In our interview of last month with Petroleum Minister Eng. Abdullah Ghorab, he stressed the importance of overhauling the Egyptian General Petroleum Company (EGPC), consolidating the regulation of the entire upstream sector once again under its ceiling as well as calibrating the company’s administrative structure. The gravity of the minister’s plan has prompted a wide range of responses from various experts in the petroleum field. Therefore, it behooved Egypt Oil & Gas Newspaper to interview a number of those experts and document their responses, since their collective wisdom could prove beneficial in guiding the process of overhauling the EGPC, a move that would entirely reshape the Egyptian petroleum sector if implemented.
Proponents of the Minister’s plan
Several of the experts we’ve interviewed were in complete support of the Minister’s proposition. They believed that having the EGPC regain the function it once had during the tenure of former Minister Hamdy El-Banby would enhance the regulatory framework of the upstream sector. They view the problem withering the EGPC as “more structural than it is fiscal.”
The EGPC is “extremely capable of regulating and monitoring all companies investing in the sector; it is hindered, however, by its poor administrative practices. Resolving these structural impediments would bolster the efficiency of the EGPC, which is key to attracting foreign investment,” one expert explained.
Another advocate of the Minister’s decision recommended expediting this kind of reform due to the positive outcome it would yield. Empowering the EGPC, he remarked, could play a “pivotal role in eradicating some of the inefficient bureaucratic practices currently employed by the ministry, which would go a long way towards providing prospective investors with a smoother procedural process.”
He recalls, “during the years of Minister Sameh Fahmy, an investor would address one of the companies [EGPC, EGAS or GANOPE,] seeking approval for a certain project. If for some inexplicable reason that project was rejected, the investor would turn to another company with the same project and obtain the sought approval.”
This apparent absence of coordination and communication between government-companies is disruptive on several levels. Not only does it complicate the contractual process for the investor, it also erodes the organizational structure of the entire sector, curtailing the government’s regulatory efficiency.
Weak regulation gives way to legal and monetary irregularities, which can be extremely difficult to remedy and would, in the long run, have severe repercussions on the economy as a whole. The EGPC is thereby in dire need of a comprehensive, progressive macro-strategy reflected in a tightly coordinated and highly regulated structure that is conducive to stimulating development and luring more investments.
A Correct, yet untimely decision
Another group of interviewees expressed support for the Minister’s plan on a conceptual basis yet deemed the decision of its application to be either late or premature.
“It’s a correct decision indeed, yet an extremely late one at that” expressed one of the experts. This crucial decision “should have been the top priority of Minister’s Ghorab’s administration from his first day in office.” This delay, coupled with the “indecisiveness” of the high-ranking officials in the petroleum ministry, gave room for further deterioration of the current procedural structure, the consequence of which would become evident if the plan to overhaul the EGPC were to be executed.
He explained that “the EGPC was founded to serve as the sole legal government-company representing the interest of the state in upstream dealings; it was intended to function as the only entity authorized to offer bid rounds, seal contracts and conclude agreements with investors. Not to mention its central role in regulating and monitoring exploratory and production activities within the sector.”
This dynamic unfortunately changed during the tenure of former petroleum minister Sameh Fahmy, as he allowed EGAS and GANOPE to share some of the functions of the EGPC. Having foreign investors deal with several government authorities serving the same purpose (to a certain extent) resulted in a multitude of structural discrepancies. Most importantly, it led to the marginalization of the EGPC and the deterioration of its regulatory authority.
EGAS and GANOPE were originally founded to augment rather than share the functions of the EGPC; they were mainly created to regulate the downstream part of the industry while having minor specific functions that pertain to the upstream sector.
In the case of EGAS, for example, the company was created to regulate post-production natural gas operations, which includes tasks such as the delivery of natural gas to both residential and industrial locations, the maintenance of pipeline networks and the collection of end-consumer fees.
The company is also responsible for the construction and development of the entire gas-distribution infrastructure, which consists of creating domestic pipeline networks, extending pipelines to neighboring countries, shipping natural gas to remote European importers as well as concluding gas-exportation agreements.
However, EGAS and GANOPE digressed from their original track, shifting their focus towards upstream operations. This diversion resulted in their failure to independently manage some the sector’s upstream dealings, which prompted ex-Minister Fahmy to legally obligate both EGAS and GANOPE to seek the approval of the EGPC before sealing any upstream deal. “If that plan was carefully considered before execution, Fahmy would have concluded that his strategy to partition the utility of the EGPC is facile, and would’ve realized the negative consequences its implementation would engender.”
