies to the minimum, and further hikes were on the horizon. But the most fundamental move, as far as international investors were concerned, was the pricing of natural gas.
“We are trying to embrace liberalisation up to the reasonable limits”, said a statement from the Egyptian government at the forum.
Egypt compels international companies to commit more gas to the domestic market, in spite of the pull of the export market, where prices have reached $11.6 per million British thermal units(btu), or $11.6 per thousand cubic feet (Mscf).
Then it sells its natural gas in the domestic market to Egypt based companies at a rate far cheaper than the international market determines. Thus, companies that utilise gas to produce cement, steel, aluminium, petrochemicals and other such products in the country, pay far less for natural gas than their competitors in Europe and the United States.
Now, such energy-intensive industries are to pay more for natural gas from July 2008. The prices would jump again in January, 2009, all as part of a plan to reduce subsidies.
Egypt will hike the price of natural gas to $2.22 per million British thermal units (or thousand cubic feet) in July from $1.85 and would increase the price of electricity by 20 per cent. Natural gas prices would eventually rise to $2.65 per million British thermal units. The price increases apply to Egypt’s steel, cement, and fertilizer industries.
The Egyptian government has been reviewing the prices under natural gas agreements in reaction to the rise of natural gas prices in international markets. A significant part of this price hike extends to the preferential price that the Egyptian government has offered to Jordan, its north eastern neighbour. Egypt will increase the price of gas it delivers to Jordan via pipeline under the Gulf of Aqaba by 200%, to $4.5 per million btu. The Jordanian government has agreed to the increase, which will be applicable only to additional supplies this year(2008) and not to the supplies, agreed upon in 2001 at a price of $1.5 per million btu. The new agreement is expected to take effect by the end of 2008. It gives Egypt the right to review the price every three years to reflect changes in international prices.
Egypt has also announced an end to the tax holidays granted to companies in the free zones. About 20-25 companies operating in the fields of oil and gas, petrochemicals and fertilizers which have long term contracts will be subject to the regular 20 percent tax. “Free zones will remain,” explained Rachid Mohammed Rachid,” the country’s minister of Trade and Industry. “We are only changing the tax status of those which use oil and gas as raw material. The remaining 2,000 companies in the free zone will continue operating as usual.”
Meanwhile, the country has agreed to increase natural gas prices to international oil companies operating in five separate concessions in the Mediterranean Sea. The new price of $ 3.95 per btu (from $ 2.65 per btu, the current price) is expected to boost the field development projects planned by BG, Eni, RWE Dea and Hess.
Egypt had brought forward the date of the subsidy cuts to July from September 2008, to help ease pressure on the budget. The Egypt’s Finance Ministry is worried that, without such a move, energy subsidies would rise to $11.13 billion (or 60 billion Egyptian pounds) in the 2008/9 fiscal year from $10.57 billion(or 57 billion Egyptian pounds). “Energy subsidies are a major contributor to the government’s budget deficit”, says Youssef Boutros-Ghali, the country’s Minister of Finance. “They help to push up interest rates”.