In the runup to hosting COP27, we look at how Egypt is attempting to build a climate-resilient energy strategy towards achieving its Vision 2030 goals. In this, we look at both the power and petrochemicals sectors, with an eye on renewables such as solar, wind, and hydro. Here we highlight the themes emerging in export and project finance through the lens of Egypt’s funding strategy.
With the next United Nations Climate Change Conference (COP27) being hosted in Egypt from 6-18 November 2022, the focus on energy transition from policymakers, corporates, lenders, and export credit agencies (ECAs) has never been stronger. And the impetus and onus on COP27 have only been amplified by the heightened energy security issues in the wake of the pandemic, the war in Ukraine, and the race to net-zero.
Egypt, which suffered from an acute shortage of power between 2014 and 2018, with daily 10-hour blackouts at the peak of the crisis, has mapped out an ambitious power procurement plan to meet the country’s energy demand and the requirement of climate change challenges. ECA support will be paramount to the realisation of these targets, as development finance institutions (DFIs) stretch their capital to combat the climate crisis and COVID-19 – although Egypt itself has not set a net-zero target.
National Determined Contributions (NDCs) have been pledged by Egypt nonetheless. In June 2022, Egypt joined the global methane pledge. In its NDCs, Egypt pledged to reduce emissions from gas flaring in the oil and gas sector to less than half of 2015 levels and lists some unquantified measures in the waste sector.
However, it is unclear whether these measures are sufficient to reach the 2030 global goal of reducing methane emissions by 30% – especially given the country’s planned increase in oil and gas production. The agriculture sector, a large source of methane emissions, for instance, is not covered in Egypt’s NDC.
To be compatible with the 1.5°C limits of the Paris Agreement, Egypt may need further unconditional targets and policies that would at least stabilise emissions at today’s levels by 2030. Its conditional target would need to reduce emissions until 2030 by around 25% compared to current levels.
Gas: A transitional fuel
In 2015, the Egyptian government introduced an emergency plan to double power generation capacity by 2020. Big-ticket ECA-backed finance played a key role in pushing large-scale gas-fired projects over the financial line – for example, the $1.5 billion Euler Hermes-backed loan for the Beni Suef scheme, the first of three 4.8GW plants and SACE-backed financing for a 1200MW combined cycle gas turbine (CCGT) plant.
ICIEC, a member of the Islamic Development Bank, has underwritten the development of gas power plants in Assiut, West Damietta Port Said, Hurghada, and Sharm El Sheikh, with a total installed capacity of 2.67GW.
These projects provided viable financing templates, which have served as a seedbed for future deals, even more so now the debate around gas being a transitional fuel has dissipated. And, given Egypt’s need for grid stability, with more renewable projects coming online, these gas-fired turnkey projects are crucial to smoothing power output and baseload power.
Rapid growth in Egypt’s natural gas supplies, boosted by the discovery of the Mediterranean’s largest field, turned it from a net importer to an exporter in late 2018. Egypt exported 9.45 million cubic meters of liquid natural gas (LNG) in the first seven months of 2022, up 44% from a year earlier, according to Refinitiv data.
More recently, this summer, in the power sector, the Saudi Electricity Company sealed a $570 million ECA-backed project financing deal with Standard Chartered and SMBC to partially finance the Saudi-Egypt electricity interconnection project. The two countries signed an agreement to establish an electrical interconnection in 2012 for the purpose of being the main axis in the Arab electrical linkage, which aims to create an infrastructure for electricity trade between Arab countries. Saudi Arabia and Egypt last year signed contracts for a $1.8 billion electricity interconnection project to ensure an exchange of 3,000MW of electricity between both nations.
Renewable schemes tap agency support
Gas cuts to domestic feedstocks and power plants – as the government hopes to lower the amount of gas used to generate electricity by 15% – will reduce Egypt’s private sector competitiveness. Egyptian heavy industries will be hit in the short term, but renewable energy has the potential to recalibrate the country’s energy mix down the line.
The government of the most populous Arab country – with over 102 million inhabitants – has been pushing to up its renewable power generation in recent years. For example, Egypt’s Integrated Sustainable Energy Strategy aimed to ensure the stability of Egypt’s energy supply by targeting 20% of electricity generation from renewables by 2022 and 42% by 2035.
