How Egypt struggles to get out from the cylinders crisis

LPG market in Egypt
May 22 2015

How Egypt struggles to get out from the cylinders crisis

Liquefied Petroleum Gas (LPG) is a key household fuel in Egypt, making Egypt the largest non-OPEC oil producer in Africa. According to the UN Energy Statistics Yearbook, domestic consumption of LPG stood at 4.4 million tons in 2009, while production amounted to 1.8 million tons with another 2.4 million tons imported in the same year. As with other fuels, LPG has been heavily subsidised by the Egyptian government with official end-user prices for LPG bottles remaining steady. 

LPG cylinders are the main source of fuel for more than 75 percent of Egyptian households, with many going to a lot of trouble to buy them for cooking and heating water. Despite their cheap, subsidised price, they represent a costly item on household budgets.

In Africa, Egypt has the third-largest population, after Nigeria and Ethiopia, and the second-highest gross national income (GNI), after Nigeria. Egypt’s economy suffered during and after the 2011 revolution as the country experienced a sharp decline in tourism revenue and foreign direct investment, according to the International Monetary Fund (IMF). Annual gross domestic product (GDP) growth in Egypt dropped from 5.1% in 2010 to 1.8% in 2011 and still remains below the pre-revolution level, averaging 2.1% in 2013. According to the IMF, financial support, particularly in the form of oil and LNG shipments, from some Persian Gulf countries has helped Egypt to meet its domestic energy demand.

Egypt’s economy has not fully recovered since the 2011 revolution. The government continues to fund energy subsidies, which cost the government $26 billion in 2012; this has contributed to the country’s high budget deficit and the inability of the Egyptian General Petroleum Corporation (EGPC), the country’s national oil company, to pay off its debt to foreign operators.

EGPC owes foreign oil and gas operators billions of dollars, which has led foreign operators to delay their investments in existing and new oil and natural gas projects. EGPC accumulated $6.3 billion in outstanding arrears to foreign oil and gas companies, of which $1.5 billion was paid back in December 2013. The debt has since increased back to $7.5 billion as of June 2014 and continues to grow.

Protests against the energy prices increase

Between February and March 2015, strikes and protests about LPG cylinders price occurred in Egypt. Petroleum Minister Sherif Ismail has agreed to increase the pumping of Liquified Petroleum Gas (LPG) rates to 150% to resolve the crisis of LPG cylinders in many governorates, said Supply and Internal Trade Minister Khaled Hanafy.

Hanafy told Al-Masry Al-Youm the daily report on butane gas during the month of February confirmed that the deficit ratio stood at about 20 percent.

Protests have occurred in many villages, as in Minya, where people complained that the price of the cylinders reached LE60 on the black market and that factories manipulated the weight of cylinders, while many Mansoura residents complained about the shortage of butane gas cylinders, which provoked quarrels between the inhabitants of Denjway village and Supply Ministry officials.

One of the main issue in Egypt concerns the black market of LPG cylinders. Indeed, two gas station owners in Samallout were arrested before smuggling 6000 liters of subsidized diesel fuel to the black market. In Damietta, the security stopped an attempt to smuggle 20 LPGs destined for the black market. The driver of the seized vehicle was arrested and he confessed to having obtained the cylinders from the governorate’s warehouses, to be sold at black market prices.

Arafat told Al-Masry Al-Youm that the shortage in fuel is more severe in Upper Egypt than in the governorates of Lower Egypt, as the prices of LPG cylinders range between LE30 and LE40 in Upper Egypt. He called for distributing gas cylinders with the use of smart cards as soon as possible.

Government initiatives

The Egyptian government has attempted subsidy reform. In early 2013, the government increased energy prices for heavy industries, energy inputs for electricity producers, and household electricity use. Egypt is also in the process of implementing a smart card system to target the subsidies toward the poorest people. The smart cards would be used by drivers at the fuel pumps.

The government plans to reduce its petroleum product subsidies by 22% during the 2014-15 fiscal year (beginning July 1, 2014), but the government has missed similar targets in the past. Even if the target is met, the fiscal gain would be offset by an 86% increase in electricity subsidy spending, which is also included in Egypt’s 2014-15 fiscal budget. According to MEES, subsidy spending in the current budget is planned for $27 billion, or 24% of government spending.

The average Egyptian household without piped gas consumes 25 cylinders per year, at the heavily subsidised price of 2.5 Egyptian pounds (about $40 cents) per unit. The actual cost per tank is 70 pounds. It is estimated that this subsidy will total 21 billion pounds, or $3.4 billion, representing 4 percent of state spending, in 2012–2013. The official price of a gas cylinder is 8 Egyptian pounds but street vendors effectively control the price of cylinder gas, some take advantage of shortages by hiking it.

Fuel subsidies have accounted for 18–20 percent of Egypt’s recurrent expenditure in recent years—equal to 5–7 percent of GDP. Some households have been switched from highly-subsidised, mostly imported LPG, to locally-produced natural gas.

The World Bank has supported the expansion of the grid since 2008 with the Egypt Natural Gas Connection project, which has connected 355,000 consumers to the grid in the Greater Cairo area. It has approved a new US$500 million for the project, which now aims to connect about 1.5 million households in 11 governorates, including three in underdeveloped Upper Egypt, to the grid.

Conclusion

By expecting a price reduction of the LPG cylinders in Egypt, it seems clear gas cylinders, used particularly for heating and cooking represent the main life source for the population.

Particularly in Upper Egypt and rural areas, another butane cylinder crisis has been spread recently, seeing overcrowded queues in front of warehouses.

That’s why it is essential supporting government and organisations’ initiatives ready to promote LPG, in order to guarantee an easy access to LPG and reach the safety expectations of all the consumers, defeating the big issue regarding the black market.

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