Fixed pricing of natural gas E&P agreements abandoned. On 20 December 2017, the government decided to cancel the fixed pricing mechanism of gas production agreements, such that price adjustments are variable based on E&P companies’ production costs. Prior to this decision, gas pricing was fixed in the production sharing agreement (PSA) between the government and IOCs, regardless of production cost profiles, forcing production cuts when costs rise significantly in the fields’ late stages. The move is positive, in our view; alongside other sector reforms it bodes well for sector FDI, and should help prevent sharp falls in existing fields’ production. Other necessary initiatives are settling of arrears to IOCs, which currently stand at USD2.3bn.
Zohr mega field kicks off. Egypt’s Zohr mega field kicked off on 16 December 2017, with an initial gas production of 0.35bcf/d rising to 1bcf/d (10.4bn m3 p.a.) by mid-2018e and 2.7bcf/d (27.9bn m3 p.a.) by end-2019e. This was preceded by another mega field, WND, coming on line in May 2017, with an initial production of 0.7bcf/d (7.2bn m3 p.a.), rising to 1.2bcf/d (12.4bn m3 p.a.) by end-2018. The two fields collectively raise Egypt’s total gas supply by a 2017-19e CAGR of c20%, leading the gas deficit to drop to 2.7% of demand in 2019e vs. 16.2% in 2017e and c11.6% in 2018e.
Reiterate our view of a prolonged gas deficit, rising gas cost and price, despite improving supply. Beyond 2020e, and absent of new major discoveries, we expect a mix of: i) dwindling supply as current fields deplete, (depletion rate was as high as 8.2% in 2016 vs. 7.1% over 2012-15a), and ii) rising demand thanks to economic and population growth, to lead to a sustained gas deficit (11.1% of consumption in 2021e, 20.7% in 2022e), which would need to be plugged by imports. We expect the import price parity of USD8.8-9/mmBtu to dictate gas prices in Egypt, if the government’s plan to remove subsidies is to be achieved. Abandoning fixed-priced PSAs translates into a rising cost curve for the government, which although positive for investment into domestic E&P, will call for a higher end-user price.
Implications on the economy, industrials. We estimate the total gas cost to the government to rise to cUSD8bn in 2018 and USD8.9bn in 2019, up from USD5.9bn in 2017, despite new supply (gradual repricing of current agreements alone to cost USD4.3bn over 2018-19e). Within our coverage, Dana Gas [Neutral | TP AED0.71] might be a beneficiary from repricing its Egypt output (8% of production) that currently stands at USD2.7/mmBtu, with a scope for higher production from Egypt as well. However, to the downside, we expect the manufacturing industry to see gradual increases in gas prices, but to varying degrees, as the government is likely to consider sector profitability, price transmission to reduce inflation, and export competitiveness. Moreover, power prices need to see sharp increases as the average is currently only 46% of fuel costs.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.