Cautious Optimism: Honoring Oil and Gas Agreements in Egypt

Egypt Oil and Gas Newspaper hosted our Second Annual Roundtable Discussion on January 16th, 2013 at the Katameya Heights Clubhouse. The event brought together oil executives and ministry officials in order to provide a forum to debate problems and issues within the Egyptian energy sector. The Roundtable agenda sought to address the terms, conditions and shortfalls of agreement models currently utilized for the exploration and production of oil and natural gas in Egypt. The discussion explored many interrelated issues all under the broad paradigm of the future direction and potential of the Egyptian energy sector. The idea that “Egypt is in transition” would also be a common disclaimer frequently noted throughout the Roundtable. Despite the obvious uncertainty concerning political and socioeconomic unrest in Egypt, twenty-five speakers and roughly fifty delegates offered renewed commitment and relayed constructive criticism during the four-hour session. Discussion topics ranged from issues of cost-recovery, the applicability of current agreement models, and the absence of dialogue amongst government officials and IOC’s. In the following sections the editorial team at Egypt Oil and Gas Newspaper address relevant themes of the Roundtable in order to shed light on the future of oil and gas agreements in Egypt.

Is Egypt Facing an Energy Crisis?
Roundtable speaker Abdullah Ghorab posed this question early in the discussion and it was recurrently addressed in several contexts. Brian Twaddle of TransGlobal Energy remarked, “As I sit in the dark at home because the lights have gone out, or in the queue for the petrol station, it certainly feels like there’s an energy crisis, but I believe it can be a short-term crisis.”  Maurizio Coratella of Edison International stated that Egypt was not necessarily facing an energy crisis rather a business model crisis, stating, “The business model should let investors feel comfortable.” Dr. Hany Sharkawi, an oil and gas consultant believes that Egypt is absolutely facing a crisis, but that it has little to do with production. 

Rather the real crisis concerns unrelenting domestic consumption. Saleh Hafez, another oil and gas consultant, argued that the Egyptian energy crisis resulted from over-regulation and a lack of diversity in the market. Moderator Abdullah Ghorab denied that Egypt is currently facing an energy crisis, instead remarking the crisis cumulatively stemmed from “how we handle our product.” Ghorab himself noted that the current system was not sustainable, let alone designed for future growth and development. Ghorab implied, that despite current efforts on behalf of the government, the institutions, processes and mechanisms that currently govern the energy sector need to be recalibrated in light of current socioeconomic challenges. The question concerning an Egyptian energy crisis provided a broad framework for discussion, one inclusive enough to allow speakers to address individual concerns, but broad enough to contend with systemic issues that face the industry as a whole.

Problems with Current Agreements
The primary topic of the Roundtable discussion concerned the present application and future potential of petroleum agreements in Egypt.  Considering this, it is unsurprising that the fiscal elements of these contracts comprised a considerable portion of the debate.  The discussion also shifted to include industry wide problems stemming from the current agreement models. Cost-Recovery, delayed payments, and questions concerning the applicability of existing agreements were recurrently addressed.  Issues concerning the implementation, inflexibility and transparency of existing agreement models were also addressed throughout the discussion. 

Amr Essawi, Vice President and General Manager of Schlumberger noted that the current agreement model, encompassing joint ventures and production-sharing agreements, could still be applied to straightforward cases.  Yet in terms of future innovation and complexity “one size doesn’t fit all.”  Several speakers echoed this sentiment.  Dr. Hany El Sharkawi commented on the issue stating “These agreements are dynamic…we have to be flexible.  I see that the cost-recovery should looked at again, the pricing should be looked at again, what worked twenty years ago is not valid anymore…the price of commodities and services has changed tremendously.” Ahmed Rashwan, Director of accounting firm Price Waterhouse Coopers stated that he believed it was “time to revisit the agreements and the contractual models that manage the business.” Dr. Shawki Abdeen, General Manger for Pico International, unequivocally stated, “The whole terms of the oil agreements should be reconsidered.”

