Nicolas Katcharov – General Manager Egypt Branch VP North Africa and Middle East Operations, Edison, Egypt
Nicolas Katcharov, General Manager Egypt Branch and VP North Africa and Middle East Operations, discusses the main priorities and achievements of his first 100 days in office, the value that Edison can offer Egypt through the synergies of combining its upstream E&P and power generation business segments, and Edison’s commitment to Egypt’s ambition to become a regional energy hub.
Nicolas, we are meeting you more or less after your first 100 days in position. What were your first impressions of Egypt’s energy landscape?
“Regulation is crucial because without it, the value creation is not clear and/or motivational enough, making difficult the implementation of system improvements.”
Having previously worked in European markets, I see incredible potential for development in Egypt, particularly within a context of stagnation – due to the lack of growth, and market maturity – in Europe’s energy sector. Egypt’s geographical proximity to Europe also makes it one of the most natural targets for international development for European companies.
It is therefore extremely opportune to be in Egypt now. Firstly, there is already proven and still growing E&P potential here. Secondly, demographics – a young and rapidly growing population – means a market with fast-growing needs. Thirdly, the problems in Egypt has in its energy sector means that there is space for companies to deliver valuable solutions to tangibly improve the economy and the daily lives of Egyptians. Finally, with the political stability successfully enforced by the current Government in the past few years, there is anticipation of a healthy regulatory and legal frame for companies to invest and operate in.
Furthermore, Egyptians by nature are very positive and full of energy. This not only makes it easier to bridge the existing development gap but also means there is room for development in human capital in Egypt, which can potentially be exported to other markets.
To unlock Egypt’s’ potential as a promising regional energy hub and expedite investments into the sector, the government should address the current situation relating to the outstanding debts to international oil companies and reduce obligations to its foreign partners in a clear and structured timeline.
Can you elaborate on this energy development gap in Egypt?
To draw a comparison, Europe is very advanced in terms of production, management and consumption of energy. The market is efficient and competitive, margins are low and there is not much conventional development potential. The key differentiator today is in constantly developing cutting-edge technologies, which represent more and more value in the energy chain. At the same time, the implementation of such technologies requires significant capital investment.
On the other side, in Egypt, we not only still see potential in the development and use of conventional technologies but also, instead of reinventing the wheel, Egypt can leapfrog quickly in its development via a faster and more cost-efficient route through companies like Edison, who can bridge the gap by introducing and deploying modern technologies following the European track records. This was very evident in Eastern European countries, which in the 1990s saw a huge leap forward in its technological adoption after the fall of the Berlin Wall. For instance, in Eastern Europe (even in small cities), you can now pay your parking fees on your mobile phone, which is not possible in some developed European countries, where the barrier for introducing new technologies is only the over-cost for removal of the old, conventional technology. By deploying conventional technologies, the same logic would apply when it comes to developing the energy sector in Egypt.
Egypt has similar opportunities to benefit from such technology leaps because they are already available and price accessible. As an example, I was surprised to see that wind and photovoltaic (PV) power were not more widely developed in Egypt, given that the natural potential is huge. The last 15 years have meant that wind and solar power are now competitive with conventional energy sources in terms of pricing. This leaves the problems of network stability and grid management, but once again, technology can now solve these issues much more easily than 15 years ago.
How important a role does regulation play in this, because the regulatory environment in Egypt is very different to that in Europe?
Regulation is crucial because without it, the value creation is not clear and/or motivational enough, making difficult the implementation of system improvements. Here again, countries like Egypt can benefit from the existing regulations that have been drawn up in Europe, learning both from our mistakes and our achievements. This also means eliminating the subsidies in place, gradually and through an intelligent approach, because no one can invest for the long term in a market where sale prices do not fully cover production and distribution costs.
We are currently in the process of building a simple but effective approach based on a specific concept and pilot projects, bringing together benefits and interest for all stakeholders in the system (the Egyptian General Petroleum Corporation (EGPC), Egyptian Natural Gas Holding Company (EGAS), power grid, gas and electricity regulators, territorial governors, construction and equipment companies, banks and so on). The idea is to demonstrate the value to be generated from better use and management of the available energy resources. There is such potential in Egypt in terms of needs and possible improvements that each stakeholder can find a way to derive value from such projects. This is not necessarily the case in Europe, where the gaps in efficiency are almost at zero. In Egypt, investing in efficiency is very promising, but there is not a focused policy or sufficient, coordination between the stakeholders which is, basically, the purpose of regulations. Regulations, when properly structured, should generate a value for all players in the sector.
By introducing energy efficiency and management solutions in Egypt, we can reduce the consumed energy, which can also help the regulator gradually remove subsidies. As example, if we can generate efficiencies by switching from a simple hot water boiler to cogeneration, then an energy price increase will be offset by the lower volume in the final customer’s bill.
