Egypt plans oil production development to boost economy

OPEC’s decision not to cut production in order to increase oil prices following a marked reduction in global prices over recent months has caused much controversy across the Middle East. Saudi Arabia’s commitment not to reduce oil production has been substantiated by the claim that a reduction in production would be met by non-OPEC producing countries such as the US and Iran, doing little to affect the price per barrel.

Riyadh’s political motives are tied up with its economic motives; failing to cut production serves to maintain its dominant position and create barriers to entry in the market. Maintaining a high level of supply and a reduced price diminishes the potential gains for other current or prospective oil producers, and especially deters investment in oil production. Such a policy targets major producers such as the US, which has been experiencing a shale gas production boom, by decreasing the expected gains for US oil production. Iran, a major non-OPEC producer whose political differences with Saudi Arabia play out across the Middle East, has also been hit hard by the falling prices.

Despite concerns about unpredictable oil prices in the future, which have decreased the incentive for oil exploration and development, countries across the region continue to expand oil production. Indeed, according to IRN, which is organising the first Egypt Oil and Gas 2015 Summit next month, discussions will be held about the development of oil production in the country. The focus will be on the signing of new agreements amounting to $97 million in oil and gas investments with Dana Gas, BP and another British firm, as well as other gas exploration contracts worth hundreds of millions of dollars. Egypt is also in the process of setting up ties with Mediterranean and Red Sea countries such as Algeria in order to bolster oil production and distribution. The agreements come as part of the Cairo government’s aim to move forward with gas exploration.

In the past few months President Abdel Fattah Al-Sisi has visited several countries to revive economic interest in Egypt and improve the international standing of his regime. In one such appearance, he spoke at the World Economic Forum in Davos this week seeking to promote Egypt as a favourable environment for political cooperation and foreign investment; this required him to underplay his contribution to the ongoing political and human rights problems in the country.

The expansion of oil projects comes as part of the strategy to reduce government debt and revive the economy. Egypt has been a major producer of oil but an ongoing energy crisis has seen the country’s imports exceeding its exports, forcing the authorities to look for new sources of natural gas from Algeria, Russia and Cyprus. Negotiating import agreements and increasing oil exploration are likely to mitigate the effects of the crisis.

The biggest challenge since the 25 January Revolution has been the recovery of the economy and the huge budget deficit, particularly the allocated $14 billion in the yearly budget for fuel subsidies. Since the ouster of President Morsi in July 2013 by Al-Sisi, the regime has aimed to reduce the budget deficit in part by increasing fuel sale prices to reduce subsidies. The regime is also keen to develop oil production to reduce its reliance on imports, reduce its debts and encourage economic growth. Egypt was also given free oil shipments and other loans last year by Gulf States to support the economy and provide stability for the regime.

Recent moves from the government come as Al-Sisi aims to restore confidence in the country and encourage investment in the energy sector as well as transport and water projects likely to bolster the economy; the country is particularly dependent on foreign investment for economic growth. In the past few months, alongside oil exploration plans, Al-Sisi has visited China, Italy, France, Kuwait and Russia to discuss economic and political cooperation. A British delegation of ministers and businessmen met the Egyptian president last week to talk about the economic and political situation and increase British investment. A major investment conference is also planned by the Egyptian government in Sharm el Sheikh in March, where agricultural, energy and tourism projects such as the expansion as the Suez Canal will be unveiled to business representatives and politicians from around the world.

Al-Sisi hopes to secure strategic partners and economic ties that may increase the stability of the country and bolster the legitimacy of his regime. At the World Economic Forum he sought to quell fears of instability in the country despite his role in widespread human rights abuses, politically-motivated arrests and political oppression of those critical of the regime since its ousting of President Morsi. He sought to present himself as a representative of the ideals of the January 25 Revolution through political and economic revival, despite his role in such abuses.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.