Some speakers argued that the agreement models were not the primary problem, rather the improper implementation of existing agreements terms. Dr. Hany Sharkawi noted, “The agreements are not the problem, it’s the implementation, the execution, it’s how to honor the agreement.”   Numerous speakers remarked that the fundamentals of current agreement could work if contractual parameters were correctly implemented.  Currently, agreement models are designed to reflect different time parameters for cost-recovery and different percentage splits in relation to production.  These elements shift dependant on the level of investment at varying stages of exploration, development and production.  Several parties noted that as the number of wells and rates of production increased over time, there was a distinct failure on behalf of the government to honor increasing percentages related to division of excess oil.  The problem of incorrect implementation combined with broader uncertainty surrounding the socioeconomic future of Egypt resulted in a crisis of confidence for investors, not to mention a distinct lack of incentive in regard to future investment in Egypt.

Another problem related to the implementation of agreements concerns their dense and complicated nature. Tarek El-Barktawy the newly appointed First Undersecretary for Agreements, mentioned this issue in his opening remarks by saying that “The agreement doesn’t allow you to be flexible when you can read it from both ways. But if it is really clear, and the clauses are explained to others then it makes it easier for both parties to honor the agreement.” Additionally, from the IOC’s perspective, confidence is increased from clear agreements that they can “bank on, and plan for when they see all the obligations” stated Jan Muhl, Deputy of Commercial, Legal and Business Development Manager for RWE Dea Egypt.  

A significant amount of diplomacy framed the inevitable topic of arrears and delayed payments. Jean-Pierre Dolla, Managing Director of Total E&P noted, “Before the future can be discussed we must sort out the current problems.” The three to six month lag between delivery to EGPC and payment to IOC’s is a major problem within current system, one that can have disastrous consequences when contextualized with broader economic concerns such as rising inflation and the absence of foreign currency in Egypt.  In regards to delayed payments and EGPC’s lack of liquidity, Mohamed Mahboub, Vice President for Business Support at Kuwait Energy Egypt commented  “The collection issue is a headache for everyone …we need to keep partners in the loop concerning how we are going to solve collection issues because at the end of the day its business.  We need to sit down and figure out how the partners are going to get their collections and receivables.” Moderator Abdullah Ghorab attempted to soften the issue noting that delayed payments and arrears were at the forefront of industry talks and that EGPC and the Ministry of Petroleum were working to resolve the issue.

Speakers communicated that broader uncertainty surrounding the political and socioeconomic trajectory of Egypt was exacerbated by an overall lack of transparency amongst the institutions that govern the Egyptian energy sector. Oxford Business Group (OBG) recently commented on the lack of transparency, citing lack of reporting as evidence.  OBG noted that the last annual report posted by EGAS was for 2007/2008. Numerous speakers noted that the absence of transparency combined with broader systemic problems would only increase reluctance of investors to further invest in Egypt.  Several speakers implied that the absence of a concrete figure concerning the actual amount of arrears currently owed to IOC’s was disconcerting.  Western media outlets, particularly the New York Times estimated arrears between seven and nine billion USD.  Local sources estimate the figure in the range of five billion USD.  EGPC refuses to disclose the actual figure.  It was overwhelmingly communicated that the attitude displayed by government institutions concerning transparency could only further damage investor confidence not only harming existing investments in the Egyptian energy sector, but inhibiting future investments as well. 

Similarly, it was also noted that the inflexibility of current agreement models also inhibited future investment and innovation. Ian Barden, Country Manager of Vegas Oil and Gas stated that in consideration of “challenges in the field, amongst the local population, and challenges with the institutions, a certain degree of flexibility [within the agreement models would] get things going and get projects running.” Efforts towards increased model flexibility “would go a long way in raising investor confidence in the business environment here.”
Amidst widespread criticism of the agreement models and government institutions that govern the sector, some speakers called for increased austerity from IOC’s as cost-recovery expenditures were exorbitant.  Under the production-sharing agreement expenditures deemed as cost-recovery are recovered first and certain expenditures can be recovered annum.  As such, according to OBG “The higher the costs the smaller the share of oil produced for Egypt.” Several speakers alluded to categorization issues that also contributed to cost-recovery problems. 