What makes Edison the right partner to deliver the energy management and conventional technology deployment that Egypt needs?
Energy efficiency projects are often complex when the goal is to optimize the energy chain of a customer and extract the complete value of the potential improvement, giving a guarantee on the results. Such projects require many different competences and focused management. Most of the companies active today in Egypt in that field are providing only partial products like specific competences, financing, services or equipment. Therefore, such companies cannot take the responsibility for the full implementation and the performance during the lifetime of the asset. Additionally, such companies are rarely investing and they have generally high risk aversion. Only experienced, multi-utility long-term players can build and operate viable solutions on the long term scale.
Long-term players in the Egyptian energy sector are mostly the ones already established in E&P – like Edison, for instance. Our sound experience as one of the first and major international E&P players in Egypt is of course a necessary foundation for building any other activity locally. Given our longstanding history of more than 110 years, Edison is today the oldest European multi-utility operating in all subsectors of Power and Gas. Based on our own experience, which is not limited to EU but also extends to developing countries, and with the support of all competences available in EDF Group, we can identify, design, finance, build and operate complex efficiency projects from A to Z. Altogether, this positions the Group to start integrating E&P (upstream) and Efficiency (downstream) in Egypt.
This focus on local market development is very interesting because a decade ago, European utilities came to North Africa in order to execute a sort of Euro-Mediterranean strategy, developing resources in North Africa to export energy back to Europe. How does this fit with your emphasis now on local market development?
Regarding Egypt, it is a matter of fact that exporting gas is impossible due to the huge domestic needs. Today, this is a constraint for us – especially if you are not fully reimbursed for the gas sold in the country – but, if tomorrow we can sell our gas to final customers at a price not far from the international gas prices, there should be no viable reason to look at the export market. One would hope, in the near future, to see the interest to extract gas being driven by the demand and interest to sell gas locally; this would be a strong sign of normalized and healthy economy.
In addition, I am a big supporter of smart and distributed energy solutions, i.e. energy generating and distributing solutions optimized and built for a given specific territory. The concept of distributed energy is by nature local and not global. It seems to me that if we want to consume energy better – more efficiently, with less cost, while protecting the environment – we should consume it not far from where it is produced. For instance, it makes more sense to improve Egypt’s own internal market and support its domestic energy transition than to serve as oil and gas supplier to other markets, unless the production becomes higher than the consumption and production costs are internationally competitive. Exporting will nevertheless remain a valuable option for the country, but I am convinced that high domestic dynamics will continue dragging the hydrocarbons inside the country. Therefore, becoming an Energy Hub is a very interesting idea.
Our first bridge in the upstream-to-downstream integration will be the Gas-to-Power project, which we are finalizing, consisting in the direct use of gas produced in our Abu Qir concession for generating electricity in a dedicated power plant. The next step will be the development of distributed and efficient energy solutions for selected industrial customers.
As you mentioned, E&P is a critical part of Edison’s operations and you have significant operations here in Egypt. What role does E&P play in terms of your mission here?
For us, E&P is a key business segment contributing significantly to the group’s results. Today our production is mainly from the Abu Qir concession, which we are continuing to develop as we are convinced that there is potential left to uncover.
For instance, we have just achieved a new significant milestone from the new platform North Abu Qir PIII (NA/Q-PIII). The first production well, NAQPIII#1, was brought on stream with outstanding performances on 2 April 2017, increasing the overall gas output of the field by circa 20 percent. Two additional wells are expected to be completed by July 2017, further boosting the production of Abu Qir Field.
In March 2017, we had another drilling success on another platform, which is now producing 2,000 barrels per day of very good quality condensate.
We are proceeding also in exploration. We have onshore drilling campaigns in South Idku and in North West Gindi. Offshore, we are finalizing data acquisition and preparing to enter into phase 2 of our first deep water project in the Eastern Mediterranean. We have also some other participation in offshore projects with our partners.
Despite of the current – and certainly for some more time – low Brent price, we are continuing to invest in such complex projects because of their strategic profile. There is huge potential in the Eastern Mediterranean, not just in Egypt but in neighboring countries, where there are also important discoveries. If we confirm a discovery in our Eastern Mediterranean concessions, we will be building new infrastructures and expanding existing ones, which could then be used to bring in hydrocarbons from all surrounding fields, in Egypt and in its neighboring.
If you have cheap solutions, it does not make sense to introduce expensive solutions. Egypt is really the solution here for the entire region. This is of course not only a question of energy but also politics. That said, energy connects people and this energy hub idea will be a unique opportunity to bring the region together in a positive and common interest.
In 2020, where should we expect to see Edison in Egypt?
I envisage to see Edison announcing a major discovery in East Mediterranean and to be the first major contributor to the energy transition process of Egypt.