EGYPT: OIL, ENERGY, AND THE BALANCE OF PAYMENTS

• Document Type: CREST
• Collection: General CIA Records
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• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 13
• Document Creation Date: December 27, 2016
• Document Release Date: April 6, 2010
• Sequence Number: 2
• Publication Date: June 1, 1984
• Content Type: REPORT

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Directorate of ?C-onfifleatial_
Intelligence
Egypt: Oil, Energy, and
the Balance of Payments
An Intelligence Assessment
?Confidential--
NESA 84-10204
June 1984
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Cr4- Directorate of Confidential
Intelligence 25X1
Egypt: Oil, Energy, and
the Balance of Payments
An Intelligence Assessment
This paper was prepared by
Office of Near Eastern and South Asian Analysis. It
was coordinated with the Directorate of
Operations. Comments and queries are welcome and
may be directed to the Chief, Arab-Israeli Division,
NESA,
Confidential
NESA 84-10104
June 1984
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Key Judgments
Information available
as of 23 May 1984
was used in this report.
Egypt: Oil, Energy, and
the Balance of Payments
The oil sector, which is critical to the Egyptian economy, probably will
falter in the late 1980s. Petroleum is Egypt's primary export and provides
about 16 percent of government revenues. Without oil, Cairo would be
hard pressed to pay for politically necessary consumer subsidies and its
expensive development program.
We believe that Egyptian oil revenues will increase only marginally this
year, to about $2.3 billion. Expected increases in production will be largely
offset by rapidly rising domestic consumption, which is the result of heavily
subsidized domestic energy prices. Because of domestic politics, the
Mubarak government probably will postpone at least until early next year
the policy reforms needed to reduce domestic consumption.
In our judgment, Egyptian crude oil production will increase over the next
two years by over 200,000 barrels per day?from about 765,000 barrels per
day?approaching 1 million barrels per day in 1986. We do not believe,
however, that this level will be sustainable much beyond 1986. Even with
some expected moderation in the rate of increase in domestic consumption
and greater usage of natural gas for domestic use, the amount of oil
available for export will shrink considerably by 1990 without substantial
finds.
Egypt's energy options are limited. Nearly all of the country's hydroelec-
tric potential has been developed. The results of current exploration
suggest, and many foreign oilmen agree, that the likelihood of finding large
new oil reserves is slim. Egyptian attempts to meet future energy needs
with nuclear power are limited by a shortage of funds for planned projects.
If, as we expect, oil revenues decline substantially by the end of the decade,
Egypt will have to find alternative revenue sources to fund its large current
account deficits or risk domestic instability. The Egyptian Government will
be pressed to rethink its relationship with its current key donors, especially
the United States, if it perceives that those donors are not meeting its
financial needs with increased aid. If so, Cairo may feel forced to pursue
more vigorously full reintegration into the Arab fold. Such a move could
hurt US-Egyptian bilateral agreements because the Arabs might insist that
Egypt put distance between itself and the United States as a prerequisite
for aid.
111
Confidential
NESA 84-10204
June 1984
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Structure of the Egyptian Oil Sector
About 97 percent of Egypt's current oil production
comes from fields developed and operated by foreign
oil companies. In 1957, following the Egyptian take-
over of the then-dominant British oil firms, the
government created the Egyptian General Petroleum
Corporation (EGPC) and made it responsible for
overseeing all aspects of the petroleum industry. In
the early 1960s Cairo acknowledged that successful
oil development would depend on foreign technology
and resources and established joint ventures with
AMOCO, Phillips, and Italy's ENI.
Sadat 's economic liberalization program, launched in
1973, gave foreign firms more favorable production-
sharing terms and larger areas for exploration. More
than 550,000 square kilometers were put under ex-
ploration agreements, EGPC received more than
$100 million in signature bonuses, and over $1 billion
of exploration investment was guaranteed. According
to Embassy reporting, investment in the Egyptian
petroleum sector since 1973 is estimated at well over
$2 billion.
Foreign companies operate in Egypt under the follow-
ing terms:
? The foreign company pays a signature bonus and
guarantees a minimum exploration investment. The
firm pays all exploration costs and, if oil is found,
also pays development and operating expenses.
