Challenging factors hinder better PSC’s terms

With a 45-year journey in the petroleum industry, whether in Egypt or worldwide, Eng. Hamed El-Ahmady, Group General Counselor of Seaharvest Group comments on the current critical situation and its effect on the petroleum sector. He shares his views about the idea of modifying the Production Sharing Contracts system and sheds light on the challenging factors hindering the gain of better PSC terms

Three Dimensions of the Sector
“Before we analyze the agreements’ system in Egypt and discuss how efficient or profitable for all parties, we should first weigh the three dimensions that affect the contractual system, which are Egypt vs. the World, IOCs (International Oil Companies) vs. Hosting Countries and levels of production difficulty,” highlighted El-Ahmady at the beginning of the interview.

Comparing the Egyptian petroleum market on a worldwide basis, Egypt is in fact one of the earliest countries that first started the petroleum industry. “Egypt has been engaged in the petroleum sector for nearly 125 years, which gives the country a leverage in the region,” said El-Ahmady proudly.

The second dimension that should be taken into consideration is the number of IOCs versus the one of hosting countries. “In the past, the number of hosting countries and invest in their petroleum potentials were limited compared to the IOCs that are interested in their petroleum resources.” But, nowadays, the situation has been flipped the other way around.

Back to the 1960s, there were 14 hosting countries, but now their number reached about 130 countries with petroleum potentials worldwide. On the other hand, the IOCs have been categorized into real majors, majors, sub-majors, independent and capital venture. There have even been mergers between major international companies over the past years, such as ExxonMobil (formerly Exxon and Mobil), which led to less number of companies compared to the increasing number of hosting countries.

As a result, there is a robust competition nowadays between countries holding petroleum potentials to lure more foreign investments. “Petroleum officials tend to be more flexible, modify their strategies and provide catchy terms of E&P agreements that are beneficial for all parties.” El-Ahmady recommended keeping a close eye on the neighboring countries, which are providing more facilities and compromises to gain the interests of investors. “We should cope with these efforts and always be a step ahead of other competitors.”
“This second dimension leads us to the third one, which revolves around the level of production difficulty,” he added. It is unfair to maintain same terms and agreements in all drilling locations; the onshore drilling is way different than the offshore one. “The needed technologies, drilling depth, types of rigs… etc. are all factors that should be considered before specifying the terms of each deal. It is obvious that the E&P operations in the Mediterranean area for example is way costly and more complicated than the drilling activities in the onshore Western Desert.” The deep-water drilling can cost an average of $120 to $150 million per well, if it is an offshore drilling in deep waters or deep formations. The drilling of new frontier tends to be extremely expensive compared to other types of drilling. Hence, the companies that can afford the high expenses of this type of drilling are usually the major international ones, which enjoy the know-how and availability of tools and at the same time, they are experienced in evaluating the risks and weigh the loss.

Moreover, the difficult production is not limited to the offshore one, but it also involves the production off the brownfields. “This latter require high technologies and costly techniques for enhanced oil recovery to restore the production flow off these fields,” he clarified.

Reserves: Factual against Fictitious Numbers
One of the trickiest topics in the petroleum sector is the volume of reserves of each hosting country. “From a political point of view, when a country reveals the volume of its reserves, this will attract the interest of more investors. But, from an investor point of view, this means other strategic tactics; he will either increase the production, which would harm the reservoir or he will decide to decrease his investment commitments as reserves do exist and are increasing, so he will try to save some costs.”

Asked about the credibility of announced figures of reserves as there were accusations that governments tend to deceptively double the figures to win more investments, El-Ahmady clarified that some do refer to this ideology, however there is a plenty of reports issued by reputable organizations disclose the accurate figures and leaves no room for misleading announcements. “When a country reveals that its reserves have been doubled in just one year is not logically accepted! And, even if it worked and lured investments, companies will eventually find out the truth one day or another and shut down their projects, which would negatively harm the credibility of the whole sector.”

El-Ahmday shed light on the various definitions of reserves that are wrongly used to promote the country’s proven reserves. He also stressed that transparency and honesty are key elements for any industry worldwide. Besides, other factors such as the geographical position, infrastructure, political stability and economic conditions are an added value for any sector. Egypt does enjoy lots of the mentioned factors, which can contribute to fruitful investments in all sectors in general and in the petroleum industry in specific.

