Egypt’s Gas Agreements: Exploitative or Necessary for Growth?

Egypt’s location as a gateway between Asia, Africa and Europe and the strategic presence of the Suez Canal, in addition to substantial untapped resources, have made it a very attractive destination for international gas producers. While Egypt’s government has been focused on attracting as many companies as possible to do business in the country with highly preferential terms of agreement, accusations of corruption and misuse of public funds have followed revelations about discriminatory agreements obliging Egypt to sell gas at below market price, or determining higher price levels for gas bought by the Egyptian government from foreign producers.

Business Monitor International (BMI) forecast that Egypt will account for 18.56% of African regional oil demand by 2012, while providing up to 5.67% of its supply. Meanwhile, gas production should reach 85 billion cubic meters by 2013, up from an estimated 55 billion cubic meters in 2008.

On the brink of becoming one of the world’s major gas producers, Egypt faces challenges over contract terms that determine the level of revenues from gas export deals and the exact balance of interests in partnerships with foreign oil and gas companies seeking to explore and develop local resources.

As corruption probes progress following the January 25th Revolution the question remains: how should Egypt balance its image as an attractive investment destination with an energy policy that benefits Egyptian society?

Egyptian Gas Agreements
In 1989, the Egyptian government signed 35 gas exploration and development agreements under preferable contracts that would encourage foreign gas companies to build up infrastructure and pipeline networks while taking large profits, often in the form of gas and oil rather than economic revenue.

Egypt has since entered into major export deals with Spanish, Jordanian, Italian, American, French and Israeli companies as well as large-scale partnerships with foreign oil companies for exploration and production.

Today, Egypt works with more than 50 foreign oil and gas companies in exploration, excavation, and production of oil and gas locally. Major firms operating in the country include Eni, Exxonmobil, Shell, British Gas, British Petroleum and Apache.

Recent deals with BG and BP have been controversial, but the crux of the public’s complaints about how Egypt’s gas agreements are structured to rest symbolically on the country’s export agreement with Israel.

Public Perception
Before it was halted on March 5th due to pipeline damage, Egypt supplied about 40% of Israel’s natural gas under a renewed contract signed in December 2010 that stipulates below-market prices for the gas. This agreement, operated by East Mediterranean Gas, Gasco and Israeli Partner Ampal Israeli American Corporation, is a remnant of the Camp David agreements, and widely viewed as exploitative given the far below-market prices stipulated in the contract.

These deals have not escaped controversy locally amongst activists who claim that Egypt is selling itself short by exporting gas at below market prices and by concluding deals with foreign oil majors that don’t benefit Egypt as much as they could.

If such sentiments were prevalent before the January 25th Revolution, when several lawsuits challenging export deals to Israel in particular, post-revolution corruption probes have refocused attention on the validity and viability of these deals.

Indeed, recent events have shown the extent to which Egypt’s Ministry of Petroleum was crippled by fraud; former minister Eng. Sameh Fahmy and other petroleum executives are currently under investigation for charges of misuse of public funds. Fahmy, along with former EGPC executive director Abdel-Alim Taha are accused of misusing billons of dollars of Egypt’s petroleum and natural gas wealth.

Specific contracts have been pinpointed to illustrate the alleged abuses, including a restructuring of the government’s deal with BG, which saw the company’s profit share rise to 28% from 12%, resulting in $20 billion revenue loss. The British company has played a leading role developing Egypt’s natural gas industry and is responsible for over 35% of all gas produced in Egypt.

Moreover, they are accused of giving up a gas concession in the North Alexandria field to BP, in a much-discussed deal in summer 2010 that analysts claim changed the face of the Egyptian petroleum industry with its breakthrough terms.

Breakthrough Deal
Under the terms of the deal, which amended the commercial terms for two concessions in the West Nile Delta, BP is reported to have been given full rights over production and guaranteed a higher oil-indexed price for gas produced for purchase by the government. The deal will increase profits for BP, making costly offshore exploration more commercially viable.

“The BP agreement is groundbreaking because it is structured very differently from Egypt’s traditional hydrocarbon agreements,” Femi Oso, an energy analyst with Wood Mackenzie told Reuters.

“Before, the Egyptians would get a share of the gas, but now they do not. BP gets the full production,” Oso is quoted as saying. “It is the first of its kind.”

Is it encouragement or exploitation?
Some analysts perceived these preferential terms as the Egyptian government’s way of making investment in the country as attractive as possible and unlocking development potential. But skeptics maintained that the new contract set a dangerous precedent, making Egypt less competitive than some peers and encouraging other foreign partners to renegotiate their terms.

“Egypt’s upstream investment regime was already one of the more attractive, though not attractive enough to compensate for the high costs of offshore development,” Samuel Ciszuk, analyst at IHS Global Insight told Interactive Investor.

However, he highlighted that the breakthrough deal between BP and the government has signaled a turnaround and could pave the way for other oil and gas companies.
“The greater investment appeal achieved by this deal will unlock Egyptian growth elsewhere. In the long run this should pay for the higher gas price the government has agreed,” he is quoted as saying.

Indeed, BP maintained that the new terms were necessary to make offshore explorations viable.  BP spokesman Robert Wine told AFP that negotiations for the agreement “had been a long process. Under the previous terms it was not commercially viable for us.”

While companies maintain the need for “commercial viability” the reality is that foreign oil and gas companies may have taken the hard bargaining too far, handicapping Egypt’s energy self-sufficiency and sacrificing much-needed revenues that could go into developing the local petroleum sector.

Although arguably less than ideal for Egypt, until recently such deals were benefitting both the foreign oil and gas companies, and, allegedly, Ministry of Petroleum officials, who were content to benefit at the expense of Egypt’s well-being. Now, there is talk of change as institutions are purged and officials called to account for their actions.

Progressive Change
As Fahmy continues to be investigated, sitting Minister Abdullah Ghorab has announced he is in negotiations with Israel and Jordan to change the pricing of the existing gas export deals. Although he has stated that all existing contracts will be honored, Ghorab has also made a commitment to supplying local demand before allowing exports to flow out of the country.

Reports of what exactly has been done to date remain fuzzy, but it seems Egypt’s Ministry of Petroleum is well on its way to reforming existing deals to gain further benefit for Egypt.
Although negotiations with foreign oil and gas companies for new deal terms could prove tricky, complaints about gas export deals can be remedied by simply raising the sale prices to be on par with going market rates.

As the spotlight remains on the sector, with activists watching carefully for real change, it is clear that the general public will accept nothing less than a totally reformed energy policy for Egypt.

“The information available suggests that all the contracts relating to the export of gas should be now re-opened and re-negotiated. This is possible whatever the precise re-opening clauses state. The fact that Egypt sells at a much lower price than that at which it purchases gas is sufficiently explosive to justify re-negotiation,” analyst El Amrani wrote.
“The foreign companies involved in the contracts would be unwise to oppose a re-opening. Contracts are a formal framework for a relationship. It is the relationship that matters, and it will only work to the benefit of both parties if it is continually perceived as fair by both of them,” El Amrani concludes.

By Kate Dannies


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