? Once production at afield begins, 20 to 40 percent
of output is set aside to reimburse the foreign
company for current operating expenses, explora-
tion costs, and development costs.
? The remainder of the oil is split according to a
fixed share, usually with the company receiving 10
to 15 percent and EGPC the rest.
The government recently has received between 70 and
80 percent of total output, including some production
from fields that are completely state operated which
EGPC uses for domestic consumption and export.
Most current production is being generated by the
GUPCO (AMOCO) and PetrobellIEOC (ENI)
production-sharing companies. GUPCO is the largest
producer, accounting for about 70 percent of current
production and over 40 percent of estimated proved
reserves. Petrobel's Bala'im fields comprise about 20
percent of current output, but the company's promis-
ing reserves?estimated at about 800 million bar-
rels?comprise nearly one-third of known Egyptian
reserves. Other smaller producers include WEPCO
(Phillips), BADRPETCO (Shell Winning), and
OSOCO (Total). The SUCO (DeminexIBPIShell) con-
cession promises 500 to 800 million barrels of re-
serves, but production is only just beginning. Most
current production is from areas in or near the Gulf
of Suez.
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Egypt: Oil, Energy, and
the Balance of Payments
The Importance of Oil
The oil sector continues to play a primary role in the
Egyptian economy despite the downturn in the world
oil market and the resulting reduction in revenues.
Petroleum accounted for almost two-thirds of Egypt's
commodity exports and over 20 percent of total
foreign exchange earnings in 1983. Moreover, earn-
ings transferred from the government-owned Egyp-
tian General Petroleum Corporation (EGPC) and
income taxes on petroleum companies generated 16
percent of government revenues in FY 1982/83 ' (the
second-largest share, after taxes on goods and serv-
ices). These revenues, plus Suez Canal tolls and
remittances from expatriate workers, have enabled
the government to fund expensive, but politically
necessary, subsidies and development projects.
The Egyptian economy boomed briefly in the early
1980s in part because of the return by Israel in 1979
of the Gulf of Suez oil exploration areas, followed by
a period of rising world prices and increasing produc-
tion from fields returned in 1976. Real GDP growth
was 8 percent or better each year, while current
account deficits remained below $2 billion. The era of
prosperity ended in mid-1981, however, as prices for
oil and other exports, such as cotton, started to slide.
Although Egypt has weathered the worldwide reces-
sion and the weak oil market better than most
developing countries, the shortfalls in revenue have
made it harder for the government to meet its foreign
exchange obligations.
Current Performance of the Oil Sector
Egyptian oil production has risen over 20 percent
since 1981. It averaged about 720,000 barrels per day
(b/d) last year, the highest level ever. The increase
was largely the result of sophisticated secondary
recovery techniques in the larger offshore oilfields and
the bringing into production of several discoveries.
Even though domestic consumption increased 10 to 13
' 1 July-30 June.
1
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Table 1
Egypt: Major Oilfields
1983 Production
(thousand b/d)
Initial
Production
Year
GUPCO (AMOCO) a
El Morgan
1967
158
October
1980
130
Ramadan
1975
93
July
1973
79
Shaab Aly
1978
22
Petrobel/International Egyp-
tian Oil Company (ENI) a
Bala'im Marine
1962
140
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Bala'im Onshore
1955
SUCO (Deminex/BP/Shell) a
Ra's Badran
1983
28
a ( ) Major operating company.
25X1
percent in each of the last few years, the volume of
exports has risen slightly?about 23,000 b/d in the
two-year period?to about 210,000 b/d last year.
We believe revenues fell slightly to $2.2 billion last 25X1
year after peaking at an estimated $2.8 billion in
1981.2 This occurred despite increases in production
and government attempts to capitalize on oil market
changes with frequent price adjustments. Prices for
Egyptian oil declined from an average of close to $32
per barrel in 1982 to about $28 in 1983. The shortfall
in oil earnings, however, was largely offset by in-
creases in officially reported worker remittances, and
Egypt's current account deficit probably declined
from $2.4 billion in 1982 to $2.2 billion in 1983
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The exact magnitude of Egyptian oil revenues is problematic.
Significant differences exist between earnings reported by the
Egyptian Petroleum Ministry and those reported for current ac-
count purposes by the Central Bank. The gap may reflect revenues
held as investment funds by EGPC.
