UPDATE 2-Egypt says BP gas project restarted, pledges to pay gas firm debts
* Oil minister sees production from BP project in 2017
* To pay $1.5 bln owed to foreign energy firms by year end (Changes dateline, re-leads with BP project)
AL-ASEEL OIL FIELD, Egypt, June 26 (Reuters) - Egypt's oil minister said on Thursday that BP's $10 billion gas project, stalled for three years, had restarted and that production would begin in 2017, a sign of progress in efforts to ease the worst energy crunch in decades.
In another move that could help improve investor confidence, Sherif Ismail also said Egypt would pay $1.5 billion of the money it owed to foreign energy companies by the end of 2014.
The minister told reporters on a visit to al-Aseel oil field in the western desert that production at BP's North Alexandria concession would begin in 2017, with 450 million cubic feet per day initially being extracted. He said output would rise to 800 million cubic feet per day in 2018.
Those volumes would mean a significant boost to current production, which Ismail told a local newspaper this month was expected to reach 5.2 billion cubic feet (bcf) per day by the end of December.
The news comes a day after Algeria agreed to ship five cargoes of liquefied natural gas (LNG) to Egypt this year, according to a source at Algerian state energy firm Sonatrach.
The total amount of the Algerian shipments will be enough to meet around three days' worth of average daily consumption, according to Reuters calculations, enough to provide serious short-term relief to gas shortages that have resulted in regular power cuts in Egypt this year.
"Gas imports are planned for a period of the next four to five years, until energy self-sufficiency is achieved," Ismail told reporters on Thursday, referring to overall imports.
Political turmoil and violence since the 2011 revolt that ousted autocrat Hosni Mubarak has hit the economy hard. The government has struggled to pay foreign companies for gas and work on some major new gas projects has ground to a halt at a time when generous state subsidies are stoking growing demand.
Egypt earlier this year forecast gas production would fail to meet surging domestic demand in the next fiscal year that begins July 1, signalling more blackouts ahead.
Egypt's steadily declining gas production has been exacerbated by foreign firms' wariness about increasing investment when the government owes them money and has diverted most of the gas promised for exports to meet domestic demand.
The near-daily power cuts are forcing energy-intensive industries to close factories or sharply cut production.
BG Group's problems in Egypt have affected its LNG unit so much that it cut production forecasts for the year and served "force majeure" notices to affected buyers and lenders.
PAYING BACK COMPANIES
Egypt's new president Abdel Fattah al-Sisi may soon be forced to tackle challenges in the sector in order to boost production and draw back wary investors.
But given that power cuts and long lines at fuel stations have stoked public anger in recent years, he will have to act carefully when reforming the wasteful subsidies system that accounts for a quarter of government spending.
In another move that could help improve investor confidence, Ismail said Egypt would pay $1.5 billion of the money it owed to foreign energy companies by the end of 2014.
The latest government figures put Egypt's debts to foreign oil companies operating there at $5.7 billion, but officials including Ismail acknowledge that debts are mounting even as the government pays off what it owes now.
The government has promised to pay companies including BG Group and BP $3 billion by the end of 2017 as it tries to lure back investors to help it develop its reserves.
In April, Ismail said Egypt would pay about $1 billion "within two months" but the government has not yet announced that it has paid.
BP, one of the largest foreign investors in Egypt, had initially planned to start production at its North Alexandria project this year, the minister said. Ismail said a delegation from BP would arrive on July 17 for talks with the government.
A BP spokesman declined to comment the project. (Reporting by Abdel Rahman Adel; Writing by Maggie Fick; Editing by Louise Ireland and Mark Potter)