On 10 August, Egypt’s Prime Minister Mustafa Madbouli announced plans to reduce the country’s electricity consumption through a number of austerity measures, including turning off the lights in government buildings after working hours, reducing street lighting, and not allowing shopping malls to have their air-conditioning set at below 25 degrees Celsius.
The government has argued that such steps will help Egypt save 15 per cent of the natural gas used in generating electricity. Exporting it instead will increase Egypt’s earnings from natural gas exports by $450 million per month, it says.
The decision came as a result of domestic and international pressures and the challenges and opportunities faced by the Egyptian state. These global and domestic problems need to be understood in order to appreciate the government’s decision, the solutions which it offers, and the gains which Cairo hopes to reap from them.
The European continent, Egypt’s neighbour to the north of the Mediterranean Sea, is facing an energy shortage due to the Russian-Ukrainian war that started in February. The shortage is even more severe because of the high demand for energy during the post-Covid-19 economic recovery.
As the Russian-Ukrainian war has raged, and the West has reacted by imposing economic sanctions on Russia, Moscow has reacted by reducing its natural gas supplies to what it calls “unfriendly countries” in what some European diplomats have called a “gas war”.
Europe is highly dependent on energy imports from Russia. In 2021, the EU got 40 per cent of its natural gas, close to 45 per cent of its total imports, from Russia, amounting to 155 billion cubic metres of gas. The rest of Europe’s natural gas supplies come from Norway, Algeria, Qatar, and other exporters. In 2021, the EU also got 27 per cent of its petroleum and 46 per cent of its coal from Russia.
Energy shortages as a result of restrictions on Russian exports have led to an increase in energy prices and the general cost of living in Europe. Natural gas prices have increased in Europe by 127.6 per cent since the Russian invasion of Ukraine. In Germany, energy now costs 35 per cent more than it did at the same time in 2021. In the UK, energy prices have reached record highs, and the economic situation is such that some people have had to “make a choice between eating or heating”.
Europe is in a race against time to find a replacement for Russia’s natural gas. In March, the EU announced a strategy called REPowerEU, which aims to reduce Europe’s dependence on Russian natural gas by two-thirds over a year and to make it independent of Russian fossil fuels by 2030.
Europe has also introduced austerity measures to reduce energy consumption and its reliance on Russian natural gas. In July, EU member states reached a deal to voluntarily reduce the use of natural gas by 15 per cent between August 2022 and March 2023, although countries can file for exemptions under certain conditions. EU member states also announced that they would temporarily shift electricity generation from natural gas to coal, in order to reduce their dependence on Russian gas.
Meanwhile, Moscow has been using Russian gas as a weapon to retaliate against western economic sanctions. It has drawn up a list of “unfriendly states”, including those who refuse to pay for their gas purchases from Russia in roubles, in order to increase the demand for the Russian currency and support it despite the Western sanctions. Russia is also cutting off its gas supplies to the European countries.
It is refusing to operate the Nord Stream 1 pipeline at full capacity, for example. This carries Russian natural gas from the port city of Vyborg across the Baltic Sea to the city of Greifswald in Germany. The pipeline closed for a few days in July for routine maintenance, but was then reopened a few days later. However, Moscow is refusing to operate it at full capacity and has reduced its gas exports through the pipeline.
Moscow has also refused to receive a turbine necessary for the operation of Nord Stream 1. This was sent from Germany to Canada for maintenance, but then it was said that allowing the turbine back into Russia would go against the European sanctions on technology shipments to Russia. Germany is arguing that sending the turbine back to Russia, and Russia’s agreeing to receive it, would not go against the sanctions.
Russia has said that it will not take back the turbine due to missing documents and technical issues, both of which are denied by the Europeans.
It has announced that it will reduce natural gas shipments to Germany by 40 per cent and from 160 million cubic metres per day to only 100 million. Germany is Russia’s partner in the Nord Stream pipeline and the industrial powerhouse of the EU. Italy, too, has seen a reduction in its Russian gas deliveries by half.
The Russian gas company Gazprom’s deliveries to Europe are now less than 30 per cent of what they were before the Russian invasion of Ukraine. Moscow has completely cut off gas supplies to Poland, Bulgaria, Finland, the Netherlands, and Denmark. It has also greatly reduced supplies to other European countries such as France, Germany, Italy, Austria, the Czech Republic, and Slovakia.
“Russia is using gas as a weapon,” said President of the European Commission Ursula von der Leyen. The “worst case scenario” of a “total cut-off of Russian gas” is “probable”, she stated, adding that Europe would refuse to surrender to Moscow’s “blackmail”.
But the energy crisis between Europe and Russia is an opportunity for other gas exporters around the world. Kadri Simson, the EU commissioner for energy, has announced plans for Europe to replace the natural gas it exports from Russia with gas from alternative exporters such as Azerbaijan, the US, Canada, Norway, Israel and, more importantly, Egypt.
For years, Egypt have been aiming to turn itself into a global energy hub that would export energy to importers in the region through the exportation of natural gas from Egyptian gas fields and the liquefaction of gas at plants in Edko and Damietta.
The energy crisis in Europe may be an opportunity for Egypt to take a further step in this direction. Egypt produces about 66 billion cubic metres of natural gas per year, and before the government’s energy austerity decisions in August, it consumed 62 billion cubic metres of this, with the surplus of $4 billion worth of gas being exported.