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Table 2
Egypt: Current Account Balance a
Billion US $
levels cannot support the development of export facili-
ties.
final consumption, and current production and reserve
1982
1983b
1984c
Trade balance
-5.0
-5.5
-5.8
Exports, f.o.b.
3.6
3.5
3.6
Of which:
Oil
2.3
2.2
2.3
Imports, c.i.f.
8.6
9.0
9.4
Net services
2.6
3.2
3.2
Receipts
5.4
6.3
6.5
Remittances
2.1
2.8
3.0
Suez Canal
0.9
1.0
1.0
Tourism
0.6
0.7
0.7
Other
1.8
1.8
1.8
Payments
2.9
3.1
3.3
Unrequited transfers
NEGL
0.1
0.1
Current account balance
-2.4
-2.2
-2.5
Oil data are adjusted from petroleum CERP reporting; import
numbers are derived from UN trade tapes and other sources; all
other data are from Egyptian Central Bank sources. Because of
rounding, components may not add to totals shown.
b Preliminary.
Estimated.
The rapid rise in domestic consumption continued to
be a major factor in the export picture. The in-
creases-averaging 13 percent annually in 1982 and
1983-have been due to the rapid growth of the
Egyptian economy, a shift in investment toward more
energy-intensive sectors, and government policies
that, according to the World Bank, hold domestic
prices to about one-sixth of international prices. Many
industrial processes in Egypt require very low energy
prices to be competitive, especially in the aluminum
and fertilizer industries.
The rise in crude oil output was accompanied by a
similar increase in the production of natural gas and
condensates from less than 50,000 b/d of oil equiva-
lent (b/doe) in 1982 to about 59,000 b/doe last year.
Domestic demand for natural gas, however, has not
caught up with potential production because of a lack
of gas distribution facilities and infrastructure for
Confidential
The Outlook for 1984
Egypt's goal is to increase average oil production by
almost 20 percent to 860,000 b/d in 1984. We
estimate, based on assessments by oil companies and
the US Embassy, that actual production probably will
be between 790,000 and 815,000 b/d. Production in
early 1984 averaged about 765,000 b/d, according to
Embassy reporting. The continued steady increase in
crude oil production this year is the result of second-
ary recovery methods, mainly in the GUPCO fields.
Production at the SUCO fields has lagged expecta-
tions.
Cairo's oil earnings this year, in our judgment, will
increase only marginally-to about $2.3 billion. We
assume that the world oil market will remain stag-
nant, resulting in no increase in nominal oil prices this
year unless hostilities in the Persian Gulf escalate.
More important, domestic consumption will continue
to rise at a pace probably approximating last year's
13-percent increase. The economic policy reforms
needed to limit consumption probably will not be
enacted before the end of the year. Cairo avoided
major increases in consumer prices before the elec-
tions in May and probably will take no action until
after the formal convening of the new People's Assem-
bly in October or November.
The Role of Oil in the Near Term
We believe that Egypt's current proved crude oil
reserves are at least 3 billion barrels-insufficient to
sustain higher production levels for more than a few
years. The pace and trend of production and revenues
will depend on Cairo's decisions regarding the role of
foreign oil companies, rates of depletion, and policies
that affect domestic consumption, such as the devel-
opment of nuclear power, natural gas usage, and
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The Government's Current Relations With Foreign
Companies
The Egyptian Government is emphasizing exploration
in the Western Desert even though over 95 percent of
current proved reserves are in the Gulf of Suez Basin.
Many local oilmen are skeptical that the desert will
become a major producing area, according to Embas-
sy sources. Seven out of 11 concession permits have
been relinquished because of a lack of proven poten-
tial, according to press reports quoting oil industry
officials. Most new discoveries continue to be made in
the Suez Basin. All those appear to be smaller fields,
according to these same sources.
Company-government relations are relatively ami-
able. EGPC
continues to respect and rely heavily on foreign
operating partners.
Cairo has not attempted to push production beyond
technically prudent levels despite the government's
need for enhanced revenues. In our judgment, this
will change if Egypt's foreign exchange situation
tightens substantially. In the mid-1970s financial
pressures caused Egypt to produce beyond prudent
levels, and this resulted in sharp declines in the rate
of production in some of GUPCO's larger fields.
