{"id":563744,"date":"2021-07-14T04:00:12","date_gmt":"2021-07-14T04:00:12","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/hardhats\/investing-in-egypts-energy-sector-risk-and-return-part-ii\/"},"modified":"2021-07-14T04:00:12","modified_gmt":"2021-07-14T04:00:12","slug":"investing-in-egypts-energy-sector-risk-and-return-part-ii","status":"publish","type":"hardhat","link":"https:\/\/enterpriseam.com\/egypt\/hardhats\/investing-in-egypts-energy-sector-risk-and-return-part-ii\/","title":{"rendered":"Investing in Egypt\u2019s energy sector: risk and return (Part II)"},"content":{"rendered":"

<\/a> Besides renewables, what do risks\/returns look like in other energy sub sectors?<\/strong> Earlier<\/a><\/a>this month<\/a>, we looked at the Economist Intelligence Unit\u2019s (EIU) latest forecasts for Egypt\u2019s renewables sector over the coming decade. This week, we\u2019re examining what the 2020s have in store for non-renewable energy in Egypt, including the coming natural gas boom and what this means for oil.<\/p>\n

Quick recap on the macro picture: Egypt\u2019s energy sector = moderate returns, moderate risk. <\/strong>\u201cThe global economic contraction caused by the pandemic will remain a major risk in the medium term,\u201d EIU writes, as social distancing norms and lockdowns undermine productivity and demand. The global uncertainty will also continue to negatively affect investor sentiment. At the local level, opposition to increased energy prices, currency volatility and fiscal pressure are considered moderate threats to energy investments.<\/p>\n

Ranking the sub sectors: Electricity, and oil and gas definitely come out at the top with relatively high returns and moderate risks<\/strong>. Egypt has a healthy pipeline<\/a> of energy investments, and the government has allocated EGP 43 bn to the sector in FY2021-2022. This pipeline is underpinned by the creation of the East Med Gas Forum, and resuming LNG exports from the Damietta liquefaction plant after eight years in hibernation.<\/p>\n

Electricity investment is considered a beacon of high returns with moderate risks. <\/strong>Egypt ranks 24th among 67 countries for projected consumption for 2029, according to the EIU. Given the power surplus that the country has witnessed over the past years, Egypt is well on its road to become an electricity hub. But sporadic power outages will continue should the government fail to upgrade infrastructure.<\/p>\n

What electricity glut? <\/strong>From 2021 until 2030, electricity demand is expected to grow by an average 3.3% per year, as supply and manufacturing outputs increase, and people buy more ACs and refrigerators. More EVs, electrified rail transport and desalination plants will also cause demand to rise. State subsidies will be gradually phased out by 2025.<\/p>\n

Investing in oil and gas yields high returns.<\/strong> In the EIU\u2019s forecast, Egypt ranks 17th in natural gas consumption and 11th in national gas production, out of 67 countries, primarily thanks to the giant Zohr gas field. While low crude oil prices during the pandemic made drilling unprofitable and reduced investor interest in the sector, oil prices have since recovered, while the lifting of fuel subsidies could place the industry on a more sustainable footing.<\/p>\n

But is underpinned by moderate risk. <\/strong>There still remains a risk of opposition to fuel price increases, as subsidies are scaled back, coupled with rising inflation. But eventually, the removal of subsidies will hinder demand growth. \u201cEven as use of gas for electricity rises, the increased uptake of EVs that this facilitates will put downward pressure on oil demand during the forecast period,\u201d the report adds.<\/p>\n

The (almost) loser in Egypt\u2019s energy future: oil. <\/strong>The investment in and development of the monorail, metro network and other rail projects will curb the demand for petroleum products, especially when it comes to urban transport and freight. While the demand will not decrease, its annual growth will be curbed more and more, with the last few years of the coming decade probably seeing more EVs on the road. While oil consumption in 2020 stood at 33.6 mn tonnes oil equivalent (toe) and is expected to grow by 1.5% in 2021 to 34.2 mn toe, the year 2030 will hit 37.2 mn toe with an annual growth rate of just 0.7%. Toe is equivalent to the amount of energy that can be extracted from one tonne of crude oil.<\/p>\n

Gas is looking brighter though. <\/strong>Expected to yield a steady flow of growth over the next 9 years, natural gas consumption will grow by 2.1% in 2021, with similar growth spurts for the years to come. The thing holding gas consumption growth back is an increase in renewable energy generation and the enhanced efficiency of combined-cycle power stations. These plants use both a gas and a steam turbine, and can produce up to 50% more electricity from the same fuel than a traditional simple-cycle plant, according to GE<\/a>. \u201cThe power sector will remain the principal source of demand for natural gas, followed by industries such as fertilisers, metals, ceramics and cement,\u201d EIU tells us.<\/p>\n

After coal made a comeback in 2012, its consumption growth may soon retract. <\/strong>In 2012, the steel and cement industry started heavily relying on coal for the factories and plants due to a natural gas supply decline. But as Egypt is on the track to become a gas hub with several natural gas fields coming into operation, these sectors may reverse their tracks again. With a recovered supply of natural gas and no foreseeable domestic coal production, plants and factories are likely to switch back. The yearly growth of coal consumption in 2030 is expected to grow by 0.1%, with consumption going from 1.5 mn toe from 2020 to 1.6 mn toe in 2030.<\/p>\n

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