Roots of the Payment Delays
Citing the headache of delayed payments as one of the reasons for proposed changes of the Production Sharing Contracts (PSC’s), El-Ahmady astonishingly addressed the question, “What has led the petroleum sector to this problem? What are the roots of this obstacle, taking into consideration that the petroleum sector has always had a separate annual budget?” He confirmed that the petroleum industry in Egypt enjoyed a status of independence by being a self-autotomized sector, financially as well as technically.

There was a negative manipulation of this budget, which has deepened the problem. For example, he highlighted, “how come we buy our production share from foreign investors and also purchase from the SUMED pipeline in order to use it in our refineries and then export it in form of other petroleum products! We claim that we are exporting, while in fact it is not our oil!”

In addition, El-Ahmday wondered how do we praise the “illogical” announcements of Egyptian petroleum exportation, while your current production does not cover the local demand! “Who are we fooling? Currently, the interim government and heads of the Ministry work hard to import some of the needed petroleum products and avoid any possible shortages.”

Hence, it is irrational to call for the implementation of Free Market concept, while you do not have enough production, he added.
El-Ahmady believes that the delay of payment is the result of accumulative erroneous strategies that were previously applied.

Ongoing Gas Controversial Debate
Commenting on the controversial gas exportation deal with Israel, which tops the cases of corruption in Egypt, El-Ahmady mentioned that this deal does reveal   a case of corruption in addition to its violation of laws, as it was not passed to the People’s Assembly to receive the legislative approval! He further declared that some recent contracts with major foreign companies were signed and effective immediately without the authorization of the People’s Assembly. “No one can deny the fact that Egypt, like many other countries worldwide, is suffering from corruption and lack of transparency. “

Although he finished his governmental service by retirement from nearly eight years, El-Ahmady allocated the corruption origins in the petroleum sector in two main phases; concluding the agreements and supervising the implementation of the terms of agreements. This is considered very common in many other governmental bodies, whether in Egypt or worldwide.

“Any sector does go through some ups and downs and corruption does exist all over the world, yet, I believe that after the January 25th Revolution, this should no longer be the case in Egypt.”

Status of the Egyptian Petroleum Sector
“The Egyptian petroleum sector is currently experiencing very critical conditions due to the collapse of the old regime after the January 25th Revolution. A state of ambiguity and vagueness covers the sector nowadays, which hopefully will fade away soon. However, the petroleum sector in Egypt has kept its edge of attractiveness despite the speculations about the future and relationships with foreign investors.”

Asked about the possibility of reviewing or modifying the Contracts of Production Sharing (PSC) as an attempt to lure more investments, specifically during these hard times, El-Ahmady rejected the idea, confirming that it will not be legitimate to make such a decision and on the contrary, it would be harmful to the sector’s credibility. He explained, “Nowadays, you do not have a legislative entity to approve any kind of changes or amendments to any contract, or even approve a new PSCs, as there is no People’s Assembly.

Also, we all know well that the current interim government acts solely on a short-term strategy until it hands over the heavy duties to the new one.” He declared that the Egyptian citizens should not judge or condemn the performance of this government in any way because it is just a transitional phase and the real changes and tactical decisions will be the responsibility of the coming elected ruling system.

El-Ahmady praised the role of current ministers, saying that it is “very patriotic to bear the responsibilities of this position (i.e. Minister of Petroleum) during such a very controversial and critical period of time in the history of nation”.

“The idea of altering or modifying any agreements is absolutely unacceptable since you do not have the needed legislative channels. Hence, until you elect the new members of the People’s Assembly, you should respect the already signed contracts in order to maintain the credibility of this strategic sector,” concluded El-Ahmady.

In conclusion, Al Ahmady summarized the basic elements that hinder gaining better terms of the PSC’s into four issues: more hosting countries, less investors (real majors, majors, sub-majors, independent and capital investors), more reserves and less human resources in terms of technical and managerial expertise.

Over 45 years, Hamed El-Ahmady was appointed chairman, managing director and board member of various companies. His long petroleum expertise covers various aspects, such as field development, reservoir engineering and production operations. He has occupied several senior positions over the years, such as chairman and managing director of Suez Oil Company (SUCO), chairman and managing director of Agiba Petroleum Company and deputy operations general manager at Western Desert Operations Petroleum Company (WEPCO). El-Ahmady started his career as a petroleum drilling engineer at the General Petroleum Company (GPC), moved to other positions in WEPCO and even acquired more experience by working abroad, as a reservoir engineer specialist at Qatar Financial and Petroleum Ministry and co-leader of the Qatari Hydrocarbon Resources and Reserves Revaluation project.

By: Yomna Bassiouni


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