The major problem areas between Cairo and the
operating companies have been determining where to
explore. Some concessionaires have also reported
trouble with Egyptian customs officials. All conces-
sion agreements provide for blanket customs exemp-
tions for equipment and personal effects, but these
exemptions are not always honored, especially when
local products could be substituted.
domestic energy prices. Revenues will also depend on
conditions in the international oil market, which
Egypt cannot influence because it is a relatively small
producer
Production Forecast
Output will probably increase steadily in 1985 and
1986. This judgment is based on current reserve levels
and on the need for operating companies to meet
3
Table 3
Egypt: Near-Term Production
Targets for Major Operators
Thousand barrels
per day
incremental Production
Average
Production
1983
1984
1985
1986
GUPCO
530
50-75
75
Petrobel/lEOC
140
20-60
SUCO
28
22
70-130
Total cumulative
production
720
790-815
860-945
955-1,080
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exploration and production deadlines specified in their
contracts with EGPC. The increases will be largely 25X1
accomplished by three operating companies?
GUPCO, Petrobel/IEOC, and SUCO. These three 25X1
have made more than two-thirds of the new discover-
ies since 1981. Where smaller, unassociated discover-
ies have been made, high development costs and low
production and reserve projections have rendered
them uneconomic. Standard EGPC contracts are
attractive to foreign oil companies only if production
is at least about 50,000 b/d, according to US Embas-
sy reporting. 25X1 25X1
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Projections for output vary widely among participat-
ing companies. Moreover, representatives of major
operating companies believe that whatever level of 25X1
peak production is attained by 1986 cannot be sus-
tained much beyond that year, and output will proba-
bly fall steadily thereafter without new reserves.
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GUPCO. Company officials forecast that their pro- 25X1
duction will increase to over 600,000 b/d during 1984,
largely as a result of workovers on existing fields and
some smaller new fields being brought onstream,
according to Embassy sources. According to press
interviews with company officials, by 1986 GUPCO
output should be close to 700,000 b/d as production 25X1
from two new blocks in the Gulf of Suez increases.
GUPCO has shut in some smaller fields that it plans
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to bring on line in 1986. These fields are to be used
largely to offset expected production declines from
older fields.
Petrobel 11E0C. The Petrobel consortium produces
about 140,000 b/d, largely from its Bala'im offshore
fields. Petrobel hopes to complete construction of a
water injection plant in 1985. The company expects
total production in 1986 to reach 160,000 to 200,000
b/d, according to Embassy reporting.
SUCO. According to company discussions with Em-
bassy officers, SUCO plans to raise production from
its Ra's Badran field to 60,000 to 70,000 b/d by the
end of this year after gas lift and water injection
facilities are installed. SUCO representatives report
that the Zeit Bay concession, which would be SUCO's
largest producing area, is also on schedule and must
begin producing by March 1985 to satisfy the compa-
ny's contract with EGPC. Production facilities there
are being designed to accommodate 100,000 b/d, but
it is too early to predict how the reservoir will behave
and whether the production goal will be met.
Using company projections and assuming that enough
smaller wells will be developed to offset declines from
older fields, we estimate that Egypt's peak production
will probably settle near 950,000 b/d in 1986, and it
might even surpass the elusive goal of 1 million b/d.'
Although we disagree with the projections of some
industry analysts that Egypt will become a net oil
importer by the end of the decade, we believe reve-
nues will drop sharply in the late 1980s. The amount
of decline will depend mostly on the pace and direc-
tion of both international prices and domestic con-
sumption
Outlook for Domestic Consumption
We believe that Egypt's demand for energy will
continue to be skewed because of government energy
subsidy policies. These policies, unless drastically
altered, will continue to spur industrial development
based on cheap energy.
Demand will drop significantly in the longer run only
if serious reforms occur in energy management. Egypt
has few options for energy development. With the
The Egyptians have been predicting production levels of 1 million
b/d since the mid-1970s
Confidential
scheduled completion of Aswan II in 1985 or 1986, at
least 80 percent of Egypt's hydroelectric potential will
have been exploited, according to the World Bank.