Tarek El Barktawy asserted that despite shifting contexts and problems, the fundamentals of the production-sharing model were still applicable to Egypt.  He did concede that the model could be changed and adapted to contend with rising costs and better compensate for increased investor risk. Barktawy noted that the Ministry would welcome feedback concerning the cost-recovery phases and mechanisms. He encouraged dialogue with the IOC executives to better improve the agreement model. However, Barktawy asserted that, fundamentally, the partnerships embodied by the current model were mutually beneficial and still valid.

Deep Water Targets and Unconventional Potential
Moderator Abdullah Ghorab contextualized the widespread criticism of existing agreements within a broader discussion framework concerning the future of oil and gas in Egypt. Do current challenges within the system and agreements signify the end of energy potential in Egypt? Ghorab expressed optimism, yet noted that a new phase had begun, as deep-water targets and unconventional gas were the future of the Egyptian energy sector.

Several speakers discussed the end of ‘easy oil’ in Egypt as surface resources are nearing depletion. OBG recently quantified the issue documenting the number of years remaining for currently producing wells. By examining Egypt’s reserve to production ratio it is estimated that Egypt has approximately 16.7 remaining years for existing oil resources and 36 remaining years for existing gas resources. Ian Barden of Vegas Oil and Gas noted that mature fields required “increased geologic and engineering precision” as oil fields would become increasing challenging, resulting in greater cost and risk.  In light of primary and secondary depletion, and the increasing prevalence of deep-water drilling, numerous representatives questioned the applicability of current agreement models initially designed to contend with conventional exploration.

Data from the sector supports the validity of the question. OBG recently estimated that two-thirds of Egypt’s potential is comprised of natural gas in deep-water deposits located in the Mediterranean Sea. Deep-water exploration and recent expansions into ultra deep-water targets (drilling in excess of 1,524 meters) are increasingly referred to as the future of oil and gas, not just in Egypt but and globally.  Morgan Stanley recently estimated that offshore deep-water exploration would increase 18 percent from 2011, with targets in South America, East Africa and Southeast Asia.

The costs and risks associated with deep-water exploration are more substantial than conventional onshore targets.  Deep-water exploration necessitates increasingly sophisticated forms of technology, equipment and expertise at all stages ranging from geological assessment to drilling. Given the substantial difference in cost and risk for offshore deep-water targets numerous parties argued that the current agreement model was outdated and in need of revision. Brian Twaddle of TransGlobe Energy remarked on the topic, “We have deep-water, high pressure, high temperature wells that cost 200 million dollars [these wells] require a different approach.” Peripheral to increased costs for required infrastructure and technology, deep-water targets also come with increased risk and liability as related to potential environment disasters.  One needn’t look further than the 2010 Deepwater Horizon spill in the Gulf of Mexico as evidence of this point. 

An additional topic that emerged in relation to outdated agreement models concerned the emerging market and potential for unconventional gas in Egypt. The term ‘unconventional’ generally refers to low permeability rock that does not allow for sufficient fluid flow to a well. In Egypt, the unconventional method of choice is shale gas. Shale gas refers to gas that is found 5km beneath the surface in a layer of black colored shale rock. Not surprisingly, extracting shale gas is more complicated than its conventional counterpart. It requires high number of wells spread over larger areas. Instead of simply drilling straight down, wells are drilled down to the shale layer then shifted and drilled horizontally. Once the well is drilled, a mix of water, sand, and chemicals are pumped down the well. The pressure that builds up at the bottom of this 5 km column of water fractures the shale rock and releases the gas. This method of hydraulic fracturing, known more simply as fracking, is very expensive and can account for more than a quarter of the total cost for the well. Mostafa El Bahr Chairman of Agiba Petroleum and former Vice President for Agreements and Exploration at EGAS expressed enthusiasm for the potential of unconventional gas in Egypt. 

However he noted that investors were reluctant to forge into the market, as current agreement models were ill equipped to contend with the difference in cost associated with the exploration and development of unconventional gas.  El Bahr succinctly noted, “Unconventional gas requires unconventional agreements.”

