Cairo – Decypha: Although Egypt was the first in the region to discover oil, it was never a major crude producer, especially compared to the Gulf Cooperation Council (GCC) countries. Following the discovery of oil fields, the country experienced a rising consumption of oil and gas due to an increase in population, high energy intensity and subsidies, stated a report released by the Egyptian Center for Economic Studies (ECES). As the country seeks to encourage development and incur revenues in various industries to meet objectives of 2030 vision. The country is establishing new laws and policies as goals to counter its debts to international companies while also boosting the oil and natural gas sectors as a safe investment hub. Will new laws and policies help the country recover from debts to international companies? Is the oil/gas sector a safe investment hub in Egypt?
As for production level, Egypt is considered to be the top non-OPEC oil producer on Africa, and second in terms of natural gas production. Additionally, the republic is ranked 16th globally in terms of natural gas reserves, according to a report released by the Ministry or Petroleum.
The country is reliant on the oil and natural gas sectors in which they require total investments of $ 75 billion by year 2022, $ 45 billion of which will be allocated for the electricity sector and $ 30 billion for the petroleum sector, according to Daily News Egypt. In efforts to attract the required investment costs, the state is implementing a major long-term strategy that will run between 2018 until 2030. The strategy is based on studies, conducted by the Egyptian Natural Gas Holding Company (EGAS) and the Egyptian General Petroleum Corporation (EGPC), discussing future oil and gas production and quantities.
Challenged by production declinewhich have been witnessed over the past decades, and new discoveries are barely compensated by however local consumption increased, according to ECES. The subsidization of petroleum products emphasizes the rates ofconsumption levels that would have been higher if prices were closer to opportunity costs, the research suggests.
The declines in oil production was never the end of the road for natural resources production, on the contrary, it marked another era for natural gas production that began in 1975 and was boosted by significant discoveries located in the Mediterranean Sea reaching to eastern Alexandria. Despite the early beginning in production, gas exports were firstly carried out in 2003/2004.
Natural gas in Egypt is said to feature several benefits such as price advantage, cleaner emission than oil, and a booster for industrial plants and power generation in Egypt, therefore highlight a significant impact to the country’s economy, according to a report on upstream infrastructure by Egypt Oil & Gas.
Reserves & Production
Natural gas production has increased by a multiple of 3.15 billion cubic meters (bcm) in the past ten years, the research added. Approximately 58.8% of the production were found in the Mediterranean, 26.5% were found in the Western Desert, while the remaining were found in the Delta and Gulf of Suez, 6.4% and 7.6% respectively . In terms of natural gas reserves, the republic has reserves of 2,168 bcm.
Egypt’s crude oil reserves recorded a total of 4,400 million barrels in 2016, according to OPEC 2016 report. The reports also stated that the country’s crude oil production 540.9 barrel per day (b/ d), recording a 1.7% increase.
The country has recently discovered major natural gas fields including West delta, East delta, and the second phase of Zohr Field (850 bcm) that will save Egypt approximately $ 3.6 billion annually following its first production. Egyptian government seeks to advance gas productions not only through newly discovered fields but also seeks to decline imports by 2019.
Government Strategies
Egypt has taken over further procedures to boost the sectors’ production, attract new investments, and pay off debts for international companies. Governor of Central Bank of Egypt (CBE) announced that the country will pay a debt worth of $ 750 million to international oil companies by June 2017. Egyptian debt to these companies are said to have decreased from $ 3.6 billion to $ 3.4 billion in April 2017, according to EOG.
A challenge to the state’s ability to lure investments are the due arrears the government owes to foreign oil companies. Only in 2015/2016 fiscal year, the state purchased from foreign companies crude oil and natural gas worth of $ 5.4 billion, paying a mere $ 100 million so far, according to state-owned newspaper Al Ahram. The country is also working to pay off these debts in efforts to attract a total of $ 10 billion worth of investments in the sector by 2018 and boosting new investments worth of $ 32 billion within the upcoming three years following the implementation of the new investment law.
Other government plans further include a recently established agreement between EGPC and international companies to explore oil in North West El Ghareb field, South Alam El Shawish field, West Badr El Din field, South East Meleiha field, North Um Barraka field, and Fayoum field according to a released statement by Egyptian government.
Egypt’s oil and gas sector is said to feature weak investments, amid local energy demand, due to the country’s legal framework which failed to satisfy international oil companies (IOCs) according to EOG.
