Debt, Fuel, Water, and Social Stability

Neglected Service
The Egyptian oil and gas sector, while crucial to the country’s economy, is presently playing a dangerous financial and political game that is simultaneously generating substantial obstacles to future macroeconomic growth and development. Over the last year, evidence of this game is to be found in the media’s wide reporting of the high debt levels owed by the Egyptian government to various oil and gas production companies.  Western outlets have estimated that this debt may be as high as eight billion USD and it is not at all encouraging to foreign investors, domestic consumers, or local firms, that government sources refuse to disclose exact debt figures. As many companies are left waiting for payment, several IOC’s have cut production or are understandably refusing to invest further until the debt issue is resolved.

Of course, this financial mismanagement is not only impacting production companies but is taking a substantial toll on service companies as well. While names such as Schlumberger, Weatherford, Baker Hughes, Halliburton and Fugro are less recognizable compared to their upstream counterparts, their role in the sphere of aggregate petroleum production is not any less significant.

In fact, it might even be said that oilfield service companies actually constitute a rather crucial bottleneck in production, and can be seen as actually doing the “real” work.  Conversely, one might describe major oil “producers” such as BP, Shell, and Apache as simply managing and monitoring the process.

The importance of oilfield service companies, and the fragility of current debt circumstances, might also be reflected in the number of employees working for them. Schlumberger, Halliburton, and Weatherford have roughly 118,000, 72,000, and 58,000 worldwide employees respectively.

Meanwhile, Shell has only 87,000 employees and Apache has only 5,000.  These rough numbers might be enough to make the casual observer question where the “value added” in the petroleum industry is really originating…and why these service companies have been so neglected.

Seismic testing, drilling, equipment production, transportation, auditing, and undertaking risk analysis are of course just some of the many things these service companies do.  In fact, a recent issue of The Economist referred to them as “the unsung masters of the oil industry” due to the fact that large oil producers are becoming increasingly dependent upon the technical expertise that service companies offer.  They serve as a solid foundation for ultimate production and presently the Egyptian government is offering them a rather severe disincentive to produce.   This disincentive is punctuated by a comment made by one source who noted that “When service debts are taken into account, the total Egyptian government debt in the petroleum sector is as high as 15 billion USD”.

Of course, the government and international oil companies are currently negotiating a possible solution to this rather daunting issue. According to another source, the government managed to pay back one billion USD of the debt recently, but will be unable to repay the whole debt in the short term. Given that, several repayment options are currently under consideration.  The first option, which the government favors, is paying the debt back in Egyptian pounds as opposed to dollars. The government prefers this option as Egypt’s foreign currency reserves have dropped dramatically (more than 60%) since the revolution. Of course, this option does not exactly bode well for the value of the pound as more and more are thrown into circulation.  This effectively forces the burden of debt payment on to Egyptian citizens who must tolerate the resulting inflation. To further highlight this reality it should also be noted that, as of March of this year current foreign currency reserves had dipped to 13.5 billion USD and the central bank cautioned in December that Egypt’s reserves have dropped to “minimum and critical levels.” This statement highlights why the Egyptian pound fell to its lowest level since devaluation a decade ago and why consumer prices in Egypt are palpably increasing. The second proposal under discussion is the government repaying the debt in the form of “co-investments”. In other words, if companies willingly invested more in their Egyptian operations, the government would absorb a part of the cost. This of course requires that firms have great faith in the governmental apparatus which, to be frank, seems unlikely given the debt crisis that they are trying to resolve.  The third and final option is a rescheduling of the debt payments. This means that the government would pay the debt back over a longer period than initially agreed.  This solution seems quite likely since it would follow a near universal rule of high finance that larger debtors often have more power in negotiations than the lenders.

Employment, Investments, and Oil Production
Given these complex negotiations, broader economic instability, other non-petroleum sectoral challenges, recurrent political unrest, and the uncertainty of future IMF assistance, many are asking what will happen if the IOC’s start to pull out of Egypt. Inevitably, if the current circumstance persists, service companies may be forced to lay off workers here in Egypt amid the reduction or outright cessation of activities.

