Middle East energy briefing (page 3 of 3)

The Egyptian government is seeking to receive a sale price of around $7/million British thermal units (mmBtu) for the LNG from Gaz de France and Spain's Union Fenosa, which are the largest offtakers of LNG from the country's two LNG plants.

Significance: There are two main reasons for Egypt's push for reasonably large upwards price revisions. Firstly, its domestic gas demand has outstripped production development recently, creating gas shortages and forcing the country to import fuel oil to feed some of its power plants.

This has raised the domestic power supply costs significantly, while most of Egypt's LNG export agreements were reached before the liquefaction plants came onstream in 2004/2005, when world market prices were significantly lower.

The second reason is Egypt's capped domestic gas prices, which it pays IOCs for the gas they produce and have to sell domestically. As it is chronically unable to offer a market price for the between two thirds and three quarters of gas production it forces the companies to sell at government-set prices, exploration and development in more expensive offshore areas—where the highest potential exists—have been suffering as a result.

While the government has addressed that by somewhat lowering the share they need to supply to the domestic market, it cannot lower it enough—given the tight supply situation—and so trying to raise the IOCs profit margin on the amounts they export instead is another way of making their Egyptian operations more profitable and encouraging further deepwater exploration and development.