An Interview with Abdullah Ghorab ”A Complicated Agreement: A Discussion of Transparency, Subsidies and the Power of Pricing”

At a pivotal juncture in Egypt’s political and socioeconomic landscape Egypt Oil and Gas Newspaper obtained an exclusive interview with Abdullah Ghorab, former Minister of Petroleum to discuss the current and ongoing revision of international petroleum contacts or agreements. 

What is your opinion on the current contractual agreement model?
It is quite well known that petroleum agreements operate based on the premise that a foreign investor enters into such investments with a reasonable threshold for financial risk. Long-term risks specifically, as there are inherent risks until the last barrel is produced.  The Egyptian oil and natural gas industries operate and revolve around prospects, expectations and information.  We always look to the foreign partner after research and exploration, never before.

Currently a drilling project is underway in the Mediterranean, this particular project has a total cost of over four hundred and fifty million dollars. At this juncture the foreign partner is the entity who takes all the risks while the government does not bear any. The government comes in after the initial development stage to help shoulder the risk. By establishing a joint venture company for production the government enters the arrangement post-agreement and then begins to bear some of the risks. Then the foreign company is entitled to recovering his expenses in the form of cost-recovery.  This is stated in the agreement model. If no production is made, the investor does not recover his costs. This simply shows that the investor is taking the majority of the risks. It is also worth mentioning that the petroleum model for the investor is simply an economic project where he invests capital and, eventually, achieves a return. Therefore, the agreement model format applied in Egypt is the main concern of the government and not the investor.

In the past, Egypt has applied several different contractual models like tax royalty, participation and others.  These models were convenient and perhaps more advantageous for the investor during that period.  Then we applied the current production-sharing model. I believe this model has shown great success and more equability. The investor makes a marginal profit and recovers partial costs injected from production. As for Egypt, if we look at all the mature fields produced and developed in the past years, you’ll find that the net profit reached eighty percent for Egypt after investor share and costs have been paid.

How do you see the future of the oil and gas sector in Egypt?
From my perspective Egypt’s future is full of potential. Throughout the past fifty years we have produced from a variety of major areas such as the Gulf of Suez.  This area is geographically limited but the amount of information gathered is substantial. In the future, higher quality information will decrease the amount of risk.

We have produced oil and gas from the Western Desert from near surface wells that produce an average of five hundred to one thousand barrels a day, as these hydrocarbon groups are small as this is the nature of this area. As for the deeper layers in the Western Desert, we started to find wells that produce five thousand to eight thousand barrels a day.  These resources are six to seven kilometers from the surface. Of course, the deeper the drilling the higher the production cost, but also the return is much greater. Therefore I see a lot of future potential for development in the Western Desert.

As for the Mediterranean, today we drill wells approximately seventy to eighty kilometers from the Alexandria shore that contain an abundance of gas. The Red Sea is another example, exploration in this area is still very amateur, we only drilled two to three wells in this area while neighboring countries have drilled extensively and made considerable discoveries in the Red Sea.  I feel this indicates potential. We should focus our energy in that locale in an effort to make our own discoveries.

As for the South Valley, we have made one discovery there.  Again this indicates potential, perhaps the presence of resources. I can say there is a distinct possibility supported by increased investment in the area on behalf of international oil companies.  These companies have begun to drill a number of wells.  I feel this is an indication that further information is warranted in an effort to develop more precise information concerning the resources in the area. 

At this juncture, Egypt has produced primary and secondary recovery of hydrocarbons that are produced naturally or through the utilization of water and gas injection.  Potential recovery of hydrocarbon is an unknown factor.  I would estimate that we actually produce thirty five to fifty percent of what really is available in ground. Can we produce more? Yes we can. The reasons why we do not produce more can be summarized in the price.

Do you believe we will have an energy crisis in Egypt?
Shortage of energy supply simply does not mean the difference between what we produce and what we consume. From my point of view, the energy crisis is the inability to obtain access to energy. All countries will have an energy crisis at some point. Egypt doesn’t have an energy crisis, it has a lack of liquidity as a result of subsidizing petroleum products to the domestic market and then buying the same petroleum products at a price approximately two-hundred percent above the subsidized price.  I understand that the Egyptian people are a significant consideration.  However questions remain, who and what should we be subsidizing, and until when?  These are relevant questions.  I support subsidies with conditions. We cannot subsidize petroleum products at an estimated cost of twenty billion pounds and sacrifice our long-term interests such as health, education, food and clothing.

This is rational thinking but what are the mechanisms?
If you have oil wealth, what is the ultimate goal or long-term benefit of this wealth? Spend it on development. Currently, we give away all the oil wealth without utilizing it for the sake of development.  We cannot have cheap petroleum products and services and simultaneously employ strange financial mechanisms and regulations for the importation cars.  It is hard to reconcile those points.  There must be priorities and we must deal with things logically. We must help people understand very clearly that we will do such and such and have total transparency with the public.  We have lost confidence in those who govern us, in those we have chosen by our own votes to rule us.  We must give those that we have democratically elected an opportunity so that we can assess and judge based on their performance. In return the government must also use the principle of transparency and a detailed announcement of what they do. On the other hand – the subsidizing and support of gasoline has reached more than twenty billion pounds per year. We must deduct and invest a portion of this and strengthen our infrastructure.  I don’t want this investment revenue going straight to the general budget of the state.  If Egypt had a plan for developing infrastructure and investing, not just for the foreseeable future, but long-term, the budget deficit could be mitigated.