Over-Regulation, Bureaucratic Delays and EGPC
A substantial portion of the debate addressed broader industry issues such as over-regulation, an intractable bureaucracy, and EGPC’s overextended role in the industry.
Many speakers agreed that over-regulation is stifling innovation and hindering growth and development. Tony Anton, President and COO of Sea Dragon Energy charged that over-regulation, specifically when it applies to imports, could have negative effects on the industry. “Interfering in the selection of a service can hurt the foreign contractor and the government. Foreign contractors need to be able to bring in foreign investment and equipment.” Dr. Shawki Abdeen, General Manager of Pico International, believes that foreign technology, such as rigs and barges need to be easily accessible to IOC’s. Bureaucratic regulations complicating the importation of essential technology and equipment serves as a disincentive to IOC’s and greatly contributes to project delays and reduced productivity.

Stipulations within the agreements that force companies to buy the cheapest services are also viewed as problematic.  Frequently, when companies are forced to buy the cheapest parts or equipment, they can end up spending more money in the long run. Salah Hafez, an oil and gas consultant gave the example that when he was Chairman at Pedzed they were forced to buy the cheapest pump. As a result they were continuously averaging six days a month where the pump was not functioning properly, which in the long-term, resulted in higher costs relative to the “expensive” pump in the beginning. More often than not, quality is sacrificed for price, and money wasted in the long run. Ahmed Abu Zeid, Country General Manager for Weatherford, made the point that  “quality costs money” and that the cheapest option is not always the best.  

Worse than money wasted, many speakers voiced their opinions that over-regulation is limiting innovation. Amr Essawi, Vice President & General Manager for Schlumberger, stated that the oil and gas industry is a field that requires innovation and risk taking, and government regulation is hindering innovation, and as a result, long-term potential. He stated “The private sector is the one enabled to take risk and innovation beyond all measures taken by government and if we try to impose government rules and regulation in every single aspect of their business we are putting a huge limit on technological innovation.”  Miguel Vargas, General Manager of Sipetrol, believes that over-regulation is contradictory to flexibility and innovation, factors essential to the growth and development of the sector. Saleh Hafez noted that “the system is overregulated, professionalism is phasing out [as] the agreements are not favorable…companies are very reluctant despite the potential that exists in the country.”

Bureaucratic time delays were also discussed at length. Many speakers mentioned encountering considerable time delays due to required government approval at various stages. BP’s Samir Abdel Moaty stated, “The decision making process takes a very long time…production is delayed by governmental approval.” Speakers recurrently noted that time delays drastically affected productivity and timely project implementation. Time spent on decision-making and delays in obtaining permits is discouraging to many companies. As Vargas put it, “delay is time, and time is money, and money is confidence in the industry.”

Brian Twaddle, Country Manager & Director of TransGlobe Energy noted that in the last five years he had “failed to spend his full capital budget. [He] had not been able to invest as much as [his] company wanted to invest. And that’s principally been because of the speed of decision making.” In an industry like oil and gas, there is a significant time lag from when decisions are made to when you can see them on the ground. It generally takes five to seven years for wells to be drilled, agreements to be made, and for facilities to be constructed. Many speakers made the point that if Egypt can’t streamline this process today, down the road there will be a loss of production. 

The role of EGPC was recurrently addressed.  Numerous speakers commented that EGPC was unclear and overextended.  EGPC was initially conceived as a “one stop shop” for government matters related to the energy sector.  EGPC is a joint venture partner, regulator, licenser, marketer, and refiner. Many speakers questioned the effectiveness of this arrangement as the numerous obligation beset before EGPC represented a conflict of interest. Samir El Moaty stated, “we need to split the whole of EGPC.”  The overextended nature of EGPC prompted many questions on behalf of speakers.  If EGPC regulates the industry, how can this be in the interest of the other partners, and more importantly, if EGPC is the regulator of the industry, who regulates EGPC?  Jean-Pierre Dolla, Managing Director for Total E&P confronted the issue stating, “Today EGPC plays a roll that needs to be clarified. They are partners, suppliers and regulators. These three words should be separated for clarity. This is something the government should consider seriously.” Samir Moaty offered the suggestion that the government should open service companies that are separate from EGPC in an effort to clarify and streamline EGPC role in the energy sector. 

