Energy Security Vs. Energy Transition

March 21, 2023


The global energy sector is staring down an inflection point. On the one hand, climate pledges to lower harmful greenhouse gas emissions are increasingly vital to avoid permanent changes to weather patterns and ecosystems, which invariably disrupts markets and companies, hurting GDPs. On the other, there are pressing short-term concerns over energy security. Sanctions by wealthy nations on energy-exporting Russia over Ukraine are causing uncertainty in global energy supplies. Meanwhile, frostier relations between China and developed economies will likely exacerbate the situation.

Many governments have prioritized energy security over energy transition. Julien Bocobza, a partner at international law firm White & Case, noted in a November blog: “In recent years, there has been a laser focus on climate change. However, throughout the world, recent events have pushed energy security to the top of the agenda. Governments have begun to roll back green policies to ensure the stability of their energy supply chains and limit price shocks, seemingly pushing out the timeframe for transitioning to cleaner fuels.”

Egypt faces a similar dilemma. The government has ambitions to reduce the economy’s carbon footprint, which should attract fresh eco-friendly FDI. However, oil and gas are vital to the economy. The Central Bank of Egypt reported that 41% of Egypt’s exports came from fossil fuels and related industries in the last fiscal year. U.K.-based Lloyds Bank has said three-quarters of FDI in Egypt is concentrated in the oil and gas industry.

Elise Ring, head of export and infrastructure at Origin Energy, an Australia-based energy exploration, production, power generation and retailing company, stressed to White & Case that “energy transition cannot happen without a secure energy system.” She said emerging markets, in particular, need to ensure uninterrupted and affordable access to energy. In the short term, that means prioritizing oil and gas over more advanced, expensive and small-scale solutions.

Where Egypt stands

In December, McKinsey published an energy transition report laying out a region-by-region agenda for near-term action. It categorized Egypt as a “developing, at-risk” economy, classifying it as part of Africa, not the MENA region. (Arab countries in Asia — are described as “affluent and energy secure.”) Egypt is one of the regions with “the greatest exposure to climate risk, which could further exacerbate … socioeconomic challenges.”

Yet a speedy, unplanned energy transition could prove detrimental to the economy. “The resulting transition risks would threaten key economic pillars of African countries and could have adverse consequences for employment and fiscal health.” The main reason is “African economies are more dependent on [fossil fuel] commodities than any other region in the world.”

The report singled out Egypt, Algeria, Libya, Mozambique and Nigeria as having “economies that rely heavily on [oil, gas and coal] exports, and many jobs are tied to these carbon-intensive industries.” It added that biofuels and fossil fuels currently dominate their domestic energy supply.

The report warned that “without action to mitigate transition risks, up to $150 billion of commodity revenue and more than 1 million jobs in Africa could be at risk.”

Conversely, the continent has enormous potential to generate energy from clean and renewable sources. Egypt, in particular, has a bright outlook for solar energy. According to various sources, the southernmost part of the country has the most sunshine of any place on earth. Nationwide, the sun shines between nearly 4,000 to 3,500 hours a year, or an average of 11.2 to 9.5 hours per day, according to various stats.

McKinsey predicted that if solar and wind power were utilized to their full potential, the continent could “scale green manufacturing, build a green transportation sector and provide energy at a low cost.” Those opportunities could generate revenue of $2 billion annually and create about 700,000 direct and indirect jobs by 2030.

African nations, including Egypt, could build an eco-friendly economy from scratch. “Almost half of the continent’s potential [greenhouse gas]-producing industries have not been built yet. [That] creates an opportunity to build a thriving low-carbon manufacturing sector from the ground up,” McKinsey said. “By doing so, Africa [and Egypt] could avoid the costly transition from fossil fuels to renewables and build a competitive and resilient economy that doesn’t rely on fossil fuels.

In addition, the report said that Africa, including Egypt, “could contribute to the global energy transition with green exports … used as feedstock in industries such as ammonia and steel. Exporting hydrogen and materials such as green steel could accelerate growth and diversify economies.”

Short-term first

On the ground, African nations are not likely to prioritize green energy investments anytime soon, as fossil fuels still power their economies. In its “Security of Clean Energy Transitions 2022” report, the International Energy Agency (IEA) said, “In the short term, there is a need to maintain energy security and rebalance supply … and demand.”

That would be done by “maximizing existing infrastructure while radically reducing emissions of oil, gas and coal,” the IEA said. “This will help decrease pressure on global energy markets and prices.” Crude oil prices stand at just under $76 a barrel as of the end of February, up nearly $10 since the start of 2022. That is down from March 2022’s $120 a barrel, thanks to the IEA member states agreeing to “release oil from their strategic reserves” to stabilize supply, particularly for developing economies.