Minister Gorab’s plan should therefore be properly studied at first, if the results of the study are favorable, the plan should be executed gradually and over a long timeframe in order to avoid the disruption of the extant operational structure regulating the upstream sector. This gradual application, as several experts emphasized, is the only method that can ensure the stability of the sector’s regulatory apparatus while preserving the competitive attractiveness of Egyptian petroleum market.
Another expert regarded the decision as extremely premature. He explained that upstream companies operating in the sector as well as the EGPC set annual development plans that they strive to realize, and their ability to fulfill these plans has been impaired by the turbulent political status quo.
From this standpoint, any major change in the current structure would add to the instability of the sector and the insecurity of investors, further curbing their ability to focus on fulfilling their targeted plans. “Only when the dust of the political atmosphere settles down should the ministry move ahead with the desired reforms”.
Skeptics of the Minister’s Plan
Some of the experts we’ve met with are at the other end of the spectrum, that is to say, they do not concur with the Minister’s strategy to ‘overhaul’ the EGPC. In their opinion, any attempt to consolidate upstream activity back under the EGPC will entirely disrupt the current flow of operations since investors have already adapted to the procedural structure in place, despite the level of its fragmentation.
The government must not overlook the fact that increasing production levels is always the top priority for every company operating in the market. Altering the scheme of obtaining approvals and inking agreements would therefore compel investors to shift their focus from fulfilling targeted plans to learning the new ways of navigating the EGPC’s procedural framework.
Another expert completely rejected the basic concept of the plan. In his opinion, having more than one entity regulating upstream dealings is comforting for the investor, as it provides them with the security of knowing that they have more than one chance to get their target projects approved.
“It is a catch-22,” commented a high-ranking source. “The minister wants to empower the EGPC in order to facilitate the process for the foreign investors. Yet, the degree of reform required in realizing the Minister’s vision coupled with the time needed for its proper implementation will most likely complicate the matter further and dissuade those same investors.” For the Minister’s strategy to succeed, he must firstly reform several elements related to the dealings of foreign investors in the sector before taking on the complex mission of overhauling the EGPC.
This reform could entail increasing the number of offered bid rounds by the EGPC and facilitating the bureaucratic process of approving projects and concluding agreements, all of which would contribute to solidifying the position of the EGPC and guaranteeing the comfort of foreign investors, which are critical prerequisites to initiating a major structural overhaul. The government should additionally “prepare contingency plans should the implementation of the minister’s strategy yield unexpected or undesired outcomes, which could potentially lead to loss of investment opportunities.”
Another opposing opinion emphasized the notion that while it might have been simple to extend the upstream structural framework to several companies, it is extremely damaging to contract it back under one entity.
Stripping upstream dealings from EGAS and GANOPE, he explained, could have dire economic repercussions. It would lead to the dissolution of many joint-venture companies, which would see to a total halt of their development plans and consequently the suspension of many ongoing upstream projects. It will also trigger a surge in the redundancy of human resources in a time of rising unemployment rates. The formation of new venture-companies in the midst of dismantling preexisting ones will most certainly create a state of disorder and instability in the entire sector, deterring new investors from entering the Egyptian market.
The government’s plan for the fiscal year, he continued, would also be impaired, which would lead to a shortage in targeted production rates. Another point to consider is the inability to store natural gas, which in the case of a structural overhaul, would require the readjustment of its production levels to accurately match domestic and exportation needs.
The individuals we interviewed may have had competing views on the Minister’s plan; they did however share some common concerns and recommendations if the plan were to be implemented shortly.
First and foremost, they all demand the ministry to conduct and publicly declare a thorough and meticulous study of the structural overhaul, demonstrating the strategy it would employ to implement the needed adjustments in a manner that is least disruptive to the sector’s operations. They also recommended a gradual implantation of the strategy over a long timeframe.
Secondly, they stress that alternative plans be drawn to act as steady back-up in the case of failure to implement or undesired results, thus guaranteeing the continuity of operations and achieving targeted output projections.
Another point commonly agreed upon is streamlining the ineffectual bureaucratic practices in dealing with foreign investors before the execution of a major overhaul to cultivate a comfortable environment for investors, and preserve the desirability and competitiveness of the sector during the period of implementation.
Last but not least, they urge the ministry to consult and seek the assistance of every major corporation (both domestic and international) operating in the sector and to formulate a taskforce of experts from outside the ministry that would serve in an advisory capacity and oversee the implementation of the project.
During our interview, Minister Abdallah Ghorab was quite determined on implementing a plan that lays a solid foundation for the Egyptian petroleum industry to prosper. He seemed to genuinely believe in the auspicious future of the Egyptian petroleum industry. He also stressed the reformation of the EGPC and the reconsolidation of the industry’s upstream; we are hopeful that his vision materializes, as it could only contribute in raising the caliber of our national petroleum industry.
By Shady Ahmed and Mohamed El-BahrawiDownload