Tough time for Egypt after Aramco oil cut
CAIRO - A decision by Saudi state-owned petroleum company Aramco to suspend oil deliveries to Egypt puts Cairo in a challenging situation, uncovers the enormity of political differences between Egypt and Saudi Arabia and exposes Egyptian economic vulnerabilities, experts said.
“This decision creates a tough situation in Egypt because now our country will have to immediately pay for its oil imports,” said energy expert Ibrahim Zahran. “Given Egypt’s hard economic conditions, this is very difficult at present.”
Aramco told Cairo it would not deliver 700,000 tonnes of oil in October, an amount considered indispensable to close a gap between production and consumption in Egypt.
The Saudi company did not clarify the reasons for the decision but the announcement spread fear that it would lead to cancelling other shipments stipulated in an agreement with the Egyptian government. Aramco signed an agreement in April to deliver 700,000 tonnes of oil to Egypt every month for five years.
The $23 billion deal allowed Egypt to pay for the shipments over 15 years with the first instalment to be paid after three years from the date of first delivery.
Now, Cairo will have to pay up front to buy oil from other markets. The Egyptian Petroleum Ministry said it had negotiated the delivery of the 700,000 tonnes of oil from other markets.
Petroleum Ministry spokesman Hamdy Abdel Aziz explained that, under the Aramco agreement, Egypt would pay $700 million for each shipment of Saudi oil.
“If we buy the same amount of oil from other markets now, we will have to pay close to $1 billion, given the rise in oil prices, compared with prices in April,” he said.
The extra amount will pressure Egypt’s foreign currency reserves, which rose in September to $21.5 billion from $19.5 billion after Saudi Arabia sent a deposit of $2 billion to Egypt’s Central Bank.
Egypt, which suffers from a marked drop in tourism and export revenues and continues to recover from political and security unrest, has been struggling to prop up reserves to secure food imports.
It has requested an International Monetary Fund (IMF) loan of $12 billion but IMF conditions for the loan demand Cairo cut subsidies, float its currency and bring in other reforms that could trigger public anger and political and security unrest.
“This is why Aramco’s decision is totally untimely and threatens to make Egypt totally incapable of securing its oil needs,” Zahran said. “This means that our factories can stop working.”
Some observers attribute Aramco’s move to a late-September decision by the Organisation of the Petroleum Exporting Countries (OPEC) to cut output to 32.5 million-33.2 million barrels per day (bpd), the first output cut since the 2008 financial crisis, to keep oil prices at $50 a barrel.
In Egypt, however, the decision led to questions about Egyptian- Saudi ties. Despite apparent amity and Saudi economic support, Egypt has been following policies that are often in opposition to those of Saudi Arabia, experts said. Syria, they added, is an example of the policy difference between the two countries.
“Egypt will not abdicate its stance on the need for preserving Syria’s territorial unity, the unity of its army and the wellbeing of its state institutions,” said Tarek Fahmi, a political science professor from Cairo University. “Saudi Arabia, on the other hand, wants just the opposite.”
Saudi Arabia insists that Syrian President Bashar Assad step down before a negotiated solution is reached to the crisis in Syria.
Egypt, which has a non-permanent UN Security Council seat, voted in favour of a Russia-sponsored resolution calling for suspending support to Syrian opposition groups. The vote angered Saudi Arabia and triggered fierce criticism of Egypt in Saudi media.
Egyptian President Abdel Fattah al-Sisi defended the vote and said Aramco’s decision had nothing to do with it.
“Some observers thought that halting the October shipment was in response to that issue,” Sisi told a gathering of army officers. “I say no; take note that this is a commercial deal.”
He said Egypt was keen on its “historical” ties with the countries of the Gulf and warned against creating tension between Egypt and those countries.
Nonetheless, observers say that, apart from Syria, Saudi Arabia expects more from Egypt in Yemen, where Riyadh is embroiled in a war against Houthi militias.
Egypt has contributed naval units to the Yemen campaign but Saudi officials apparently expected more in return for its economic aid, Fahmi said.
Egypt also has been unable to follow through on an agreement to transfer to Saudi control two Red Sea islands Egypt occupied before the 1967 war with Israel at the request of Saudi Arabia.
An Egyptian delegation is to soon travel to Riyadh to seek to temper Saudi anger, media reports said, but Aramco’s move opened the door for debate about how Saudi Arabia should act towards Egypt.
“Saudi Arabia shouldn’t think it is a superpower that dictates policies to others, because Egypt is not a marginal state that should blindly obey orders,” wrote Abdullah al-Senawi in the Egyptian daily al-Shorouk. “Both Saudi Arabia and Egypt have no interest in clashing because each of them needs the other.”