EGPC must regain control of upstream activities

Though his ministry has been heavily strained by burdens that have accumulated over the years, Eng. Abdallah Ghorab, the Egyptian Minister of Petroleum, talks to Egypt Oil & Gas about his strategy to tackle the persistent problems, his vision for creating a fertile investment milieu conducive to the sector’s prosperity and his plan to alleviate some of the major obstacles encountered by foreign investors

Investors’ Concerns

In my opinion, Eng. Abdallah Ghorab stated, the Egyptian petroleum sector is one of the most strictly controlled and heavily regulated sectors in the country. The legislative framework of the petroleum sector is designed to explicate any ambiguities or speculations regarding its activities… the various members/elements that constitute the petroleum sector are tightly interrelated, which leaves no room for concealing shady activities.

When presented with some of the concerns raised by foreign investors (drawn from a recent survey conducted by Egypt Oil & Gas,) regarding the absence of transparency in the petroleum sector, Eng. Ghorab firmly denied these allegations and explicitly stated that, “transparency is not just a word, it is a value on which my strategy is based”
The Minister highlighted his envisioned strategy to resolve the extant quandary of outstanding debts, which has been a collective concern for most of foreign investors. He commented, “I have met with most investors to exchange views concerning this critical problem and I have already discussed the Ministry’s plan to solve it.”

“The core problem of the current financial deficiency arose when the petroleum sector exceeded its allowed credit limit from banks, which forced the latter to discontinue financing the former. In fact, the petroleum sector used to receive loans from banks and financial institutions for other entities that couldn’t commit to the repayment of these loans, which eventually led to the current this predicament.”

Eng. Ghorab unequivocally affirmed, “this will not be the case anymore. In order to maintain the credibility of this sector, no more loans will be borrowed from banks for others!”
The Minister expressed his willingness to debate whomever questions his transperancy in presenting the problems and the method by which they could be resolved. “I explicitly clarified to our foreign partners the roots of the payment delays and elucidated that at the time being, all our financial resources are directed towards subsidies. Yet, this would be a short-term problem as the Ministry’s next step will be focusing on the payment of all debts to our partners.”

Eng. Ghorab characterized his new system of managing the sector as rigid and firm, which are qualities that have been entirely absent in the past. “Claims regarding lack of transparency are invalid. In fact, a major trigger to the displeasure of foreign investors is the rigidity by which we currently govern the petroleum sector for the first time ever… the extreme pliability that dominated the sector in the past has resulted in negative consequences that need to be contained”

The practice of modifying and amending business models to appease investors was very common in the past. Alternately, the new model is focused on maximizing the sector’s gains and yielding optimal outcomes.

Ghorab cited the North Alexandria gas contract as one of the examples that put the petroleum Ministry under strong criticism. He explained that the lack of public awareness coupled with the incomprehension and cluelessness of some journalists, to the crucial matters regarding the petroleum industry, has led to the misinformation of the public; they assumed that the Ministry of Petroleum is giving up their ‘free share!’ “The term ‘free share’ does not exist in any of our contracts. According to the general regulatory framework of Production Sharing Agreements (PSAs), once cost recovery is settled, the remainder of production is distributed among partners on the basis of the agreed upon shares. Usually, our share revolves around 70-80%, while the remaining 20-30% are the partners’ take.”

“In the case of the North Alexandria agreement, the modification from a PSA to participation/contractor agreement was adopted due to the Ministry’s inability to afford a $2 billion payment per year for cost recovery. It is economically unfeasible to pay $10 billion in cost recovery over a five-year contract.”

Ghorab referred to the old participation contracts that were signed by GUPCO to prove his point, which is that contracts are like business models; they should be formulated to efficiently suit the requirements, location and the type of contract regime being implemented.

“For instance, the booming Iraqi petroleum sector does apply the model of participation contract. This means that we are not inventing something new.”
He further added, “I have been criticized on many occasions for modifying the North Alexandria contract. However, it is illogical to abide by the regulations of the old contract regime and pay $10 billion, which is economically burdensome, just to satisfy some voices that are unable to comprehend the full picture of this deal”

Aside from the concerns stemming from contracts and transparency issues, some investors stated, according to a survey conducted by Egypt Oil and Gas, that the Ministry of Petroleum does not provide long-term plans that investors cab rely upon when deciding on the size of their investment. “I totally disagree,” responded Eng. Ghorab, “this is completely wrong and bias! I oppose whomever is responsible for perpetuating the incorrect claim that the Ministry does not specify or follow a plan.”

“The 2011/2012 fiscal year has a $7-billion commitment in the upstream sector. The investors would not have spent such large sum of money if they did not see a clear plan implemented by the Ministry!”