To improve Egypt’s energy security in 2022, the Ministry of Petroleum and Mineral Resources was busy finding promising plots and selling concession agreements to international oil companies. Petroleum Minister Tarek El Molla told Egypt Oil & Gas in January, “We’ve been able to attract more investments in upstream activities … especially exploration and development of natural gas.” Natural gas is the least polluting fossil fuel and has been classified by the European Union as “sustainable.”

Those investments helped meet domestic demand “for individuals, motorists, industries [and] households,” said El Molla.

In addition, natural gas exports increased last year to 8 million tons, up from 7 million in 2021. El Molla said Egypt “for the first time [generated] $7.5 billion in revenue from exporting natural gas,” adding that revenue from exports of petroleum products reached an all-time high of $18.2 billion, up from $12.9 billion in 2021. One reason the IMF approved Egypt’s $3 billion extended fund facility in December was that it forecasts oil exports in the fiscal year 2022/2023 would increase by 30.6%.

The ministry has laid the necessary groundwork to achieve that growth. In December, Egypt Oil & Gas reported the ministry was launching a “new global bid to search for natural gas and crude oil in 12 areas.” In February, the Cabinet approved 13 draft petroleum commitment agreements for Egyptian General Petroleum Corp., Egyptian Natural Gas Holding Co. and several international oil companies.

The flagship natural gas field in 2023 should be ENI’s Nargis-1, an offshore discovery in the eastern Mediterranean announced in January. The government has yet to specify its production capacity, so it is unclear how it compares to the Zohr field, Egypt’s largest natural gas discovery and the one that helped the country reach self-sufficiency and export to Europe. Nevertheless, the Nargis-1 field could prove to be a huge discovery, as ENI called it “significant.”

Affirming the government’s dependence on oil and gas in 2023, Prime Minister Mostafa Madbouly announced in January that the sector would be exempt from the decision to rationalize foreign currency spending. By contrast, the ministries of environment, and electricity and renewable energy, would be subject to that rationalization, requiring the finance minister’s approval for foreign currency spending on new projects on a case-by-case basis.

Environmental dimension

During his one-on-one interview with Egypt Oil & Gas in January, El Molla stressed that new exploration deals would be subject to more stringent emissions standards. The ministry would also work with Egypt-based oil and gas companies to improve their environmental track record. “I would like to see more and more improvement in energy efficiency,” El Molla said. It “has been an important target for our sector, and an important KPI (key performance indicator) that I hold all … companies accountable for achieving.”

During November’s Conference of the Parties (COP27) event, the Egyptian LNG Co. signed a feasibility study agreement with a Bechtel-led coalition that included Enppi, Petroject, Baker Hughes, GE Digital, HSBC and the National Bank of Egypt. The study would evaluate the feasibility of using zero-flaring systems to significantly reduce harmful emissions from natural gas rigs. The tests would be implemented at the Egyptian LNG Co.’s export terminal in Idku.

Also during COP27, the state-owned Egyptian Natural Gas Holding Co. (EGAS) signed six MoUs, mostly with multinational companies in Egypt, to decarbonize their domestic operations. The government also signed an MoU with the state-owned Egyptian General Petroleum Corp. (EGPC) and several international companies to evaluate the feasibility of carbon-removal solutions. Lastly, EGAS signed an agreement with Microsoft Egypt to “cooperate in developing [the former’s] sustainability roadmap,” the EGAS press release said.

Trading carbon

Another way to attract new international oil companies to Egypt and entice existing ones to expand while still keeping a watchful eye on the environment would be creating a carbon credit market. The way it works is the government sets limits on the amount of harmful emissions companies can release into the environment by giving them “carbon credits” every year. Companies that never reach those limits can “sell” their excess carbon credits to companies that exceed that threshold.

That allows companies with large carbon footprints to continue operating normally, albeit at a higher cost as they would have to buy carbon credits. Meanwhile, low-polluting companies would be rewarded with a regular revenue stream.

In November, the government announced that the Egyptian Exchange Holding Company for Capital Markets Development, the company managing the stock exchange; Agricultural Bank of Egypt; and Libra Capital, an investment management firm, would create the country’s first company for issuing “carbon credits” to local firms. Eventually, that newly created entity would develop a market to trade those credits.

The government has yet to announce regulations forcing companies operating in Egypt to participate in a carbon-credit system. The decision to buy and sell carbon credits locally would be voluntary. Its primary benefit would be to raise the profile of trading companies, attracting eco-conscious investors. In the Middle East and Africa, only Saudi Arabia and Iran have active carbon credit markets. Hjalmer Soomer, a Denmark-based environmentalist and owner of a climate program project in Uganda, told Al-Monitor, “It is great that Egypt becomes the first mover into carbon credits in Africa.”

