“We Want to be Your Partner of Choice.”
EGPC chairman Tarek El-Molla recently sat down with Egypt Oil & Gas to discuss the current challenges for the petroleum industry, how to address them, and what their future plans are. Many questions were asked over our hour-long interview, far too many to include below. We then went through and selected the highlights for you below.
When asked about the challenges faced by Egyptian upstream sector, Tarek emphasized that the challenges faced by Egypt are really no different than anywhere else. Obviously the low oil prices have affected upstream operations in the country, but that is true anywhere. “Of course for Egypt the challenge is greater as we are a producer and consumer at the same time,” Tarek said. “We do not have enough production to meet domestic demand, so that is challenging for us.”
“Another major challenge for the upstream sector in Egypt is access to US dollars.” The chairman went on to say that as this is a challenge, the EGPC is being flexible with upstream companies for types of repayment offered. They have successfully worked with partners to offer partial payments in EGP, excess cost recovery, and sometimes, crude product. “This is something faced by the entire government.”
Tarek went on to state that while there have been challenges, IOCs—big players especially—have been very forthright with the EGPC and the petroleum ministry about their desire to continue operations in Egypt. This is a very important country for many multinationals, and conferences like the recent EEDC in Sharm El-Sheikh showed a reaffirmed commitment to Egypt as a place they want to invest in.
One problem plaguing the industry has been the debt owed to foreign oil companies. When asked about it, Tarek repeatedly emphasized that the EGPC is attempting to show very concrete commitment to its partners by working on this issue. “We were able to successfully reduce the debts owed to foreign partners from $6.3 billion to $3.1, and we are working to reduce this further. This did not happen by itself, we had to secure financing from banks to be able to repay our partners. I am very proud of this, it shows EGPC’s commitment.”
The Egyptian government does not only owe money to foreign firms, but it also owes itself. El-Molla was very frank about the problems facing the petroleum ministry and EGPC. “We are owed about EGP 70 billion by the ministry of electricity, and nearly EPG 6 billion by Egypt Air. All told, we are owed about EGP 140 billion.” These debts are difficult for the EGPC to resolve because it functions much like a oil producer, but as a government entity, it has an obligation to serve the Egyptian people.
The Egyptian government strongly believes that only subsidy reform is the answer to the balance of payments problem. A huge chunk of the petroleum ministry’s dues come from generating electricity. “We need to raise the awareness of people. We need to rationalize consumption. People need to be educated about energy efficiency and it is not something that the government can just do alone, it is a culture change and it should start from childhood.” Tarek continued, “Unfortunately, if the product is cheap, we do not feel the pain. Prices must rise over time, in parallel with increasing awareness.”
El-Molla noted that fuel subsidy reforms were successfully implemented in July of 2014, a major step for the government and one that increased the confidence in major international institutions such as the IMF and World Bank. “The government is aligned, the name of the game and the answer for everybody is subsidy reform.”
“The North Alexandria Concession is very important for us. When it comes online in mid-2017, it will be producing 1 bcf per day of natural gas. This is huge.” El-Molla went on to say that this volume of gas, if operating today, would close the gap between domestic production and imported needs. “The plan was for it to be operating today, but for many reasons, this did not happen. Now it is scheduled for mid 2017.” “This represents an investment of more than $12 billion, it is unprecedented for Egypt. It is known the world over.”
The concession was expected to close the gas import gap, but by 2017, the population will be greater, and so projected consumption will be too. “We have started LNG imports, this will help with the problem.”
As the Egyptian government is attempting to ramp up production of oil and gas, Egypt Oil & Gas asked El-Molla how they have been more flexible with recent contract terms. “Well, as you know, the model we are working with is the Production Sharing Agreement (PSA). We are working to be flexible, being rigid will not help.”
“There are two main things we have addressed: The first are the debts owed. We have worked to reduce these, and I am proud of that. The second is the price paid for gas, not for everything, but for deepwater especially we are working to negotiate fair prices to make it profitable for companies. We have been studying cases with our partners and we have been able to increase the prices for several concessions.”