Two landmark renewable independent power producer (IPP) projects have closed heavily DFI-covered projects since 2019. These are the 200MW Kom Ombo solar PV deal, which closed last year, and the 250MW West Bakr wind farm, which had helped increase wind generation capacity to 18% by the end of 2021 (when it became operational). Both schemes are examples of the ongoing need for agency debt to realise renewable energy projects in Egypt. In short, DFIs are crucial to this nascent sector as they provide comfort to international banks to get such renewable projects completed. ECAs will eventually join the fold – but solar deals in MENA have been few and far between for ECAs to support so far.
Egypt’s petrochemical promise
Egypt’s state-owned oil refiner Assiut National Oil Processing Company (ANOPC) signed an innovative $1.5 billion SACE-covered loan to back the Assiut oil refinery expansion project at the beginning of 2022. ECA support was an integral feature of the financing, which mimicked the project’s predecessor, MIDOR.
The economic fundamentals behind the expansion project are sound: meeting Egypt’s growing demand for refined fuels while contributing to the country’s aim of achieving self-sufficiency in petroleum products in 2022 (petroleum imports reduced from $9.4 billion in 2019 compared to $6.38 billion in 2020 – a 32% year-on-year decrease).
The expansion aims to increase Assiut’s refining capacity from 4.5 million tonnes per annum (tpa) to 5 million tpa, helping to maintain the operation of new and future projects as part of the continuous expansion of the refinery which provides oil supplies and petrochemicals to the upper Egypt region. EPC contractors Technip, Enppi, and Petrojet are expected to complete construction by the end of 2024.
Petrochemical projects are carbon-intensive, given the process and feedstock, but the sector is also central to cleaning up plastics and reducing emissions for an industry synonymous with pollutants. Existing assets must be made more efficient. So, ECA debt will be used to upgrade facilities, as well as build greenfield schemes.
TXF Data: Egypt takeaways
Egypt is no stranger to ECA debt. From 2018-2022, the volume of ECA-backed finance in Egypt totalled $18 billion across 21 transactions, with the majority of those loans being accounted for by manufacturing and equipment deals. This was followed by infrastructure, oil & gas, and transport deals.
With power procurement and cleaner transport higher on corporate agendas, expect a raft of projects within those sectors going forward. Sponsors of phase one of the 1800km high-speed train line across the north of Egypt — Siemens Mobility, Orascom Construction, and the Arab Contractors — are expected to reach financial close on the roughly $2 billion Euler Hermes/SACE-covered financing backing the scheme by year-end, for instance.
ICIEC, via reinsurance or direct agreements, has the capacity to extend support to these types of projects, enabling ECAs to increase collaboration and better manage their capital. This product suite can dovetail with the promotion of climate crisis mitigation, with climate-resilient infrastructure as another important space requiring funding.
France’s ECA, Bpifrance, was the most active ECA in Egypt by total volume, followed by Sinosure and SACE. Meanwhile, Credit Agricole, BNP Paribas, and Societe Generale were the most active ECA banks, which is unsurprising given that Bpifrance is the ECA to extend the most support by volume, with the top three most prevalent commercial lenders to Egypt being French.
Hydro under threat
Meanwhile, extreme weather threatens dams, thermal power plants, and nuclear stations, according to a report by the World Meteorological Organisation (WMO). The WMO said a third of thermal power plants that relied on freshwater availability for cooling was already in areas of water stress, as were 15% of existing nuclear power plants and 11% of hydroelectric capacity.
About a quarter of the world’s existing hydropower dams, and almost a quarter of projected dams, were situated within river basins that already have a “medium to very high risk” of water scarcity, the WMO said.
The results affirm a study published in the journal Water earlier this year about flood and drought risks to hydropower dams globally. It found that by 2050, 61% of all hydropower dams in river basins would be at risk of “very high or extreme risk for droughts, floods or both”. Egypt was one of those countries highlighted as at high risk from flooding and/or drought.
The report modelled three scenarios, with the pessimistic scenario assuming an increase of 3.5°C by the end of the century and the optimistic scenario assuming a temperature increase of 1.5°C. Global temperatures have risen at least 1.1°C since the 1840s.
Jeffrey Opperman, one of the authors of the study and the lead global freshwater scientist for the World Wildlife Fund, said even under an optimistic scenario for limiting global warming levels by 2050, there would be an increase in drought risk and flood risk. There remains much work to be done by the international community to help finance climate mitigation.