Political Ambiguity and the Absence of an Energy Master Plan
While all speakers at the Roundtable expressed their commitment to the Egyptian energy sector it was clear that many harbored concerns about the current political situation.  Specifically, that current agreement models needed revision to better balance risk and reward given the current political and socioeconomic unrest, and the variety of challenges facing the industry.

The energy sector escaped relatively unscathed after the Jan 25th Revolution. However, production has yet to return to pre-revolution levels and broader socioeconomic issues threaten the future potential of the sector. The absence of governing body is a key element of this concern. In Egypt, oil agreements are law, and without approval from the People’s Assembly (Parliament) they cannot be finalized. In June 2012, Egypt’s Supreme Constitutional Court ruled that the parliamentary elections held in March (and the first democratic elections Egypt had seen in more than six decades) were unconstitutional, and thus dissolved Parliament. It is rumored that the next round of Parliamentary elections will be held this April, however this date has yet to be confirmed as the Parliamentary Election Law is still being examined by the Shura Council (the upper house of Parliament). Once the Shura Council approves it, it will be sent to the High Constitutional Court before being passed to President Morsi, who will set the exact date for the elections.

The delay caused by a lack of Parliament negatively affects the future of the industry. EGPC successfully completed their first post-revolution bid round at the end of last year. Surprisingly, it was one of their most successful bid rounds in the last decade. Eleven out of fifteen offered blocks were rewarded to nine different companies. This bodes well for current and potential future investment in the sector, however, without the approval of Parliament these contracts go nowhere.  If elections are held in April, it will have been over two years from when the bid round first opened.

The lack of industry-specific knowledge and experience on behalf of government officials was also noted as a key problem. Tony Anton expressed the need for knowledgeable decision-makers in key positions that directly affect the energy sector, as a basic understanding of industry fundamentals was essential for current resolution and future progress. The petroleum sector is technical and comprised of many complicated interrelated aspects. Jan Muhl, Deputy of Commercial, Legal and Business Development at RWE Dea Egypt expressed a need “for the right people [to sign] the right agreements.” Jereon Regtien, Shell Vice President Upstream International, relayed a sobering experience related to the absence of qualified decision makers. Last year Shell took the initiative to meet with most political parties to talk about the industry. Regtien relayed shock at the absence of knowledge in the meetings, stating that numerous party officials were completely unaware of industry fundamentals. The absence of qualified decision makers is disconcerting in any context, but especially problematic considering oil agreements become Egyptian law.  He stated, “Its not just sufficient for us in the industry to come up with proposals. We need to sit across from the table with experts… there needs to be a level playing field.” Regtien conveyed the need for the government to build up expertise concerning industry fundamentals and appoint qualified individuals to key positions. Informed decision-making on behalf of government officials will help guide the energy sector toward efficiency, growth the development.  Regtien noted that EGPC could be helpful in this aspect and that they should make an effort to share knowledge with elected government officials.

Another innovative suggestion that came out of the Roundtable discussions concerned the creation of an “Energy Master Plan” for Egypt.  Jeroen Regtien noted the need for a more comprehensive approach “that brings together all the various components of the energy sector. Including upstream, downstream, power, petrochemical industry, domestic use, subsidies [and] infrastructure to develop a blue print in which sustainable solutions can be formulated.” Other speakers also voiced their concerns over a lack of an overarching business plan for “Egypt Inc.” as coined by Ian Barden, Country Manager for Vegas Oil and Gas. Investors contended they assumed a higher degree of risk when operating in a country that lacks a business plan. If there is no clear industry framework for the country, it is harder to see where they are doing business and the future of their business in that country. Investors look for stability, and in a time when the political situation in Egypt is ever-changing, investors need assurances, like an energy master plan, to build confidence. Even if investors “do not like the business plan, they can a least see the plan and then build their own business models” around it, stated Ian Barden.

Consumption, Awareness and Renewable Energy
The topic of domestic consumption was recurrently addressed throughout the Roundtable, as any adjustment to the agreement models and institutions that govern the energy sector would be ineffective without reduced domestic consumption.

