A resurgence in the land of the Pharaohs

A resurgence in the land of the Pharaohs

Giuseppe Acconcia | Journalist focusing on the Middle East
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While Egypt reaches new trade agreements with European partners, a major gas discovery and the expansion of the Suez Canal offer hope for economic growth

The expansion of the Suez Canal, inaugurated last August, and the discovery of one of the largest gas fields in the eastern Mediterranean, the Zohr IX exploration prospect, are the main outcomes of the Egyptian economic policy after years of stagnation. They promise economic growth that could have significant long-term effects on the country’s infrastructure. However, it is still too early to establish the impact that these major works may have on the Egyptian economy. Cairo’s government is, on the one hand, negotiating a new loan with the International Monetary Fund (IMF) and, on the other, implementing policies to cut public spending in a context of mobilization of the public sector following recent salary cuts.

 

The economic effects of a multi-billion dollar expansion

The Suez Canal was nationalized by Egyptian President Gamal Abdel Nasser in 1956. It now controls 19% (240,000 tons of goods) of the global maritime trade and its importance has been growing exponentially in the last decade. With its expansion, the Canal has grown from 80 to 115 km, allowing for faster 2-way traffic. Freighters and merchant ships will reach the ports of Great Britain from the Gulf Countries in just 14 days instead of the 24 days previously required. Moreover, travel waiting times for ships heading to Europe have decreased to 3 hours down from 11. Canal crossing times have also been reduced (from 18 to 11 hours). Numbers are gradually increasing, from 49 ships per day crossing the Suez Canal last year to 97 expected in the coming years. According to the Egyptian authorities, the project will more than double annual profits from the Canal, from $5 billion to $13 billion by 2023. However, these estimates depend on a more general growth in global maritime trade. "The expansion of the Suez Canal has been the main success of the Egyptian economy in recent years and is already recording its impact on growth rates, " said the economist and director of the Third World Forum, Samir Amin. With the quick implementation of the expansion of the Suez Canal, the Egyptian military has sought to present themselves as economic innovators, as they did with the March 2015 Egyptian Economic Development Conference in Sharm el-Sheikh. Moreover, for months, the Egyptian authorities have aimed to strengthen bilateral relations with strategic partners in Europe as well as Russia and the United States. These include, in the front row, Italy and France, with whom Egypt signed agreements totaling sixteen billion dollars between early 2015 and the beginning of 2016.
The Gulf of Suez, together with the eastern Mediterranean and the Nile Delta, show the most significant growth in foreign investments in the Egyptian oil market. The implementation of the expansion of the Suez Canal, in a region affected by serious political instability should allow Cairo to focus more strongly on gas production. This has been achieved thanks to better management of both the Suez Canal and the Suez-Med Pipeline. Following the jihadist attacks on the gas pipelines in the Sinai and the halt to gas exports to Israel and Jordan (2012), even US energy companies (Noble) and Israel’s Delek have undertaken to relaunch the Egyptian energy market. According to some Egyptian analysts, the U.S. and Israeli investments could allow for greater developments of the local industry’s companies. Yet, according to initial figures, published by the Financial Times, the project has not yet produced significant economic benefits. Indeed, profits have decreased from $462 million last August, before work had been completed, to $449 million in October.
The Egyptian government is committed to new liberalization policies, privatization of the energy market and to significant cuts in public spending, as required by the IMF, with which Egypt is negotiating a huge new loan. Moreover, in recent European business missions, the Chairman of the General Authority for the Suez Canal Economic Zone, Ahmed Darwish, has requested a greater commitment to investment in the expansion of infrastructure in the area in order to achieve the goal of creating a large free trade zone by 2030.