While no public data exists concerning the number of employees working in the Egyptian service sector, it is known that there are about 222,000 public sector employees in the oil, gas, and mining industries in Egypt. In general, the ratio of public to private sector employees in Egypt is approximately 1:3. On the assumption that this ratio is about the same for the oil, gas, and mining industries, one can speculate that 888,000 people work in this sphere of the private sector.  At least a third of them are likely employed in the oil sector specifically. Considering that, in Norway for example, service employees constitute about one third of the whole oil sector workforce, one can therefore estimate that the Egyptian service sector gives work to about 100,000 people.

Roughly 75,000 of them are probably employed by the private service sector. According to industry sources, Egyptians fill most positions in these firms whereas foreigners are usually employed for managerial or other skill-specific positions. Therefore, there are probably at least 50,000 Egyptians employed by international service companies in Egypt. Of specific concern is the reality that, if the foreign oilfield service companies were forced to layoff even a mere tenth of their workforce, this would mean unemployment for thousands of Egyptians.  However, this is only the immediate consequence of inaction or failure.

If Egyptian government officials do not solve this debt problem, it will also likely mean a dramatic decline of investments in the sector as companies will slowly lose their trust in the Egyptian government. This will probably result in an even sharper decline in oil production and a further exacerbation of the employment collapse described above.  Interestingly, since both the government and the foreign companies are remaining quite silent about the debt problem, some workers in the Egyptian service sector are largely unaware of the threats to their jobs. Egypt Oil and Gas Newspaper interviewed one young employee of a large international service company and he was completely oblivious to the problem his employer is facing. “It will definitely be hard to find another job in the same sector”, he admitted as he lounged in a fancy City Stars café.  As he exhaled his shisha, one could see that he was not terribly concerned as the possibility of big layoffs seemed far too remote.  Unfortunately, due to their lack of seniority, such young employees will be the first to lose their jobs in a broader economic environment of already elevated youth unemployment.

In spite of the youthful ignorance discussed above, and perhaps because the government has been unwilling to publicly disclose the scale of the debt problem and its possible consequences, rumors of the problems have also been swirling around the country. In addition to possibly sparking a public panic, this lack of transparency between the Egyptian government and the oil industry further discourages new investment.

While the money owed to service companies must be paid back, actual repayment may be impossible without economic growth.  This however, cannot take place under the current political, economic, and social realities.  Frankly, the above circumstances highlight only one element of the extreme juggling of priorities currently undertaken by the Egyptian government. It absolutely must keep the fuel, electricity, food, water, and international relations spheres in the air with near simultaneity and precisely at a time when it has become incredibly difficult or impossible to do so. 

At any other time in Egypt’s history, the local population might tolerate the government dropping a single ball but today it seems that the people have very likely reached their psychological and material limits. Egypt faces a depreciating currency due to political uncertainty, collapsing foreign reserves formerly used to pay for social services and subsidized products, and a stalled IMF funding deal.  The result is a self-fulfilling prophecy of political chaos caused by an inability to pay for food subsidies upon which millions of poor depend, fuel shortages as EGPC refuses crude delivery from Petraco and Arcadia and now runs domestic refineries at a fraction of capacity, and worsening electricity shortages caused by insufficient fuel to operate power plants.  At the same time, Egypt continues to become “water poor” on a per-capita basis due to dated infrastructure and pollution. 

Add to this final, and rarely discussed issue, a coming summer bound to be characterized by bottled water shortages, and fuel of various sorts may just be one type of scarce liquid fought over in Cairo streets.

To alleviate any and all of the above, The Egyptian government is now acting as the modern political equivalent of Charles Dickens’ Oliver Twist.  She is holding her bowl up to Qatar, America, Turkey, Iraq, and Libya hoping for political and economic salvation.  Her mantra is simple…”Please Sir, can I have some more?”  The cost of a denial from any source may have dire domestic consequences.

By: Laura Raus and John Pastrikos


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