The country implemented a new legal framework in 1973 where it replaced the old tax/royalty system with new regulatory concession agreements following Production Sharing Agreements (PSAs). The system applies that agreements should be shared with one of the three official entities EGAS, EGPC, and Ganob El Wadi Petroleum Holding Company (GANOPE).
The country lacked expertise in assessing reserves and making use of technologies in the sector, thus PSAs invited foreign companies to explore and exploit the country’s reserves and fulfilled the expertise in the sector alongside with using required technologies to execute operations.
The aim behind PSAs is to reduce pressure on state budget and satisfies foreign investors; however that was not the case years later, where IOCs operating under this system are not capable of collecting their payments, expand their activities in the sector, earn their production shares, or obtain enhanced return rates; thus failing to secure the companies’ deserved payments.
Market Key Players
Foreign countries who seek to invest in the sector must participate as a joint venture company (JV) with the government-owned EGPC. Both parties sign an agreement that manages their relationship in specific exploration, assigns investors operational responsibilities, capital allocation, and assess project risks. The JV partnership secures funds, resource, and necessary information for project. The benefits of JV include facilitating the accumulation of capital, recovering capital expenditures, and sustaining forex flows. JV investors receive a great share from the oil and gas produced that covers their costs.
There are also plans to work with DEA in producing gas for the first time from West Delta gas fields located in North Alexandria and West Mediterranean deep waters, where DEA shares with the project’s official operational manager British BP. The General Manager of the Chinese Bank also aims to strengthen economic ties with Egypt through the petroleum sector, whereas it has recently inaugurated a new branch in the country.
Some of the local key players in the industry include PICO Energy Service Group that has been active for 40 years in Egypt and offers upstream, marine, logistics that meet demand of high-profile national and international clients. Other companies include Rashid Petroleum which focuses on oil wells drilling and Tharwa Petroleum which operates in drilling and producing petroleum and gas.
Some of the industry’s key players also include Apache, one of the major oil and gas foreign producers in Egypt. Operational in the country since 1994, the company is one of the largest land holders in the Western Desert, where their operational activities are successful, owning approximately 27,114 kilometers. One-third of Apache’s interests are owned by Sinopec, a Chinese-owned firm, according to a statement by Oxford Business Group, Apache owns 280 million barrels of oil (boe) in Egypt.
Apache’s output in the Western Desert is more vibrant than the Gulf of Suez where, recording $ 30 per barrel in the Western Desert which also features low cost for production. The company also runs assets in Egypt’s El Fayom Concession through JV with EGPC, thus emphasizing heavily onshore investments.
While Apache preferred onshore investments, other companies such as BP, BG and Eni, other foreign key players, prefer offshore projects. BP produces 10% of Egypt’s oil and 30% of its natural gas through developments in North Alexandria Concession, West Nile Delta that include the West Mediterranean Deepwater Concessions. BP has signed a recent agreement worth of $ 12 billion where the production phase will begin in 2017.
British company BP is pumping major investment costs in Egypt during 2016-2017. The company has recently obtained 10% in Zohr field in 2016, which is estimated 850 bcm.
Italian company Eni is also investing in offshore projects including its recent discovery in Zohr gas field in 2015, leading to an agreement with BP and government worth $ 220 million, according to a statement by Energy Egypt.
Challenges
The only way to support the export policy is to enlarge reserves. The statement reads that the country was obliged to import gas from global markets to facilitate supply shortfalls. The country’s decision to purchase gas from Zohr and West Nile Delta also presented a challenge as it burdens the current high trade and budget deficits. Despite the advantage found in low gas price given to gas export projects, it reduces investors’ interest in the upstream and downstream of the sector, which requires the revision of the gas allocation policy.
Other challenges are found in the public-private ventures that endure different regulation from companies that are state-owned or privately owned. Both parties tend to have different views revolving around disclosure, transparency, and environmental standards.
Egypt is also challenged with energy shortages that triggered a cut in production in companies that came in parallel to the currency deprivation that led to the oil and gas industry’s inability to import raw material inputs, according to EOG, and as a result exports dropped by 17.5% last October due to the shortage.
The PSAs system applied in the country portrays another challenge in both sectors where it is not able to secure foreign investors’ cost recovery. Contractors under PSAs law are allowed to gradually recuperate all the costs and expenses endured within the operational activities at the concession area, while receiving a 30% to 40% share of the oil produced.
Egyptian government is devoted to secure more gas and oil discoveries in efforts to enhance industry output, pay accumulated debt to International Oil Companies, decrease dependence on energy imports, and attract more investors.
By Fatma Khaled