Sarah Abdel Kader, an environmental and sustainability engineer at the Institute of Global Health and Human Ecology, believes carbon credit trading would work in Egypt despite the voluntary setup. “This step is important in boosting Egypt’s efforts to reduce emissions without negatively affecting economic development,” she told Al-Monitor in November.

Transition still vital

Regardless of the complexity or expense of transitioning from fossil fuels to clean renewable energy, governments must make that shift happen. Being left behind could prove detrimental in the long term. Emerging economies will have to significantly expedite their green energy investments to remain relevant to foreign investors as they become more environmentally aware and more countries offer them the opportunities they seek.

The McKinsey report outlined steps all governments need to take to lay the groundwork for an “orderly” energy transition. The first set of measures relates to the “physical building blocks” of eco-projects. The government needs to “streamline access to land, accelerate permits and simplify processes to accelerate the deployment of renewables and clean tech.”

Subsequent “building blocks” include “modernizing and repurposing legacy infrastructure” to “accelerate the integration of renewables and cleantech into the energy system.” Governments also need to invest heavily in supply chains “to secure critical raw materials … and labor” for the transition. The state also should invest in decarbonizing the country’s transportation ecosystem, as well as creating storage systems for carbon and clean energy.

Other factors necessary to ensure an orderly energy transition, according to McKinsey’s report, are “economic and social adjustments.” In the short term, that includes “reducing the carbon footprint of fossil fuels and lowering the risk of stranded assets [such as unused rigs].” Another task is to “promote energy affordability and create fair opportunities for affected and at-risk communities.”

Governments also need to create “governance, institutions and commitments” to ensure the transition to cleaner energy is financially rewarding for investors. The first step is to develop stable and attractive payment systems and frameworks, market structure and dynamics, and binding agreements to encourage investments in renewables and green tech.

The McKinsey report also noted the importance of “scaling frameworks and standards to measure carbon [emissions] of energy and final products [to] develop [a] new carbon economy.” The key will be to make those statistics accurate and public, as they help identify energy transition opportunities, noted the report.

The document also highlighted issues threatening African nations’ orderly energy transition. The list includes “limited capital deployment … despite sufficient capital pools with investment appetite.” According to a report from the Climate Policy Initiative, a U.S. independent nonprofit specialized research group, annual funding for eco-friendly projects in Africa is only $30 billion, of which 14% comes from the private sector.

The McKinsey report said, “about three out of four utilities in … Africa fail to recover their operating and debt-service costs.” That is mainly due to high generation and transmission costs and low or subsidized electricity bills, given “Africa has the largest share of extreme poverty globally,” according to the Institute for Security Studies, a think tank. That makes additional investments into more expensive renewable energy grids increasingly unfeasible.

Other obstacles include the high cost of scaling up the renewable energy grid due to high upfront costs. That makes it less affordable for end users, particularly in countries with high poverty levels. Additionally, few governments, especially in Africa and the Middle East, offer financial incentives to scale up those grids, let alone reduce regulatory obstacles.

Those investing in clean and renewable energy projects would also have to “contend with limited infrastructure, [insufficient] government support, and [unfriendly] regulations,” McKinsey said. Additionally, slow and inconsistent implementation of ESG standards in Africa “may impact the energy transition by potentially deterring investments.”

McKinsey’s report warned against massive expansions in natural gas. “It will … be important to limit investments in [natural] gas to necessary assets needed to balance the grid,” it said. “In many cases, expanding renewables will be a cheaper and more scalable way to expand electrification in Africa.”

Balancing act

In his White & Case blog post, Bocobza of Project Development Finance Group stressed the “future of energy is at a critical juncture … energy transition and supply security are not mutually exclusive. These two goals can be brought together in a way that strengthens the resilience of the energy system.”

Balancing short-term needs with long-term planning is essential, Bocobza said. The key will be to commit to building a “net-zero [emissions] future.” That means investment decisions must not dismantle the current energy markets, yet they must reduce harmful emissions by gradually shifting consumption away from fossil fuels and toward clean, renewable sources.

The IEA noted that one effective way to find that balance is for “governments … to take the lead in ensuring ‘secure energy transitions’ by tackling market distortions.” The most notable are fossil fuel subsidies, which are the most common “market failures,” particularly in emerging markets.

Finally, the state needs to encourage the private sector to increase the clean energy supply. “Transitions are unlikely to be efficient if they are managed on a top-down basis alone,” noted the IEA document. “Governments need to harness the vast resources of the market and incentivize private actors to play their part. Some 70% of investments required in transitions need to come from private sources.