Egypt’s bid to pay off its mountain of debt to international oil companies and improve contract terms could create a rush of activity to make up for lost time. Patrick Werr reports.
Former chairman of Egypt’s state-owned gas holding company EGAS Mohamed Shoeib thinks the change in tack will lead to a swell of activity by foreign companies in Egypt.
Egypt’s debt problems date back to the country’s 2011 popular uprising when oil and gas development was disrupted. But the Egyptian government paid oil companies US$3 billion in the last year, and in November secured a $1.5 billion syndicated loan from banks to make further payments. BG Group, which holds 35.5% stake in the Egyptian LNG facilities at Idku (pictured), and Circle Oil have since declared they have received payments, but the debt, as at 31 December, still stood at around $3.1 billion.
The government’s moves came ahead of a new auction of onshore and offshore exploration and production concessions, which have already started to flow to oil firms.
The government signed six new agreements for oil and gas exploration in the Gulf of Suez and the Western Desert in January. The companies involved were Shell, Italy’s Eni, BP and Canada's Trans Globe, along with Tharwa and General Petroleum Co., the state-owned companies. The terms included minimum investments of about US$5.271 million and a signature bonus of $124 million to drill 41 wells.
The six represent the first of 20 new petroleum agreements that will be signed over the coming period, said Egypt’s Oil Ministry. Eni also won further concessions to explore two new blocks in the Egyptian Mediterranean.
“The coming period will see robust activity for foreign companies and for service companies. I expect it to affect the production of natural gas positively,” says Shoeib, now managing director of the energy division at Cairo-based Qalaa Holdings.
Analysts caution that the recent drop in international oil prices may make attempts to attract more activity anywhere in the world an uphill battle.
“At $70 a barrel, the number of projects which companies will mothball is huge,” says Johnny West, of OpenOil, a Berlin-based energy consultancy, before prices further dropped to below $50.
Many companies, owed billions by the cash-strapped government, slowed down development of existing concessions and lost appetite for new ones. No new agreements were signed in 2011-2013.
The government built up $8 billion in overdue payments to finance a mushrooming program to provide low-priced gasoline, electricity, diesel and natural gas to consumers.
With the population growing and consumer inflation at around 10%, the subsidies have been eating up about 20% of the state budget. The turmoil that ousted President Hosni Mubarak in February 2011 compounded the problem, making it more politically difficult than ever to increase fuel prices.
To keep the low-price energy flowing to the domestic market, the government, in exchange for promises of future payment, diverted locally produced oil and gas that international companies had been selling abroad, turning the firms into reluctant financiers.
Egypt produced 2,214 Bcf of dry natural gas at its peak in 2009, or 2.1% of the world total, but production is in decline by about 3%/yr, according to the EIA. Some 60% of Egypt’s gas comes from offshore wells, Shoeib told OE.
The economy has been stabilizing since the Defense Minister, Abdel-Fattah al-Sisi, took power in July 2013 and thanks to abundant aid from Gulf Arab countries. The government raised domestic fuel prices in July 2014, reducing its subsidy bill by almost 30%. It also paid a total $3 billion in arrears to oil companies in December 2013 and September 2014, reducing arrears to $4.9 billion, Oil Minister Sherif Ismail told an energy conference in November. Companies investing in new drilling and exploration get priority, the finance minister last year said.
In late November 2014, the government secured a syndicated loan of up to $1.5 billion that will be used to further reduce arrears. In an interview in late November with Middle East Economic Survey (MEES), Oil minister Sharif Ismail suggested a two-year timeframe to pay off the rest.
Egypt has also begun modifying the terms of new contracts, giving companies greater freedom to sell their product abroad. It has been renegotiating old contracts to increase prices as well. Eni, RWE Dea, Apache and Dana Gas are among those who have obtained better prices for their gas or entered talks with the government over the past few months.
The oil minister told MEES he expected a new bid round by the end of December, with as many as 15 onshore and offshore tracts up for grabs.
Image: The Egyptian LNG (ELNG) terminal in Idku, located 50 km east of Alexandria, Egypt, comprises two LNG production trains each with a capacity of 3.6MTPA. (Photo from BG Group)
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