The absence of large new petroleum finds in the last
two years suggests there will be no significant addi-
tions to oil reserves in the near term. Finally, the
government's plan to develop a nuclear program
probably will not be fulfilled because of a lack of
financing
Price reforms will be an important aspect of more
rational energy management. Cairo is under heavy
pressure from the IMF and World Bank to reduce
explicit and hidden oil subsidies?estimated by the
Bank to be about $3-4 billion in 1983?and to raise
domestic fuel prices to world market levels. Although
the Bank had earlier insisted that prices reach world
levels in five years, both the Bank and the Fund now
seem willing to accept a 10-year adjustment program
because of the extent of the pricing gap. Fund officials
state, however, that they will accept such a plan only
if it includes substantial price increases at the begin-
ning of the program. Cairo appears to accept the idea
of price adjustments, and its need for continued
outside assistance probably will cause it to impose
some reforms beginning in 1985. We doubt, however,
that government price reforms will be as severe as the
Fund and Bank are advocating because of the nega-
tive political consequences.
Planned increases in the production and usage of
Egypt's natural gas reserves will strongly influence
the pace of oil consumption. Estimates of proved gas
reserves vary from 720 million barrels of oil equiva-
lent (boe) to 1.8 billion boe, according to oil industry
sources. The Egyptian Government, with some fund-
ing from the World Bank, is encouraging growth in
household and industrial use of gas. According to
press reports, the government plans to increase gas
production and use from 80,000 b/doe to 114,000
b/doe by 1985. Further increases to 194,000 b/doe
are planned by 1990. These increases, if realized,
would restrain somewhat the fast pace of domestic oil
use.
Development of nuclear power as a substitute for
thermal power generation is more problematic. Cai-
ro's plan to finance part of its nuclear power program
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Selected Major Egyptian Oilfields
Egypt
0
20 Kilometers
2'0 Mlles
N
Ra's Badrin
October'
0
Abis Rudays
Bala I Bala Im
Marine Onshore
(5)
(7)
Ras Gharlb
July
\ "Ramadan
1 El
Morgan
Ghubbat az Zayi
(Zeit Bay)
Egypt
SINAI
Shaab Aly,
Sharm ash
Shaykh
)
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by setting aside excess oil revenues has been stymied
by the slump in oil prices. Egyptian officials claim
that about $700 million has been allocated to an
"Alternative Energy Fund" from petroleum revenues
since 1981. The US Embassy has been unable to
verify Egyptian claims. If the fund exists, the govern-
ment may have tapped it to meet more immediate
foreign exchange needs. While some money might
have been set aside in 1980 and 1981 before oil
revenues started to fall, we believe it unlikely that
further contributions have been made.
The Egyptian nuclear power plan calls for an expendi-
ture of $2 billion for the first two of eight planned
facilities. With little domestic financing available, the
plan depends heavily on outside trade and develop-
ment credits. Although the first two reactors are
supposed to be operational by late 1989 or 1990, the
financing problems have not been solved. The home
governments of interested companies in France, West
Germany, and Italy are withholding credits because
they doubt Egypt's ability to repay. The US Export-
Import Bank turned down a financing proposal by two
US companies last August
We believe the Egyptian Government will find it hard
to reduce domestic oil consumption in the near term
even with increases in domestic prices and use of
natural gas. At best, we foresee a decline in the
annual growth of consumption to about 8 percent in
1985 and possibly 5 percent in 1988.
Export and Revenue Scenarios
We believe that Egyptian oil production will peak at
about 950,000 b/d in 1986, provided company projec-
tions and our assumptions about pricing are close to
the mark. Egypt would earn peak annual revenues of
about $3 billion at that level of production. This peak
level is not sustainable, however, without substantial
new finds or sharply increased prices. According to
Embassy reporting, foreign oil company interest in
exploration has leveled off in the past two years. The
likelihood of new finds and their exploitation before
the end of the decade is therefore low. Our judgment
is that export revenues will fall well below $1 billion
by the end of the decade, given probable production
slowdowns and our assumptions about domestic con-
sumption growth.
