A look at German investment in the Egyptian oil and gas sector reveals a tale of global encouragement for Egypt and untapped opportunities for Germany
The European market presents immense opportunities for Egypt at large and for the oil and gas sector in specific. While Italy, France, and Spain have ceased the prospects of the sector, with Eni, Gaz de France and SEGAS’s gas liquefying factory in Damietta, respectively, many see Germany as lingering in the “middle field” of the sector. However, recently the country has expanded its presence in the sector. Germany as one of the mightier elements of the EU illustrates a good example of what cooperation can mean for the future.
Egypt and the EU at Large
On March 27, 2007, the International Cooperation Committee at the American Chamber of Commerce hosted H.E. Dr. Klaus-Dieter Ebermann, Head of Delegation of the European Commission to Egypt, at a talk entitled “Egypt-European Union: neighborhood in motion.” Dr. Ebermann discussed the European Neighborhood Policy (ENP) and the EU-Egypt Joint Action Plan.
The talk essentially revolved around two current realities: first, that the EU now constitutes the world’s largest consumer market and second, that Egypt is one of the faster growing markets of the world as has been noted by the Economic Reform Forum, which placed Egypt among the top reformers of investment climate and business environment. With these two realities in mind it is only natural that a means of cooperation mediate between the two: enter the Joint Action Plan.
The EU will be providing Egypt with a €558 million package of assistance for 2007-2010 based on the Joint Action Plan which was adopted at the 3rd EU-Egypt Association Council in Brussels on March 6, 2007. Part B of the Section 2.3. entitled “Transport, energy and environment” in the Plan discusses cooperation between Egypt and the EU on the long term energy strategy in relation to the EU’s energy policy objectives.
In specific, part B discusses the strengthening of institutions and financing, the free exchange of information, cooperation on electricity and gas markets, development of energy pricing methodologies, cooperation on the development of an oil and gas Regulatory Agency, the restructuring of the sector in order to converge with the principles of the EU internal electricity and gas markets and the development of a regional Gas Master Plan in order to assist in the transportation of gas between the EU and Egypt.
German Prospects in Egypt
One of the forces of the EU that are currently present in the oil and gas sector in Egypt is Germany. In 2003 some of the members of the German-Arab Chamber of Industry and Commerce (GACIC) held a meeting under the title “Future of Petroleum and Gas Industry in Egypt.” The meeting addressed the need for German companies to pursue further investment in the flourishing sector. At that time, it was calculated that direct German investments in the oil sector reached $ 2.6 billion. Since the meeting German companies have bolstered their presence in the sector.
On February 3, 2007 GACIC organized an Egyptian-German Business Talk, this time however, it revolved less on the needs on the German market and more on the needs of the Egyptian market. It was noted that Egyptian energy consumption would soon surpass production. Solutions to this dilemma were three fold, first to increase imports; second, to focus on renewable energy; and third, to develop nuclear energy. It was mentioned that Siemens will invest one billion Euros in this sector. One of the more important revelations made at the talk, was that Germany is seen by many, in terms of Foreign Direct Investment (FDI) in Egypt as remaining in the “middle field” where potential is present for additional investment.
Nonetheless, while Germany presents opportunities for Egypt in terms of investment and transfer of knowledge, Egypt presents for Germany a means of sustainable energy through natural gas more than petroleum. Currently, Germany does not have domestic terminals for the transportation of natural gas, but with the rising demand for energy consumption, the country will have to begin thinking of building the necessary structures or of alternatives means of getting its energy.
In an interview with GASWINNER, the monthly magazine of WinGas Deustschland, Hilmar Rempel, deputy head of the energy raw materials unit at the Federal German Institute for Geosciences and Raw Materials, stated that while Germany “at the moment [has] no facilities for landing LNG…if the financing was right and approvals were given, then terminals and tanks could be in place in one to two years.” Rempel continued to state that since German companies are active in Egypt, among other areas that “both delivery types, transport per pipeline and LNG, could be used” there.
It would seem, based on the above information, that Germany has a ways to go before claiming victory of future security in terms of energy. Nevertheless, conferences and interviews can, at times, be far removed from reality and German economic tactics can be deceiving in the short term, and quite effective in the long term.
German Investment in Egypt
On June 6, 2006 the Deutsches Weltbank-Forum in Hamburg featured Dr. Matthias Mitscherlich, Chairman of North Africa Middle East Initiative of German Business (NMI) and Chairman of the Board of MAN Ferrostaal AG, as its keynote speaker. The discussion was entitled “Germany and the Middle East – The Perspective of German Business.” In his speech, Dr. Mitscherlich responded to the claims that German businesses were not ceasing the opportunities presented by the Middle East by explaining that the German economy is unlike any other.
