* Sells oil to pay bills, leaving less for refineries
* Rising fuel import bill compounding payment problems
* Political, social unrest limit access to credit
By Julia Payne and Jessica Donati
LONDON, Dec 17 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
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
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
"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
The agency said the decision to postpone the IMF discussion
highlighted the challenge in implementing tax increases and
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
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
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.