Egypt demonstrates an unrelenting need for energy resources. Natural gas consumption increased 10 percent from 2010 to 2011, and according to OBG, as of early 2012 approximately 54 percent of extracted gas was utilized to produce electricity for domestic supply. Shell estimates that Egypt’s domestic consumption will double by 2025. 

According to the American Chamber of Commerce in Egypt, domestic consumption of cooking gas has doubled in the last decade. These sobering statistics present ample evidence for increased efforts toward conservation of energy products.

Subsidies factor substantially into consumption as they do little to encourage conservation as excess consumption has little monetary consequence.  According to the Ministry of Finance for 2011/2012 energy subsidies accounted for 71 percent of the total (22 billion USD) amount allocated for subsidies. Since 2005/2006 subsidies have accounted for 8 percent to 13 percent of GDP.  The current government plans to reduce subsidies, a move which may have political consequences, but will inevitably reduce consumption.

Numerous speakers called for increased efforts to balance domestic consumption and production.  Dr. Hany El-Sharkawi emphasized that the government needed to “cooperate more with IOC’s to raise awareness” concerning conservation efforts.  Former Minister Abdullah Ghorab echoed this sentiment noting that the government must facilitate a proper dialogue with the public to increase awareness and implement plans to reduce domestic consumption.

Along with increased efforts aimed at conservation and awareness, numerous speakers noted that Egypt would benefit from diversifying energy sources beyond conventional hydrocarbons. The Aswan High Damn is a notable precedent, but according to Dr. Magdi Nasrallah, Chair of the Petroleum and Energy Engineering Department at The American University in Cairo, Egypt has immense potential for renewable energy. He noted that the geographic environment of Egypt is ideal for harnessing wind and solar energy. Egyptian efforts in this regard would be part of an increasing trend in the region.  Recently the U.A.E invested in infrastructure for long-term generation and utilization of solar power. The Shams 1 Solar Project in Abu Dhabi will be the world’s largest single unit solar panel plant with projected electrical generation of 100 megawatts. Developers recently commented that the existing plant is part of a long-term strategy to meet domestic energy needs in an effort to increase oil and natural gas exports to regional and international markets. Plans for the Shams 2 and 3 are already in development. Egypt could gain immense environmental and economic benefits by mirroring such strategies and investing in renewable energy.

Industry Perception
Dr. Patrick Allman spoke fervently concerning the accomplishments of the energy sector.  He expressed pride in participating in an industry that contributed to “wealth creation on a global scale unprecedented in human history.” The General Manager of Dana Gas emphasized that communication was an industry problem, stating, “We are appallingly bad at communicating the achievements we have made in this industry.”  Allman’s statements segued to an additional point concerning broader perception of the energy sector within the domestic population.  His point is particularly valid in consideration of the highly politicized domestic environment.  Other speakers conveyed similar sentiments.  Jean Pierre Dolla Managing Director of Total E&P noted, “We need to explain that the oil and gas industry [provides] benefits for the population, without it Egypt would be suffering from a serious energy shortage. So let’s be proud and tell the truth to people.” The point resonated as the importance of the energy sector to the Egyptian economy is considerable in light of the substantial decline in tourism revenue and a general stagnation in key economic sectors. Concerning this point, Tony Anton of Sea Dragon noted, “Its those individuals within the public domain that are elected to be politicians. They are the ones who will go to parliament and approve or disapprove your application to do business.” Cumulatively the speakers expressed that they felt the domestic perception of the energy sector could be improved and better communicated.

Several speakers expressed further concern at negative international perceptions of Egypt as a potential investment venue, as it could be harmful in the long-term. Dr. Allman cautioned that the industry needed to be more mindful of outward perceptions. “As a company, as investors in a company, we can see the future, we can see the opportunity.  Institutional and private investors that invest in our company and international markets, they watch CNN.”

Cumulatively all suggestions concerning the domestic and international perception of Egypt’s energy were given in a constructive light, which bodes well for the future potential of the sector. 

