Egypt’s newly signed US$ 7.5 billion agreement for a major refining and petrochemical plant in Ain Sokhna has the potential of revolutionizing the country’s downstream production and refining capacity, Fitch Solutions indicates.

The agreement signals Egypt’s desire to become a regional hub for oil and gas trade, which it has been pursuing with agreements in the midstream and downstream in particular. Egypt’s strategic location on the Suez Canal, between the key markets of Asia and Europe, strengthen this ambition.

Furthermore, this investment follows another large, separate downstream investment made by Egypt in the downstream sector in 2019, named as the Tahrir Petroleum complex. It is worth US$11 billion and to serve as the biggest naphtha cracker facility in the Middle East and to commence operations in 2024.

The complex is to be constructed in the industrial zone of Ain Sokhna, which is located around 20 miles south of the Red Sea entrance to the Suez Canal. The agreement was signed between the Main Development Company of the Suez Canal Economic Zone and the Red Sea Refining and Petrochemical Company.

Fitch Solutions notes that the intention is to create high value-added products for the local market to reduce the import burden and create export opportunities. Some of the products listed to be produced include, but are not limited to, the following: polyethylene, polypropylene, polyesters and bunker fuels.

Potential downside risks exist

These notwithstanding, Fitch Solutions highlights that this investment will not reduce the import burden of Egypt’s downstream market. Accordingly, in 2021, Egypt is forecast to produce 673,000 b/d of crude and consume 674,000 b/d of refined products, the research firm alludes.

However, Fitch Solutions indicates that the gap between refinery output and refined product consumption will lead to Egypt exporting around 180,000b/d of crude, whilst also importing the same quantity of refined products.

Of the imports, approximately 93% are diesel and gasoline, which leaves Egypt with a substantial import bill.

Furthermore, Egypt’s refined product consumption is expected to grow healthily over the medium term, averaging 3.5% from 2021-2024. The research firm believes this to be higher for diesel and gasoline consumption, given the forecast average of 6% growth in fleet size per year to 2025.

Fitch Solutions further suggests that the petrol chemical complex will face fierce competition for its refined products from other major complexes in the Middle-East. Furthermore, cuts to fuel subsidies pose downside risk to fuel demand growth.

Many countries in the Middle East, which historically focused on exporting crude or low-end products, are seeking to take advantage of their cheap domestic crude supplies. These countries are seeking to do this by embarking on large refinery and petrochemical expansions over the forecast period.

The countries, which include big producers such as Kuwait and Saudi Arabia, seek to utilise the value-add opportunities of producing high-end refined products such as gasoline and diesel and other petrochemicals.

Moreover, fuel subsidies are a politically sensitive subject in Egypt whereby incumbent governments are reluctant to lower subsidies due to fears of losing political support. Fuel subsidies have also been a point of negotiation between Egypt and the IMF regarding access to economic reform programmes.

Fitch Solutions underscores that these subsidies will continue, and as they do fuel demand will be hit.