The western European countries are currently suffering from energy shortages because of the cutting of Russian gas supplies due to the Russian-Ukrainian war. The price of one million British thermal units of gas (mbtu) has risen to $30, and this rise in price is also an opportunity for Egypt.
Exporting natural gas, instead of consuming it locally, would raise the government’s earnings. Natural gas is sold by the ministry of petroleum to the ministry of electricity for the purpose of local consumption for only LE3 per Mbtu. If exported, it could be sold for $30 in the European market.
Before the energy austerity measures were introduced in August, 60 per cent of natural gas consumption in Egypt was used for electricity generation. If the energy austerity measures are properly implemented, and a part of Egypt’s natural gas is shifted to exportation, then they could shift about 174 million cubic metres, or 570 million cubic feet, of natural gas per day from local consumption to exportation. This is about a third of Egypt’s export capacity.
According to the government, the amount of electricity generated in Egypt would not be affected by the reduction of the use of natural gas in electricity generation. This is because the gas would be replaced by another type of fuel — mazut fuel oil.
This also did not start with the austerity measures in August, as since October last year the government has been shifting the country’s power stations from using natural gas to mazut, in order to save more natural gas for exportation, a step which has led to an increase in export revenues from $100 to $150 billion over the past few months.
However, Egypt has not completely stopped using natural gas to generate electricity. It will still be used for electricity generation even if the current changes are fully implemented, but the share of natural gas in the energy mix will decline, while that of mazut will increase.
The advantage of using mazut instead of natural gas to generate electricity is that mazut is cheaper than natural gas, as each mbtu of mazut costs only $14, while natural gas can be exported at $30 per mbtu. Mazut has a significant disadvantage, however, as it causes more environmental damage. Both types of fuel are polluting, but mazut emits twice as much carbon dioxide as natural gas.
This is a classic example of the trade-off between protecting the environment versus enhancing economic performance, something that causes a lot of debate and controversy in every country.
The government has decided that economic performance is for the moment more important than sustaining the environment through these hard economic times.
This is especially the case given Egypt’s recent shortage of foreign-currency reserves. These fell from $33.38 billion in June to $33.1 billion in July. One way of trying to raise them is by exporting natural gas instead of consuming it locally.
The preference for economic performance over the environment also comes at a time of opportunity for Egypt because of the energy crisis in the EU, which means a good export market for gas in Europe. It has recently been announced that the EU will aim to replace natural gas from Russia with gas from alternative exporters, including Egypt.
Egypt had started taking steps in the direction of turning itself into a global energy hub even before the August austerity measures. On 15 June, on the margins of the seventh East Mediterranean Gas Forum meeting in Cairo, an important agreement was signed between Egypt, Israel, and the EU on exporting Israeli natural gas to the EU after liquefying it in Egypt. The agreement was signed by EU Commissioner Simson, Israeli Energy Minister Karine Elharrar, and Egyptian Minister of Energy and Petroleum Tarek Al-Molla.
Elharrar said that the agreement showed Egypt and Israel’s “commitment to share our natural gas with Europe and to help with the energy crisis.” Al-Molla said that it was “official recognition from Europe that Egypt is a regional hub for gas trading and a global hub in the field of energy” and that “the European Union considers us as among their primary suppliers.”
Egyptian diplomats said the agreement would not have a negative effect on Egyptian-Russian relations, because Moscow was aware of Egypt’s strategic importance and of Cairo’s desire to have good relations with all parties. They said that the agreement, which includes Israel, would not reduce Cairo’s commitment to the Palestinian cause.
On the same day, von der Leyen granted Egypt 100 million euros in food relief. Egypt relies on Russia and Ukraine for 80 per cent of its wheat, and it has lost a significant amount of these supplies because of the war. She said at a press conference with President Abdel-Fattah Al-Sisi that “Russia’s war against Ukraine has exposed our European dependency on Russian fossil fuels, and we want to get rid of this dependency… We want to diversify to trustworthy suppliers, and Egypt is a trustworthy partner.” She commended Egypt for its sun and wind, “the energies of the future”.
However, the agreement did not state a definite schedule or set a timetable for Israel and Egypt to export a definite amount of gas to Europe at a particular time. The details and conditions of the agreement are still vague. Furthermore, the amount of natural gas exported to Europe from Egypt and Israel (vast as both country’s natural gas resources may be) will never be as large as those provided by Russia, the country with the world’s largest natural gas reserves and largest exports. Therefore, Russia still holds a considerable amount of leverage.
These gas-exportation opportunities, auspicious as they may be, are also not long term. Fossil fuels like petroleum and natural gas will probably remain the main components of the global energy mix for decades to come. However, the EU and others have plans to gradually reduce the fossil-fuel component of their energy mix and are moving towards less polluting forms of energy such as nuclear, solar, and wind.
The steps that have been taken by the government will have a positive effect on the overall economy today, but in the longer term Egypt will have to adapt to the global movement towards sustainable energy and sustainable development.
*The writer is a political science lecturer at the British University in Egypt, a member of the Egyptian Council for Foreign Affairs and the Royal Institute of International Affairs, Chatham House, UK.
*A version of this article appears in print in the 22 September, 2022 edition of Al-Ahram Weekly.