Dr. Mitscherlich states that “the backbone of the German economy is formed by what we in German call the “Mittelstand”, small- to medium-sized companies, often family-owned and managed. Because of this, the management and financial capacities of these companies are limited. They apply more caution to avoid problems which might cost them their independence or even existence. Nevertheless, these companies have also successfully internationalised in the last decade, especially into the new markets in Eastern Europe and Asia.
“A number of them are so-called “hidden champions” of the global market. There is no reason why the “Mittelstand” should not invest in the MENA region, if the region can present conditions which support these companies in their expansion.”
While the Mittelstand have yet to fully embrace the energy prospect that is Egypt, there is undoubtedly a German aura in Egypt’s oil and gas sector. Not all are Mittelstand, but some carry the characteristics of the “hidden champions.” The Egyptian investment environment is also transitioning, and this transition into a more hospital atmosphere will assuredly attract the cautious Mittelstand.
Nevertheless, at the moment there are three German companies in specific that have left their mark on the Egyptian oil and gas sector and remain a beckon of hope of what Germany can bring to Egypt, but also of what Egypt can bring to Germany and the EU at large. These companies are RWE Dea, Uhde, and Ruhrpumpen.
RWE Dea Egypt
An RWE Dea Egypt land rig while drilling in the West El Tayifah area
RWE Dea, a member of the major German energy group RWE, has more than a hundred years of experience in its pocket and can hardly be described as a Mittelstand. The company began its operations in Egypt in1974 as an exploration and production company.
RWE Dea currently has five concessions. The concessions are operated by the Suez Oil Company (SUCO) a joint-venture between the Egyptian General Petroleum Corporation (EGPC) and RWE Dea. In the years that RWE Dea have operated in Egypt, they, along with their partners have invested more than US$ 3 billion and their concessions have produced more than 580 million barrels of oil.
The four concessions are: North Idku offshore concession, Asyout Upper Egypt concession, Disouq concession, North El Amriya (NEA), and Tanta. RWE Dea holds 100% interest in the latter four concessions and 70% interest in the former North Idku concession. North Idku has had four discoveries which tested for gas and condensate, while Asyout, Disouq, NEA, and Tanta are still undergoing evaluation.
RWE Dea also has stakes as a non-operator in a number of onshore and offshore concessions. The onshore concessions include East Kalasha with IEOC as operator and 25% interest for RWE Dea, East Yidma with INA as operator and 50% interest for RWE Dea, West Med onshore with Apache as operator and 35% interest for RWE Dea, and East Delta with IEOC as operator and 25/45.5% interest for RWE Dea. As for offshore concessions, these include North Alex with BP as operator
The Social Side of German investment: A School in the Abu Rawash area renovated by RWE Dea Egypt in the frame of their social activties achieved in 2006.
and 40% interest for RWE Dea, West Med Deep Water with BP as operator and 20% interest for RWE Dea, and West Med offshore with Apache as operator and 35% interest for RWE Dea.
RWE Dea operations in Egypt do not only amount to direct investment in the country but also employment opportunities for the country. In total, the company along with its joint venture, SUCO, employs 1,254 Egyptian nationals and 35 expatriates.
Also, keeping in the spirit of the previously mention Joint Action Plan, Section 2.1.3. entitled “Social Development” to be precise, which endeavors to combat illiteracy and achieve education for all in Egypt, RWE Dea has sponsored several schools in Greater Cairo area through Corporate Social Responsibility program. In 2006, RWE Dea extended its efforts to 13 schools in informal communities in Greater Cairo. It ranged from improving basic school facilities such as chalkboards and desks, to total building renovation in co-operation with the GTZ (Deutsche Gesellschaft fur Technische Zusammenarbeit / German Technical Corporation) as the implementation organization. As a result, RWE Dea spent approximately half a million EGP in 2006 and will continue to spend at least the same amount in future.
Uhde is a company which specializes in a full range of services involved in the construction of industrial plants. The company’s activities focus on the engineering and construction of chemical and other industrial plants in the following fields: fertilizers, electrolysis, gas technologies, oil, coal and residue gasification, refining technologies, organic intermediates, polymers and synthetic fibres, and also coke plant and high-pressure technologies.