 

Eastern Mediterranean and Zohr IX gas field

Furthermore, the recent gas discovery that could give the Egyptian economy a significant boost is the Zohr IX exploration prospect. Indeed, former Minister of Energy and Petroleum Sherif Ismail was reached the top of the Egyptian government, on the strength of this discovery. Zohr IX, in Egyptian territorial waters 107 km off the coastal city of Port Said and 200 km from Eni’s Temsah platform, is located 1,450 m deep, in the Shorouk block, granted to the management of Eni following a January 2014 agreement between the Egyptian Oil Minister and the Egyptian Natural Gas Holding Company (EGAS). Once production has started, most likely by 2017-2018, the giant gas field could produce 850 billion cubic meters (bcm) (the equivalent of 5.5 billion barrels of oil, and some analysts believe that number is conservative) in a 100 km sq. area.
Eni’s discovery could have significant effects on Egyptian imports and exports in the sector. Egyptian authorities are aiming to achieve the goal of energy self-sufficiency by 2020. The pro-government newspaper al-Ahram celebrated Zohr IX as a path to this goal. "We will now have natural gas to supply our plants, for much-needed industrial development, for new factories and increased employment, " assured industry expert Mohamed al-Ansary. At full production, "gas exports should only be a small part of production: approximately 10%" added al-Ansary. According to the local press, pipelines will start from the Temsah platform to reach the Zohr IX prospect. This would make it possible to launch production within just over 2 years, with a resulting fall in prices. "When Zohr IX becomes operational, it will be a great help to economic growth and the reduction of imports," said the former director of the Cairo Chamber of Commerce, Ali Moussa. In the long term, the discovery of the giant Zohr IX gas field should reduce the country’s net foreign debt and reactivate foreign investments, which withered in response to the economic crisis of 2008.
Lastly, the discovery of Zohr IX came during a period of economic stagnation for Egypt’s economy, with a concurrent crisis in the country’s tourism industry. Specifically, the attack in the Bahariya desert at the end of last year, in which Mexican tourists were mistaken by security forces for terrorists, and the in-flight explosion of the Airbus Metrojet A321, which caused the deaths of 224 people, have seriously affected the local tourist industry.

 

The geopolitical repercussions of 2 great projects

When Zohr IX becomes operational, Egypt will be able to export its gas to Israel and Cyprus. For this reason, the cooperation between the governments of the 3 countries is crucial to forming a joint-venture. Evidently political resistance exists because this has not yet happened. The Egyptian authorities, during an initial stage, seemed willing to proceed alone to exploit Zohr IX. Yet it would have been possible for them to create, together with Cyprus and Israel, a main gas hub in the Eastern Mediterranean. On the one hand, this would have allowed Egypt to strengthen its geopolitical role in the region and, on the other hand, the European Union to increase its imports from the region in a context of reduced domestic production and approaching end of long-term agreements with Norway and Russia. The Israeli authorities had hoped to export gas extracted from the Leviathan gas field to Egypt. Even Britain’s British Gas and Spain’s Fenosa Gas aimed at exporting to Egypt thanks to Leviathan and to Israel’s offshore Tamar gas field. Yet the announcement of the discovery of the giant gas field in Egypt caused a financial earthquake in Tel Aviv (and also in Qatar). The development of the gas field, which is not yet operational, has been blocked by a bitter internal political debate concerning industry regulation. According to Israeli expert Eran Unger, Tel Aviv company Tamar could now see a decrease in its exports and will have to contend with lower prices.
However, Israel’s National Security Council was convinced that Egyptian authorities would not have been able to relaunch the country’s local gas market. Israel’s Energy Minister, Yuval Steinitz, reiterated the government’s intention to approve the Leviathan plan and confirmed the strategic centrality of this project. Thus, despite skepticism by Israeli entrepreneurs and the collapse of the Tel Aviv Stock Exchange due to speculation on a possible Leviathan collapse, last November Israeli Leviathan partners reached a preliminary deal to export gas in the Egyptian domestic market for 10-15 years, signing an agreement worth $10 billion. The Egyptian president, Abdel Fattah al-Sisi, needs international legitimacy and economic recovery in order to erase and overcome the images of political instability and the recent attacks against tourists and foreigners. Both the construction of the Suez Canal expansion and the announcement of Eni’s discovery off the coast of Port Said could help to create the foundation for significant achievements in the country’s economic growth and new opportunities in the regional energy market. The construction of the Suez Canal expansion is a step forward for global maritime trade, but its effects on the Egyptian economy are still small. Real economic development and new investments could be encouraged in Egypt especially by innovative industrial policies to rebuild the chemical and steel sector and the textiles and agri-food sector. Major projects, however, must be accompanied by structural reforms in industrial policy: on the one hand, in response to the requests of the IMF and the World Bank (WB) and, on the other hand, in the form of programs to meet the needs of the middle classes and the poor, who have been seriously affected by the economic crisis of recent years.


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