LONDON, (Reuters) – Egypt is becoming increasingly dependent on fuel imports as it uses oil to pay off debts instead of refining the crude at home, in a downward spiral that is piling pressure on its deteriorating finances.
Political and social unrest is making suppliers and creditors nervous about financing Egypt, forcing it to rely more on sales of crude to cover imports of other products and debts.
This leaves less for Egyptian refineries to process into products such as diesel, forcing the state oil firm to rely on global markets for increasing volumes of fuel, traders and analysts say.
These growing imports are inflating its debts and heightening creditors’ concerns, according to Hakim Darbouche, a research fellow at Oxford Energy Institute for Energy Studies.
“The other question is how will the Egyptian General Petroleum Corporation (EGPC) pay,” Darbouche said, commenting on the latest Egyptian tender to buy diesel.
“It is already behind with payments for previous deliveries and is finding it more difficult to raise finance because of its indebtedness and the internal situation in Egypt.”
The Egyptian oil ministry did not offer an immediate comment.
Egyptian refineries have always operated well below capacity, but processing runs are likely to have fallen sharply, product traders and analysts say, estimating current levels as low as 50 percent.
Egypt has entered a circular debt situation that is compounding its payment problems, according to Catherine Hunter, senior Levant and North Africa analyst at IHS Energy.
As for solutions to this energy crisis, “One option might be for somebody to step in with a crude donation or more likely, ‘below-cost sales’. There have been a fair number of financial loans from the Gulf”, indicating help with fuel supplies may follow, Hunter said.
“IMF instalments would have been extremely beneficial. We were hoping for late December, early January, but now it is delayed to February at the earliest, so there is no near-term respite,” she added.
Egypt asked to delay its $4.8 billion loan from the International Monetary Fund because of its political turmoil, the Fund said last week.
Credit rating agency Fitch in June downgraded Egypt to B-plus, deep in junk territory, from BB-minus, with a negative outlook.
“Successful reform of fuel subsidies is the single biggest reform the government can make to improve Egypt’s fiscal position or free up revenue to spend elsewhere,” Fitch said more recently.
The agency said the decision to postpone the IMF discussion highlighted the challenge in implementing tax increases and subsidy cuts.
GOOD SHORT FOR NOW
Until a solution is found, those best placed to supply Egypt are trading companies with more freedom to take on risk or major oil companies that are producers in Egypt, such as Shell , according to oil and product traders.
“Their (Egypt’s) refineries are clearly not running anywhere near where they should be, and they need the products,” said a trader. “I am sure someone will take advantage of the situation. This is a trader’s dream, no?”
Egypt is the largest non-OPEC producer in Africa, but output peaked in the 1990s at around 930,000 barrels of oil equivalent per day (boepd) and has since declined by 4 to 5 percent a year.
Its oil output is now about the same as its consumption at around 700,000 bpd, about a third of Germany’s.
Some of this oil must go to the oil companies that produce it as part of long-term production sharing agreements, which means that even without the current financial pressures Egypt is forced to be a net importer of crude as well as refined fuel.
The imports of crude are a further drain on Egyptian finances, because it is sold below cost to domestic refiners.
The government has tried to tackle the issue of oil subsidies, which account for around one fifth of the country’s GDP, but unrest is stalling attempts to curb the state’s rising bill.
Repeated fuel shortages have angered motorists and disrupted industry and agriculture.
Egypt spent around $9.7 billion to import oil products in the year to end-June 2012, about $2.8 billion more than in the previous year, data from the Central Bank of Egypt shows.
On the revenue side, it increased crude oil exports by $1.5 billion to $7.1 billion, cutting supplies going to refiners. Its oil product exports fell by $500 million to $6 billion, bank numbers showed.
While exports have risen, imports of crude for refineries have dropped, further trimming refining runs. Bank numbers showed crude imports for the year were down by about $300 million to $2 billion.
Plans released by the state oil company for product imports next year indicate the bill will continue to rise.
In its latest tenders, which have not yet been awarded, it is seeking offers for 1.1 million tonnes of gasoil for the first quarter of 2013. That almost matches what Egypt sought to buy in the first six months of 2012.
Traders say payment delays are routine and that firms are charging Egypt higher and higher risk premiums to compensate for the increased cost of doing business there.
The number of suppliers able to shoulder the delays and increased risk is shrinking, meanwhile, leaving Egypt in a worse negotiating position with the firms that still participate in its supply tenders.
“The situation is so unclear – Yes Mursi, no Mursi; yes Sharia law, no. What we get from our banks is not good,” a trader elsewhere in the Middle East said, commenting on the rising cost of doing business in Egypt.
“Having said that, it’s a good short to have, and they never default on payment, they just delay it. It’s more about who you know and if he can push for payments.”
Being “a good short” implies that the price paid for products delivered to Egypt will be higher than on the market, providing a good margin of profit.