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Egypt and Energy: It's No Time for Investors to Bail

Tony Waltham | Robert Harding World Imagery | Getty Images

Egypt is not only hungry for energy — it's starving, and this will play a role in the instability that has foreign investors asking whether they should quit the country before the other boot drops.

Most immediately, Egypt is hoping to buy 968,000 tons of diesel fuel for April-June delivery to stave off a worse energy crisis amid country-wide protests that threaten the Muslim Brotherhood's hold on power ahead of April parliamentary elections.

The past four weeks have been very rough — against the backdrop of political unrest, tensions simmer as fuel shortages have people lining up for hours outside gas stations.

An acute diesel shortage is hurting public transportation, contributing to rising in food prices, particularly for agricultural products.

The government is in a quandary over fuel subsidies and hasn't yet decided on its next move. There are a number of proposals out there. One is to reduce oil subsidies by 10 percent over the next five years — if the government lasts that long. The trade-off is a promise to increase salaries by the same amount. Officials are also toying with the idea of rationing subsidized fuel, or buying more partially subsidized fuel instead of reducing subsidies. Another idea is to hand out cash subsidies to replace in-kind subsidies.

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Cairo had already spent $8.1 billion in the first half of the current fiscal year 2012/13 on energy subsidies, and the total for the full fiscal year will be around $16.3 billion.

Whatever the solution, the government will find it critical in the coming weeks and months to provide more fuel.

Economic indicators are not good. Egypt's foreign reserves fell by almost 10 percent in January alone. At the same time, there are serious doubts as to whether Egypt will get its hoped-for $4.8 billion IMF loan in time to do anything useful with it — namely, before its foreign currency reserves are entirely depleted, or before the Egypt Pound is fully devalued.

It's a nightmare scenario for the short-term investor, but for the longer term — and with an eye on the energy industry — consider this: The Suez Canal.

Over the longer term, foreign investors should note that Egypt will one way or another play a major role in energy geopolitics. The Suez Canal is one of the world's most important freight zones. And amid the chaos, the violent protests and the disastrous economic situation, at least foreign currency revenues from the Suez Canal have remained steady and insulated from everything else. The tourism industry has suffered fatal losses, but shipping has earned even more than it did before the 2011 revolution. It is unfortunate that the violence has now spread to the towns and cities bordering the Suez Canal.

This canal makes Egypt a potential trans-continental energy hub for Europe, Asia and Africa. Egypt will be particularly important in bringing all those new East African oil and gas finds to wider markets. And this is the risk in giving up on Egypt right now, before the dust has settled and before a post-Mubarak era can be decided. This will be a rough ride, and one that could result in another revolution, but giving up an energy foothold in Egypt now means giving up on a major future player.

Energy investors should be prepared for another potential revolution, but long-term strategy should recognize Egypt's position in this market.

(More from Oilprice.com: Investors Beware: Egypt's Revolution is Not Over)

The majors aren't blinking over Egypt's political uncertainty. To the contrary, Italy's Eni announced an oil discovery in the Egyptian Western Desert this week, and Kuwait Energy discovered oil in October in the Gulf of Suez. Egypt may be a hydrocarbon importer struggling to meet its domestic energy demand, but in terms of oil it is believed to have significant untapped potential.

Shell is even considering a deal to construct a liquid national gas (LNG) terminal in Egypt because natural gas demand is outpacing production.

The key problem with Egypt right now is its government. While the majors remain committed to exploration and development in Egypt, they are hindered by a rather unattractive investment environment. Bureaucratically, it's a nightmare: Technology is difficult to import and it's difficult to get expenditures approved. Financially, it has also been stymied by the fact that state-owned oil and gas companies are not meeting the financial obligations to their foreign partners and are billions of dollars in arrears.

If the government falls — again — this could get worse, but majors have already survived the revolution, and they will hold out still as the revolution is not over.

—This story originally appeared on Oilprice.com. Click here to read the original story.

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