Future Potential
In regard to the future direction of the Egyptian energy sector, Moderator Abdullah Ghorab and numerous other speakers responded positively to the assertion that Egypt is nearing the end of its oil and gas era. “Is Egypt finished in the energy industry?” asked Dr. Allman, “Absolutely not.” He noted that over the last five years Dana Gas had invested nearly two billion dollars in Egypt. He continued, “The challenges change, the environment changes, but the industry has shown incredible resilience and ability to reinvent itself and to come up with new technologies and meet those challenges.” Tony Anton President stated “Sea Dragon came back to Egypt because we saw potential.” Despite budget reductions for 2011 and 2012 TransGlobal Energy allocated its biggest budget ever for 2013.  Brain Twaddle of TransGlobal noted that the increased budget was an indication of the companies’ commitment and faith in Egypt’s potential, expressing, “we don’t want to quit in Egypt as we see potential for new resources.” Maurizio Coratella, General Manager of Edison International added his support by saying, “We have several billion dollars [invested in Egypt] since 2009. We are very committed to the country.” While the problems that plague the Egyptian energy sector were confronted at length, and political and socioeconomic instability was considered, it was clear that IOCs are still committed to Egypt and see potential for a bright future.

Increased Communication via Committee
Numerous speakers expressed gratitude to Mohamed Fouad, publisher of Egypt Oil and Gas Newspaper for the organizing the forum, as several speakers noted, it was a nearly impossible to get numerous IOC representatives and government officials in the same room.  Tony Anton, President and COO of Sea Dragon Energy quipped “We are lousy communicators; we might as well admit it.”  However amusing this point reflected the perspective of several speakers and government representatives in regards to the absence of unified dialogue between IOC’s and government officials.  Numerous speakers and government representatives noted they had engaged in collaborative efforts aimed at dialogue, albeit on a smaller scale. Dr. Allman of Dana Gas mentioned he attends a monthly forum for general managers in an effort to collaboratively discuss the current challenges facing the petroleum sector. He advocated a similar approach on a larger scale stating “we would welcome the opportunity to put together some kind of industry forum [in order to] debate and discuss issues in a more coherent manner.”

Numerous speakers emphasized the need for a formal committee in order to address the problems and challenges currently facing the industry.  Many speakers noted that the timing was crucial and it was becoming necessary to have clear engagement with government partners. Dr. Hany El Sharkawi stated “There needs to be a formal committee between the government and the industry…to make sure all the issue are tackled. I strongly support a formal committee to resolve these issues.” Egypt Oil and Gas publisher Mohammed Fouad pledged renewed commitment to organizing such a committee in an effort to further facilitate dialogue amongst government officials and IOC executives.

Speakers and government representatives offered several interrelated points at the Roundtable discussion. First, the processes and mechanisms that govern the Egyptian energy sector need to be recalibrated. Current methods result in substantial economic loss for Egypt and reduced production revenue for IOC’s. Egypt currently imports natural gas only to sell it domestically at subsidized prices and to meet existing export obligations. Government institutions lack the efficiency and infrastructure to correctly implement existing agreements in a manner that facilitates innovation and development. Unfortunately, the current system has resulted in nearly seven billion dollars in arrears owed to international oil companies.  Delayed payments inevitably trickle downstream affecting local manufacturers, producers and distributors. It is only a matter of time before broader economic and political instability serve as a disincentive to foreign investment. Considering that Egypt is in a period of transition, the timing is apt for a systemic overhaul including subsidy reduction, decreased regulation and increased transparency.

Second, the agreement model needs to be reassessed and negotiated in order to better reflect risks and rewards in an environment of rising technological costs, depletion of mature wells, and deep-water and unconventional targets.  Agreements can and should be revised and renegotiated to strike a more appropriate balance between IOC profitability and Egypt’s efficient and productive use of its natural resources. 

Third, it has been noted that communication is key.  Government institutions and IOC’s need to engage in consistent dialogue in an effort to constructively develop mutually beneficial solutions to common obstacles.  The formation of an industry committee to further this objective is imperative.

Egypt is simultaneously facing economic challenges that can only be exacerbated by marginalizing the problems of the energy sector. While industry specific efforts aimed at improving the energy sector wont eliminate all of Egypt’s economic problems, it is a start.

By: Tatianna Duran – Julie Herrick – Effat Mostafa


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