We need to decrease expenditures, but we must look into increasing the added value of our GDP.  The problem is our budget deficit comes from surplus spending. If we are not able to control the spending we must allocate money from subsidized petroleum products in the right place for the development of infrastructure such as public transportation.  This is a crisis within a crisis suffered by the Ministry of Petroleum.  During my tenure as Minister of Petroleum I was advised to avoid the subsidy issue as it might upset many people. 

However I could not dismiss a problem with such far-reaching consequences.   Money must be allocated and distributed wisely and properly.  Of course questions will arise concerning how Egypt got into this situation, what were the main reasons? Certainly corruption plays a role, but I do not agree with the logic that the problems Egypt is facing can be tied to a particular act, policy or political vision that was wrong.  It is time to move forward and the government must use openness and transparency in opposition to previous policies that sought to please emotions and ignore harsh realities.

No one denies that your ministry is facing challenging times, as are all government entities in transitioning Egypt.  How do we achieve transparency in policy and action?
Did the former regime provide tools access for print and media in an effort to help and inform the people about the actions of their government?  No they did not, government policy has always been convoluted and vague. Looking toward the future, we must be patient and give an opportunity to the man we democratically elected as president. Concerning the usage of the petroleum products as a burning fuel?  I feel that we need to find a balance between the current system and one more in line with our long-term interests for growth and development.  We need to find this balance.

Can you elaborate on the amendments to the agreements?  Based on your experience and knowledge what amendments would facilitate the sale of natural gas to the industrial zone at a free market price? Such measures would surely encourage investments in the Mediterranean zone.
To answer the first part of your question, my goal and conviction concerning the amendments to natural gas agreements revolved around simultaneously, producing and acquiring more natural gas to meet domestic consumption. Now, Egypt’s production of natural gas is estimated at 6000 million cubic feet of gas and this number is not insignificant, although it is not enough, I want further development. 

To address the second part of your question, we implemented alternative policies to allow our foreign partners to either export their share of gas to the international market or sell it in the domestic market.  I feel that increased efficiency in this regard would surely resolve the issue of payment delays. Another element of the investment equation concerns Egypt’s reserves and the public perception concerning natural gas.  You need to understand that transparency concerning natural gas reserves significantly factors into potential investments. Transparency concerning this information, meaning the actual number of reserves would facilitate investment.  Potential investors look at this number when contemplating investment plans.  In the past, the government has demonstrated a lack of transparency concerning reserves. The government’s hesitancy concerning this information relates to public perception.  Meaning, some segments of the population do not understand why Egypt is importing natural gas, as we are a producer of natural gas.  They do not understand the extent of domestic and industrial consumption.  Naturally, in this politically charged environment this could be a problem as certain people could claim corruption, etc. The result is a lack of transparency on behalf of the government to avoid public misperception.  This may be a factor that inhibits potential investment.  It is a complicated dynamic as such, the government has a role to play, but cannot be held wholly accountable.

In regards to the Mediterranean, the current agreement model is unsustainable with rising technological and operational costs for exploring and developing resources. In the future if the government is financially stronger and capable of buying all the gas produced domestically, we shall do so.  If not then the international oil companies should have the right to export their gas and sell it on the open market.  If we are not able the purchase the resources they should be able to sell to local market or international market.

In regards to the Mediterranean, do you feel there is a dilemma concerning the price? If we are trying to encourage investments in the Mediterranean should price be based before or after discovery?
The main obstacle for developing Mediterranean resources concerns the cut-off percentage after costs. Concerning cost recovery, we need to agree on the cut-off percentage.  Also the government’s main goal should be securing a consistent supply of technology and developing infrastructure to secure these investments.  In an environment where these elements are secure, meaning technology and infrastructure, attracting investments shouldn’t be a problem.  The price would be a small issue, not a major obstacle.

Can the following amendments made be applied to other area besides the Mediterranean?
These big companies have the financial and technical capability to withstand high risk
Fundamentally, foreign investors do not care about what the amendments are.  The investors care first and foremost about the return on their investment.  Most of the larger oil companies have the financial and technical capability to withstand the risk, and with out a doubt this is surly beneficial to Egypt.  As a government we have a problem deciding on the price and that shouldn’t be the case. 

Why did you agree to be responsible for the Egyptian petroleum industry during this difficult period of transition?
I would have taken the position in better times, so why wouldn’t I take it during a challenging time for my country? I honestly thought it would be a short-term appointment during a transitory period.  I did not think it would last for as long as it did. I believe the petroleum industry is vital for Egypt’s socioeconomic stability, as well as its growth and development.  Considering the importance of the sector I felt responsible  and obligated to take the position.  I firmly believe that the petroleum industry is essentially about exploration and production. Considering my knowledge and familiarity with the upstream sector not to mention the industry’s overall importance to Egyptian economy, I felt obligated to take the position. I also considered it an honor.

Do you see corruption in the petroleum industry, specifically the product distribution system?
Any commodity in the world sold for less than the market price would surely provide an opportunity for corruption.  If you have distributors that are selling a commodity at a price that does not allow them to recover costs and simultaneously make a marginal profit, then you have designed a process and situation that will likely end in corruption.
I sincerely wish we could have resolved the issue during my time as Minister of Petroleum. I did submit a proposal to the Council of Ministers aimed at identifying and rectifying some of these issues, but it is an ongoing problem.

What advice can be directed to the current Minister of Petroleum Engineer Osama Kamal?
I would advise him to pay more attention to the petrochemical industry as growth and development in this sector can bring long-term and far-reaching benefits for Egypt.



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