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Gas fuels Egypt's instability

The causes behind the popular uprisings across the North African states are generally more prosaic than political pundits would have us believe. In the case of Egypt, a gathering energy crisis has the potential to perpetuate the present political crisis
July 19, 2013

The standard line is that this month's military coup in Egypt, which a senior US diplomat curiously described as the country's "second chance" at democracy, had less to do with any opposition to theocratic rule but rather to an executive administration that was malfunctioning due to unbridled political patronage. Somehow, this explanation doesn't ring true, at least not entirely; cronyism and incompetence at the heart of government - who would have believed it? Regardless of its actual genesis, this latest coup d'état does serve to remind investors of the need to factor in the potential for political instability (or simple bad governance) for companies operating in the Middle East and north Africa (Mena) region.

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Egypt's natural gas industry provides a case in point. An aggressive - largely foreign funded - exploration programme has driven total reserves to 78 trillion cubic feet in a little over a decade. But Egypt's ability to tap into its immense contingent reserves is now in question because the government, which is perpetually short on foreign reserves, has managed to get in hock to overseas oil and gas companies to the tune of $6bn (£3.97bn). Companies such as PetroCeltic International. (PSI) which operates a total of 27 production/development assets in the Nile Delta, have been forced to gradually claw back a backlog of receivables owed by the state-controlled Egypt General Petroleum Corp (EGPC). The constant rescheduling and delay of payments to larger foreign operators that have contracts with EGPC, such as BG Group (BG.), Repsol, Eni and BP (BP.), is threatening future inward investment and the expansion of the sector. Why would any of these companies bother to fund costly deepwater exploration ventures if their disbursements are perpetually delayed?

The problem is principally linked to the level of funding by the Egyptian government to subsidise energy use - around a fifth of its fiscal commitments. Egypt's interim government - or whomever eventually takes charge - will need to negotiate higher prices for companies for offshore gas in order to boost incentives, while following through with an earlier commitment to end industrial subsidies by 2016. It might be a harder sell where the general populace is concerned; contrary to romantic notions over a regional longing for democracy, the 'Arab spring' uprisings, like the French Revolution, were initially brought about by food riots - could the prospect of a dramatic hike in power bills render the country ungovernable?