Downstream progress slow in Egypt

According to Business Monitor International (BMI), Egypt’s plan to invest US$ 14.5 billion in its downstream sector will not fully materialise within the five year plan, due to subsidised domestic fuel prices.

Investment in the downstream sector would help the country reduce its increasingly heavy refined product import burden, which has impacted government revenues due to fuel subsidies. According to Egypt’s oil minister Sherif Ismail, Egypt spends over US$ 500 million/y on fuel imports, while the country has also reportedly received over US$ 3 billion in fuel aid from Saudi Arabia so far in 2014.

Over recent years, refined product demand has increasingly supported favourable government fuel subsidies aimed at stimulating economic growth and maintaining public content. The accompanied increase in fuel imports closely correlates to the country’s worsening budget outlook. With the el-Sisi government now well established in Egypt, BMI forecasts a stabilisation and recovery in this situation.

A key first stage to the development was the abrupt fuel price reforms in early July. The price of low grade gasoline was raised by 78% to approximately US$ 0.22/ltr, high octane gasoline went up by 40% to US$ 0.38/ltr, while diesel increased 64% to US$ 0.26/ltr. BMI expects these changes to slow the strong fuels consumption growth seen over the Arab Spring years. However, at US$ 0.22 – 0.38/ltr, Egypt’s retail gasoline price is well below the 2014 forecast for gasoline traded in Rotterdam of US$ 0.73/ltr, as well as the international average retail price of US$ 1.27/ltr.

Even with downwards pressure on fuel demand, Egypt’s refining sector will not be able to supply sufficient refined product volumes to support domestic demand, BMI holds. The country will remain a net fuels importer.

The plan to boost the refining sector is targeting 5 – 10% refined product production growth over the next fives years. 85% of the US$ 14.5 billion downstream budget – US$ 12.5 billion – will be focused on refining projects. While a significant amount of this may be invested in plant modernisation and upgrades, there are currently only a couple of credible refinery projects that could add new output.

Cairo Oil Refining Company (CORC) is looking to expand the country’s largest oil processing facility in the Mostorod district of Cairo. Plans aim for a 55 000 bpd capacity enlargement at the current site. The refinery would accept heavy oil – in part from CORCs other facility – and refine it into lighter ends. In particular it will be designed to produce diesel, an area where the country is deficient. Start up has been targeted for early 2017 and is due to have significant impact on the import burden, particularly distillate fuels.

BMI highlights that a second expansion could see the Midor refinery near Alexandria increase capacity to 160 000 bpd, from 100 000 bpd currently. The project is due to focus on distillate fuel production, in particular diesel. The expansion project is expected to cost US$ 1.2 billion, 40% of which would be state funded, with the remainder of the finance coming from banks. It could be operational by 2017.

However, further expansion of the refining sector may prove more difficult. The vast growth in Asian and Middle East refining capacities is depressing global fuel prices, as global demand remains weak. This has significantly curbed refining margins among the major international oil companies that could potentially invest in Egypt, reducing their incentive to expand global downstream operations in favour of optimising current operations.

BMI explains that this development creates significant downside risk to investment in new build refineries, such as the proposed oil complex in Suez designed to replace the current ageing facility. BMI holds that the current global downstream dynamic and low fuel pricing structure in Egypt provides insufficient incentive to attract significant international investment. This will leave the planned redevelopment of the sector largely in the hands of the government.

While additional modernisations to Egypt’s less efficient refineries such as the Assiut plant and Al-Mex facility could be made, BMI suggests that these developments would not be sufficient to meet domestic refined fuels demand, and will fall short of offering spare capacity for exports.

Adapted from a report by Emma McAleavey.

Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/22102014/egypt-downstream-progress-1469/