Ghorab added that more than 20 companies are taking part in the upcoming EGPC bid round to release 15 blocks, which was announced last October.
“In the midst of the country’s current political instability, several investors have had doubts and uncertainties, but I have already approached many of the companies that expressed interest in keeping their Egyptian investments intact and confirmed their willingness to participate in the coming bid round,” he added.

Moreover, Eng. Ghorab stated that new contracts will be signed soon and a new bid round for natural gas will be announced shortly. “The absence of the parliament has decelerated the process of commencing new contracts and the release of new blocks in bid rounds. That is why the closing date of the EGPC bid round is scheduled on January 31st, so that the newly elected Parliament kicks off.”

Need for structural reform
Quoted previously in an interview, in which he declared that the “financial situation of the EGPG is solid, yet needs structural changes”, we asked Eng. Ghorab to explain what kind of structural reform would be applied. “when I spoke of structural reform, I was referring to the sector’s financial structure, both the debts and dues, which is related to the whole financial system of the country. If each one receives his financial dues and pays his debts, we would not be facing such a problem. Hence, restructuring the sector financially is quite dependent on to the country’s financial reform.”

Ghorab believes that the need for structural reform should target the improvement of the upstream sector. “In my opinion, the functions and activities of the upstream sector should be gathered under one roof, which is the EGPC, while the EGAS should be functional in the gas projects and the downstream only… the dimensions of this view are still being evaluated.”

The Minister defined restructuring as the clarification of duties and responsibilities of each petroleum body. “The restructure is needed for the upstream sector, which should go under one entity… this would assist in avoiding any confusion or conflict between the different entities.”

To sum up his perspective on structural reform, he stated that “the EGPC should be the one-shop stop for the upstream sector.”

Subsidies’ inequality should come to a halt
“I am the first minister who tackled this issue openly, whether in state-owned television channels and newspapers or private ones.” He frustratingly clarified that subsidies have lost the way to the real needed citizens! “For instance, the luxurious marine activities and yachts of the coastal cities of Hurghada, Sharm El-Sheikh…etc. get their fuel at subsidized prices, on the expense of the needy and the country as a whole!”

The Minister also shed the light on the factories of the Free Zone that purchase petroleum products at subsidized prices and succeed in achieving more than 100% profit, while returning zero-revenue to the country. “Such profit margins are economically unacceptable worldwide… Why am I supposed to provide a risk-free environment solely to attract investors’ interest, while industries worldwide are usually the ones who bear the risk factor? Why am I taking this heavy burden on my shoulder?” he further added, “I will never be a facilitator factor for any investor!”

“In my l opinion, subsidies represent a strategic tool to oppress people’s lives. If we examine the issue of subsides from a historical standpoint, we will realize that subsidies were initiated by regimes seeking more control and dominance over their citizens” The Minister clarified that he is not calling for a full abolition of subsidies, but rather a fair distribution of them. He further emphasized, “The main role of government is to provide the basic rights of a just life to all citizens; whether it pertains to education, wages, food, health care, transportation…etc. It is the government’s sacred duty to maintain the welfare of its citizens, by not making their lives dependent on subsidies.”

Besides, Eng. Ghorab believes that the system of allocating subsidies should be reviewed and ratified. “Let’s agree that the formula of subsidies should be as follows: those who need, should get the subsidized products, but those who do not need subsidies and exploit this opportunity to make revenues should receive all petroleum products at the free price, or at least contribute the country the profit”

“Unfortunately Egyptian resources have progressively depleting over the years under the façade of foreign investments, exportation, production…etc. We lack the proper knowledge and the clear vision to better utilize our resources.”

When asked about the threat of the alleged energy crisis in Egypt, the Minister said, “I admit that there is a problem of circulation, not a shortage of petroleum products. For instance, we have been working hard to handle the complaints of butane cylinders shortage of and the lack of sufficient fuel at the gas stations. Such problems are a result of poor circulation practices, since the sector has never stopped producing and distributing petroleum products all over the country. I am confident that there is no energy production problem in Egypt, but we do have a circulation complication.”

The best is yet to come
Eng. Ghorab wonders about the seemingly dominant pessimistic outlook towards the future of the petroleum industry in Egypt. “For those publicizing such concerns, I can guarantee that Egypt would be generating more production for longer than they expect. The number of foreign investors that apply in our bid rounds does reflect the fruitful potentials of this industry.”

Optimism is the clue for anyone working in this dynamic sector; you cannot keep drilling if you are not optimistic about the high potentials you can find. “There are many areas that have yet to be explored. If we take a look at deep-water drilling for example, we’ll find out that we are still drilling close to shores and have not gone into high depths, where promising gas potentials could be found and produced.”

I believe that within five years, the Egyptian petroleum sector will skyrocket.
The Minister concluded, “Egypt is a very wealthy country in terms of resources and natural endowments that have yet to be exploited… and I believe that an auspicious future awaits our beloved Egypt.”

By EOG Team


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