“We are trying not to be rigid. We want this to be a win-win situation because at the end of the day, if you compare prices it will always be cheaper to produce locally than to import, especially for LNG.”
“This is another way we are trying to be flexible, we realized we have not been issuing enough bid rounds, so we have started to do that more frequently, whether it was EGAS or GANOPE, or EGPC. The bid rounds will be continuous to keep Egypt on the radar.” Tarek went on to state that he expects to see another bid round in 2015, once the current ones end.
Brownfields and Service Contracts
Egypt Oil & Gas asked Tarek what the EGPC’s plan is for the development of the approximately 15 tcf of stranded gas all over the country, pointing out that much of the gas is being ignored by oil producers because the price is too low to develop it.
“You are totally right, there are many opportunities to develop this gas, and we are working to make it happen. We are reviewing prices on a case-by-case basis, and will continue to work with our partners.”
Egypt Oil & Gas also asked the chairman about his approach to Brownfields in Egypt. “We [The EGPC] recently had a meeting with the executive board where we discussed Brownfields. We think that for some concessions, service agreements would be fast and speedy with bringing these online. We do not have the luxury of time, so this is important to us. Service agreements are what we are looking at for Brownfields, definitely.”
There has been a marked reduction in the past few years in the amount of investment in upstream production facilities. This is something that IOCs traditionally invested in, but the trend has moved away from companies providing these facilities, leaving state-run agencies like the EGPC responsible for that investment. “This is also one of the challenges we have, but it does not face upstream investors, it faces us [the EGPC].”
“As IOCs are not investing in pipelines, we now have to. What makes this even harder is that these facilities were designed 20-25 years ago for lower quantities of oil and gas. They need to be upgraded.”
The chairman outlined three different options for the EGPC to invest in pipelines and production facilities: “First, we [the EGPC] could finance this ourselves. Second, we could allow a third-party investor to come in and build these and then rent or toll their use. Or third, we could go to big infrastructure funds such as the World Bank, IMF, etc. We are working through these options to upgrade facilities.”
EGPC’s Changing Role
“We are trying to get away from the role of being two heads at once.” Tarek went on to outline the issues with trying to be both a regulator for the oil and gas industry and a production partner at the same time. “I think we should go for being a producer and distributor, and upstream, downstream, global energy company. That is it.” El-Molla emphasized that this change will need to be a gradual one, but that it needs to change.
“We need to migrate from being a regulator, because it is not our role, let somebody else be a regulator. This will take time, it is a journey.” Tarek continued,“Aramco, Adnoc, etc; they do not regulate prices, they do not regulate tariffs. Neither should we.” The EGPC chairman envisions an independent regulator to take the place of the EGPC in the current structure. He gave the recent example of petroleum minister Sherif Ismail issuing a decree that EGAS have a shadow regulator for gas. “For communications there is a communications regulator; there is an electricity regulator and a water and food regulator. A third party should determine the prices.”
“I am really focused on the people development issue. One of my main goals is to find and develop potential young leaders. People who show great promise.” El-Molla went on to say that he has put together several committees with the goal of finding these people.
El-Molla’s deputies all nominate young employees from each division, who the chairman meets personally for a short interview. Many of the young nominees have been sent to overseas training. “This lets them be exposed to different instructors and lets them see best practices first-hand.” After each trip El-Molla sits down with them for a short presentation on what they learned.
“I do not want to simply have a message of reassurance. I want to say what my goal is as chairman of EGPC. We want to be your partner of choice.”
El-Molla was blunt about the challenges Egypt has recently faced. “Between 2011-2014, what has changed? Practically speaking, not very much. Tourism is still challenging, the economy is still challenging, foreign currency is still challenging. But we have made progress.”
“The minister of petroleum, Sherif Ismail, has assembled a good team and we have been able to show our commitment by paying down debts and being flexible with contracts and gas prices. We signed 56 concession agreements over the last two years.”
“We want to be your partner of choice. Lets work together,” El-Molla finished.