The company was founded by Friedrich Uhde at Bövinghausen in 1921. Uhde is a good example of a Mittelstand, which has internationalized. From a small operation, Uhde today is responsible for 2,000 plants and is considered one of the world’s leading engineering companies in the design and construction of chemical, refining and other industrial plants.
In the beginning of 2007 Uhde was commissioned with the task of building a turnkey petrochemical complex in Port Said. The complex will consist of a propylene plant and a polypropylene plant with respective annual production capacities of 350,000 tonnes as well as all appurtenant utilities and off-sites, including an air fractionation and refrigerating unit, and the required storage tanks.
The Egyptian Propylene & Polypropylene Company (EPPC) requested Uhde for the task. The contract between EPPC and Uhde was signed at the end of 2006 and officiated by Ahmed Nazif, the Egyptian Prime Minister and Sameh Fahmy, the Egyptian Minister of Petroleum.
For Uhde this complex marks a breakthrough for the company’s propane dehydrogenation technology because it will be the first time that their patented STAR process® will be used for the commercial-scale production. The process will be used to dehydrogenate propane to propylene and/or butane to butylenes.
For Egypt, the complex will be used to produce a wide range of high quality polypropylene plastic pellets, which then can be turned into rigid and flexible packaging, consumer goods and automotives. These products will be produced for both export and domestic markets.
EPPC has invested close to US$ 680 million for the project which is scheduled for completion late 2009.
An example of the variety of pumps produced by Ruhrpumpen. Source: Ruhrpumpen website.
Ruhrpumpen GmbH was established in 1950 in Witten, Germany. The company develops and manufactures Centrifugal Pumps, including pumps for use under extreme conditions. They have sales and services facilities across the world and manufacturing facilities in Monterrey & Celaya, in Mexico; Tulsa, OK, USA; Witten, Germany, Bogotá, Colombia and Cairo, Egypt.
One of the more successful divisions of the company is the Corporacion EG, which started operations in 1979 and has evolved into an integrated global pump supplier. One can only hope that the Egyptian division be as successful and turn the country into a regional hub for pump exports.
The manufacturing facility in Egypt was established in 2005. The contract between Egypt and Ruhrpumpen allots 67% share of the project to the foreign partner and 33% to the Egyptian component. Thus far 20 million euro have been invested in the factory, which will produce pumps used in petroleum and petrochemical industries in accordance with world standard specifications (API610) as well as producing and maintaining their spare parts.
For Egypt, the factory will provide greater opportunities for exports as well as creating new job opportunities for Egyptian nationals.
When Occident Met Orient
German investment in Egypt’s oil and gas sector is an interesting tale because it essentially encapsulates two dichotomous points: Egypt’s potential for growth and its propensity for diminution. The above mentioned companies present the aforementioned potential for growth. These companies have invested large amounts of money, infrastructure, and knowledge in the country. They have provided not only job opportunities, but also attempts at social welfare, as was seen with RWE Dea, and a prospective for an increase of export capital, as was seen with Uhde and Ruhrpumpen.
However, these are three companies. They might not be the only companies in the sector, but they are the largest and most noticed companies. Dr. Mitscherlich’s insight into the German economy is not only an explanation for the small amount of German companies in Egypt, it is also a somewhat veiled suggestion for Egyptian decision-makers. Political, economic and social developments must ensue in the country before more and larger foreign investment is to enter the country. The Mittelstand of Germany might not be solely native to Germany, there are other cautious companies that want to be assured their investments are placed in a stable environment before they enter any market. This is also the partial reasoning behind the Egypt-EU Joint Action Plan.
While RWE Dea’s decades long investment of US$ 3 billion, or Uhde US$ 680 million, or Ruhrpumpen’s 20 million euro amount to a figure to truly behold, these companies are just the tip of the iceberg in terms of what Germany can offer Egypt. On the global front, the MENA region is the largest producer of oil and gas, while Germany as part of the EU is a fragment of the largest consumer market; cooperation between the two is rational if not imminent.
At the end of his speech, Dr. Mitscherlich translated a part of Goethe’s West Eastern Divan: “Who knows himself and others must also recognize Orient and Occident can not be divorced.” The West and the East have much to offer each other; however, the full realization of this very lucrative unification has yet to be. Egypt must concentrate on streamlining its market with the international market in order for companies to feel comfortable enough to enter it. The country has taken grand strides towards this end; nonetheless, bureaucracy and the lack of transparency still pose a problem for many interested investors.
(By Diana Elassy)Download