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Oil Price Assumptions
The outlook for international oil prices bodes ill for
Egyptian oil earnings. Our energy projections assume
declining real oil prices to 1985 and flat or moderate-
ly increasing real oil prices to 1990. These assump-
tions could be overturned by a major supply disrup-
tion, such as an interruption of shipments through the
Strait of Hormuz. Conversely, a cease-fire between
Iran and Iraq or a surge in production by another
major supplier, such as Nikeria, would further damp-
en the outlook for prices
Under the more optimistic production scenario of
nearly 1.1 million b/d for 1986, revenues would
improve for the peak year but would still fall substan-
tially by 1990. Assuming that the Egyptian Govern-
ment did not let higher production hinder oil conser-
vation efforts, revenues would peak at just over $4
billion in 1986 and probably fall thereafter. Earnings
in 1990 would probably be a little over $1 billion. The
fall in revenues to about half of current levels would
deal a major blow to the current account and govern-
ment budget, even under this optimistic scenario.
Unless new sources of earnings?such as more worker
remittances?or higher levels of nonoil exports were
found or imports were drastically cut, current account
deficits over $4 billion annually would be likely
toward the close of the decade.
Implications
For Egypt
Growing and unmanageable current account deficits
would threaten the stability of the Egyptian Govern-
ment. The Mubarak regime already is under domestic
political pressure to maintain a higher standard of
living through subsidies while preparing for the future
by underwriting an ambitious development scheme.
To fulfill these expectations without substantially
increasing the debt burden, the Egyptian Government
will need either rapidly rising revenues or increased
foreign aid. Failure to secure more aid would proba-
bly mean less stability in Egypt.
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Figure 2
Egypt: Alternate Oil Sector Scenarios,
High and Low Projections, 1984-90
Thousand barrels per day
1,200
1,000
800
600
400
200
I li
0 1984 85 86 87 88
--High production
Low production
Consumption"
z, High export
Low export
89 90
Assumes growth in domestic oil consumption slows to 8 percent per
year in 1985 because of government disincentives and increased gas usage;
and further to 5 percent per year in 1988. Failure to achieve these
consumption cuts will result in lower export levels.
302578 5-84
There are few alternatives to aid if, as we expect, oil
revenues decline substantially. Suez Canal earnings or
worker remittances probably will not replace falling
oil revenues. Canal earnings will be constrained by
capacity even if oil trade picks up because expansion
of the Canal to accommodate larger ships has been
put on hold. Officially recorded worker remittances
may rise somewhat if exchange rates are aligned to
capture funds that are now remitted through the
parallel "own" exchange market and are not available
to the Central Bank. This would be a one-time
increase, however, and economic conditions in the
Gulf states do not augur well for continually rising
earnings.
For the United States
A widening financial gap would cause Cairo to press
traditional donors?especially the United States?
even harder to increase aid or provide debt relief.
7
Figure 3
Egypt: Oil Revenues, 1984-90 Projections
Billion US dollars
4.5
4.0
3.5
3.0
2.5
2.0
1.5
High
1.0
Low.
0.5
0
1984
85
86
87
8-8
80
90
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There is already widespread criticism within Egypt
that debt repayments to the United States are putting
undue strain on Egyptian finances and that project
aid is serving only the USAID bureaucracy and
private contractors. This perception would be rein-
forced if, as expected, petroleum revenues decline
while repayments on military debts to the United
States rise. Should Washington refuse to give more
aid or grant debt relief, Cairo would probably feel
forced to explore other aid options.
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A whole range of US strategic interests could be hurt
if Cairo were forced to seek aid from other donors,
particularly Saudi Arabia and Iraq. The quest for
Arab aid could induce Cairo to put distance between
itself and the United States. Such a move, in turn,
could impair such bilateral initiatives as the prelimi-
nary agreement to allow US use of the airbase at Ras
Banas. A press for full reintegration into the Arab 25X1
fold could also undermine Egyptian support for future
US Middle East peace initiatives and could hurt
Egyptian-Israeli relations, which have already cooled
as Egypt has developed its unofficial ties with the
moderate Arab states.
Confidential
Declassified in Part - Sanitized Copy Approved for Release 2013/05/28: CIA-RDP85T00314R000200030002-6
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Declassified in Part - Sanitized Copy Approved for Release 2013/05/28: CIA-RDP85T00314R000200030002-6
Confidential
Confidential
Declassified in Part - Sanitized Copy Approved for Release 2013/05/28: CIA-RDP85T00314R000200030002-6