CORRECTED-Egypt tackles fuel use, smugglers to stave off summer crisis

Tue May 28, 2013 12:06pm EDT

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(In paragraph 10, corrects to show fuel subsidies account for about a fifth of government spending, not of GDP)

* Egypt asks main industries to do maintenance in summer

* New pricing scheme to cut fuel smuggling opportunities

* Egypt to cut gas exports, Qatari swap deal to start in a few weeks

* Iraqi crude oil deal stalled, little other options

By Julia Payne

LONDON, May 28 (Reuters) - Egypt will cut exports of natural gas and tell major industries to slow output this summer to avoid an energy crisis and stave off political unrest, the chairman of the Egyptian General Petroleum Company (EGPC) told Reuters.

Tarek El-Barkatawy said Egypt was counting on top liquid natural gas (LNG) exporter Qatar to obtain additional gas volumes in summer, while encouraging factories to plan their annual maintenance for those months of peak demand. Cairo will also need to source more oil to meet seasonal driving demand.

A restructuring of its huge subsidy programme will reduce smuggling by thieves who now siphon off a fifth of subsidised fuel to sell at profit, El-Barkatawy said. Under the new scheme, subsidies would be applied only at the retail stage, leaving fewer opportunities for theft in wholesale and shipping.

The new chairman of the main state oil company took the top job last week after incumbent Sherif Hadara became oil minister. Previously, El-Barkatawy was under-secretary at the oil ministry and has worked for foreign oil companies.

He arrives at a strained time in Egypt as the country has been struggling to buy fuel since the revolution that toppled President Hosni Mubarak in 2011. Egypt's economy has floundered with political uncertainty and the loss of tourism, culminating in a currency crisis.

Cairo now relies on large loans from friendly countries, notably Qatar, which allow it to buy diesel and gasoline on the open market. For crude oil, it has turned to Libya and Kuwait but the volume is still not enough to run its refineries at full capacity and meet summer demand.

"We know that demand is more than supply. We are relying on imports," the chairman said.

Hopes of Iraqi oil arriving in time for summer are dwindling. Back in March, Iraq's oil ministry said it was willing to supply 4 million barrels per month.

"It is static. It has not been agreed yet, I cannot say when it will be," El-Barkatawy said.

At the heart of the fuel problem is the subsidies, which account for around one fifth of Egypt's government spending and could reach 120 billion Egyptian pounds ($17.4 billion) for the year ending in June as Egypt's fuel needs are forever rising.

Egypt produces its own energy but became a net oil importer in 2008 and is rapidly becoming a net importer of natural gas. The government pays for Egyptian drivers to buy fuel for as little as 15 U.S. cents for a litre of diesel.

Cairo's new leaders worry that cuts to subsidies would risk political and social unrest, but without cuts the International Monetary Fund will not agree to a $4.8 billion loan seen as necessary to keep the public finances afloat.

In addition, Egypt owes at least $5 billion to foreign oil producers, of which half is in arrears.

GAS EXPORTS TO DROP FURTHER

Long petrol queues and some protests have become the norm since 2011 and major cities have lately been hit by occasional black outs. To survive the summer, Egypt plans to reduce natural gas exports, with Qatar filling its customers' needs through an LNG swap deal.

The first such swap is due to occur in a few weeks, El-Barkatawy said. That will allow Egyptian gas to be diverted to feed Egypt's own power plants, but even that will not be enough and Egypt will need to supplement it by burning fuel oil.

"We will convert some burners to run on fuel oil... Either from our system or through imports," he said.

Egyptian gas exports have fallen steadily in recent years. Pipeline flows to Israel and to Jordan, Lebanon and Syria stopped last year while in LNG only the Idku export plant operated by BG Group is still working, and at reduced capacity. Exports from another LNG plant at Damietta stopped at the start of the year.

Longer term, El-Barkatawy said the country aims to boost production of oil to 1 million barrels per day and natural gas to 7.5 billion cubic feet per day in the next 3-5 years, both of which represent increases of about 35 percent.

Egypt will achieve these levels as existing concessions come online and through new technologies, unconventional resources and exploration in the Red Sea and the south, he said.

BP's offshore finds in the Mediterranean should add 1 billion cubic feet per day of gas, with some eight other concessions due to come online to reduce depletion.

SQUEEZING OUT THE SMUGGLER

El-Barkatawy does not see a significant decrease in subsidy costs immediately as more ground work must be done, notably removing the smuggler from the equation.

To target the middle men, Egypt plans to change the point at which the oil becomes priced at the subsidy level. At the moment, subsidies apply to the whole supply chain, which makes it possible to steal artificially cheap fuel in big quantities through large distribution networks and sell it at a profit at higher prices in Egypt or abroad.

EGPC hopes to deter smugglers by keeping the price at the high international level until the actual point of sale. Distributors will no longer have access to subsidised fuel.

"Once we deliver the diesel, the financial load will transfer to the gas station," El-Barkatawy said.

A new "smart card" system to track purchases of subsidised fuel, due to start next month, will also make it easier to fight theft.

"We will introduce the smart card soon and even apply it to the assembly points and gas stations and make sure that any diesel or gasoline unloaded from ships is accounted for when it goes onto trucks to the distributors and gas stations."

Data accumulated from smart cards will eventually help the government reduce the subsidy bill without spurring protests and hurting industry, he said.

"So by doing this, it will improve our credit level and will be one step in the right direction to secure the IMF loan." (Editing by Peter Graff)

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