Though the banks have been a steady form of support, the world economic crisis has cast its shadow over the Egyptian oil sector
The global economic crisis has tightened its grip on the Egyptian oil sector and disrupted its plans to expand and renovate within the sector. These calculations are based on two main factors which are reliant on attracting foreign investments and borrowing from international financial institutions and banks located in Egypt and abroad. Compared to the sector’s own resources and capabilities therefore, external factors and resources carry the greater weight.
An important indicator of this is the statement made last May by Farouk El-Okda, governor of the Central Bank of Egypt, during a press conference pointing to a ‘drop’ in net direct investments in the oil sector. This claimed drop was drawn from the $2.8 billion invested figure, compared to last year’s $3.7 billion. Sameh Fahmy, Egyptian Minister of petroleum, denied this supposed ‘drop’. “The impact of the international crisis on the Egyptian oil sector has been limited and foreign investments have not fallen compared to last year but have reached $7 billion this year.”
The Minister’s denial was based on the fact that Egypt signed 19 new oil and gas exploration agreements covering areas in the Mediterranean, the Western Desert and Upper Egypt and totalling $4 billion. However, the Minister did acknowledge that due to the international crisis, Arab banks and the private sector had withdrawn from investing in the construction of an oil refinery at present.
In response to whether the financial crisis negatively affected financing the petroleum sector, Barakat replied: “Yes, but not dramatically like what happens in other business sectors.” He continued, saying “It was just a re-directing and cost controlling to be ready for the coming era more than minimizing and investments.”
In addition, in a report published in June 2009 covering the third year of the Sixth Five Year Plan (2007-2011) the Ministry of Economic Development indicated that it had requested the Ministry of Petroleum to stop the establishment of any new companies, according to Al-Ahram Weekly newspaper. This indicates concern over the oil sectors liberal borrowing practices and whether these practices verge on excess. This new company policy can also be attributed to banks and international financial institutions decreasing their investments in light of the world credit crunch.
Experts across all sectors have weighed in on the effects of the crisis and what it means for Egypt. “The financial crisis weighed heavily on bank financing for the petroleum sector as a result of the sudden decline in the oil prices, which declined from $147 to $40 a barrel,” Ahmed Selim, Manager of the Arab African International Bank, told Egypt Oil & Gas. He Continued “However, the previous rise of the oil prices which now settle between $70 and $80 a barrel resulted in returning things to normal conditions and brought back the banks in the financing and investing in the sector again.”
Banks have characteristically been eager to finance the oil sector over the past decades as it is synonymous with security and stability. Its stability clearly stems from the global dependence on energy and petroleum products and with Egypt’s growing population there is little indication that this trend will abate.
The objective of major petroleum project lending can be summarised via a few key points which are based on the initiative to foster competition between banks for role and agent bank in financing. Firstly this pertains to the design of the over-all loan and secondly formatting pricing arrangement to attain minimum net costs after taxes for the client and maximize the return to the lending bank. Thirdly this boosts confidence on the part of borrowing client and the host country in the agent bank‘s ability to provide timely delivery of financing. This also requires enhancing rather than damaging the political environment in the specific country or region. Fourthly this ensures conviction on the part of the borrower that the agent will oversee the duration of the loan act to maximize the probability of timely payment of principal and interest on the loan. It is key that the payment of principal and interest on the loan in no way disturbs the political relationships of the bank or the oil company in the host country.
The Egyptian General Petroleum Corporation (EGPC) was granted a substantial amount of loans from several banks including the Arab African Bank, the Arab International Bank, the Egyptian Gulf Bank, the Société Arab International de Banque (SAIB) and the National Bank of Egypt. The availability of these loans from the domestic banking sector is a result of sizeable liquidity in the banking sector searching for investment.
This divide between the domestic and international begs the question; will the oil sector be capable of absorbing these loans from domestic banks while having to bear the burden of sizeable debt to foreign partner companies in crude oil production that has reached $7 billion?
Some voices in the finance and oil sector call for establishing a partnership between banks and oil companies instead of only getting loans to finance projects. Nevertheless, this idea has seen little popularity in either party. Eng. Mohamed Barakat, Local Manager of Italfluid Egypt, said: “The banking field generally does not initiate to offer the required minimum of gaining experience in the oilfield business like other industries and real estate business.” Selim followed his previous statement, saying “I refuse to enter as a key partner in the petroleum projects in particular and generally to do any commercial activity, especially if it was beyond the scope. Besides, the role of banks must not exceed the financing stage in the oil sector.”
Despite the negative effects of the economic crisis reports indicate that EGPC issued an agreement with the Ministry of Finance over new oil bonds for $1 billion in cooperation with the American financial services firm Morgan Stanley. The duration of these bonds will be three years, ending in 2014. This new bond issue focuses on funding EGPC’s general needs in addition to current capital expenditures, among which are funding petrochemical and gas projects.
The issue of oil bonds highlights the difficulties faced by the petroleum sector in obtaining the required funding for new projects or for the expansion of existing projects. This suggests that the international economic crisis has had a significant impact in Egypt and there is a need for a serious reconsideration to address these implications in the sector. Such effects call for a strategy to confront the impact of the international economic crisis rather than rely on short-term tactics
Officials in the sector insist that there is much more that banks can offer than relying heavily on banking loans to finance oil and gas projects.“Till now we cannot assure that the banking sector and the bankers generally give the sufficient weight for the oilfield business. Generally speaking, the oilfield business in its core business meaning depends on multinational corporations who rely on its direct investments to run its business inside the local market and they are evaluating the outcome as the IRR factor comparing to the interest rate given by the bank.” Barakat stated and continued on to say: “This should be studied carefully and deeply by the bankers to approach more influence as a key player in this market.”
Financial lending to major international petroleum projects necessitates the melding of technical and financial skills at every level as we continue forward. As project lending evolves, both engineers and bankers are faced by challenging new scenarios and questions for the new financial age. Any hope of a successful joint interface to serve the interests both of the borrower and bank is dependent on the financial sector to consciously organize, train, and manage its assets and capabilities to address the oil sectors evolving needs.