Refining improvements to cut Egypt’s fuel import bill

According to Business Monitor International (BMI), the Egypt Refining Company (ERC) has outlined US$2.7 billion of investment over 2015 and 2016 to realise the Mostorod refinery expansion. The Mostorod project, which had stalled since February 2014 due to political turmoil, is a necessary project to combat Egypt’s considerable deficit in diesel fuel production. The 55 000 bpd expansion is due to refine surplus residual oil from Egypt’s less efficient refineries and convert it predominantly into diesel.

Foundations for the expansion project are due to be laid by July 2015 enabling construction to begin. According to a company official, much of the equipment for the expansion has already reached the Port of Adabya near Suez and will begin transportation to the Mostorod site in north eat Cairo in August 2015. The project is targeting first output from the 55 000 bpd expansion in Q1 2017.

Given the strong government support for the project and its pragmatic approach towards improving business, BMI forecast the Mostorod project to achieve completion in 2017. Key to this is the fuel sales agreement. The refinery will sell diesel to Egyptian General Petroleum (EGPC) at global prices over a 25 year period. This creates incentive to invest in the Egyptian refining sector, which has lost out on significant funding due to unfavourable retail markets distorted by subsidies.

Subsidies have been pivotal to the rapid increase in fuels demand over recent years, creating a large deficit in domestically produced diesel and gasoline. This has also increased the pressure on Egypt’s fuel import bill as the government made up for the shortfall. New output from the Mostorod expansion will be a critical step in reversing this trend, BMI reports. New diesel production capabilities should reduce distillate fuel imports by over 50 000 bpd and could cut approximately US$500 million from the country’s fuel import bill from 2017.

More refinery upgrades ahead

Investment is returning to many parts of the Egyptian economy given the greater political stability following the installation of the El-Sisi government. In July 2014, fuel price reductions were introduced making some headway into lowering the fiscal impact on the government. If Egypt continues on its path of reform, BMI expects interest to grow in its refining sector, especially if the state allows sales from refineries at global prices.

However, given the rapid growth in global refining capacities, particularly throughout the Middle East and Asia, investment in a brand new refinery will be less likely. Given the growing supply of fuels globally and flat demand in the largest markets, it will be difficult to attract investment from international oil companies and investment will be largely state supported.

Expansion and modernisation projects at existing refineries hold more promise. There are plans to increase capacity of Midor refinery near Alexandria to 160 000 bpd, from 100 000 bpd currently. Again 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 will be state funded, with the remainder of the finance coming from banks. It could also be operational in 2017. Modernisations at Egypt’s less efficient refineries, such as the Assiut plant and Al-Mex facility, could be next in line for investment.

Adapted from a report by Emma McAleavey

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