By Mahinaz El Baz
Egypt has been facing an economic decline in the last couple of years, and in an attempt to help and revive the economy, the government decided to float the Egyptian currency, that took matters from bad to worse. The Economic fluctuation had a tremendous negative effect on many industries and sectors in the country; among them was the rise in consumption of petroleum products. With that in mind, modernizing Egypt’s petroleum sector was a must to be able to decrease the gap between oil and gas production and consumption. The first of many steps to upgrade and modernize the petroleum sector is revising laws and regulations.
Legal and Regulatory Frame work
Under the Egyptian Constitution of 2014, all oil and gas resources are controlled by the state. Article 32 of the Egyptian Constitution stipulates that “All oil and gas resources are within the control of the state. Granting the right of exploitation of natural resources or public utility concessions shall be by virtue of a law for a period not exceeding 30 years” as stated in chapter eight in The Oil&Gas Law Review, written by Reham Eissa & Ahmed Haggag and published on November 2014.
Accordingly, only the state can award rights for exploration and exploitation of oil and gas resources for International Oil Companies (IOCs). In addition, concessions must be granted to the IOCs by virtue of a law issued specifically for the mentioned concession. The specific concession law will govern all aspects related to the concession, while making a few references to other applicable Egyptian laws, such as the Environmental Law, which will apply to certain aspects in question. “Concession agreements, hence, have the force and privileges of a law promulgated in Egypt”, according to Donia El-Mazghouny & Girgis Abd El-Shahid, Oil Regulations Article published on July 2016. Hence, the petroleum sector in Egypt is mainly regulated by two laws: the Public Utilities Concession Law No. 129/1947 and the Fuel Materials Law No. 66/1953
Moreover, the Egyptian Ministry of Petroleum and Mineral Resources is the governmental authority responsible for the regulation and development of the oil and gas industry in Egypt. The Ministry acts through the General Petroleum Corporation (EGPC), which regulates the petroleum industry in Egypt and the Egyptian Natural Gas Holding Company (EGAS), which is a private entity owned by EGPC and responsible for regulating the gas industry in Egypt.
New Gas Law
The Egyptian government has adopted a new gas law that supports the regulatory framework of the gas market in Egypt and allows third-party; including the private sector to enter the downstream gas networks under transparent codes and in consideration of fair tariffs in order to liberalize the sector gradually. The law has been approved by the Cabinet of Ministers in October 2015, it has been reviewed by the State Council and waiting for its ratification by the Parliament.
“The Parliament had a meeting recently with Oil&Gas private sector contractors to discuss the new gas law and there are no updates about the approval timing” according to Reham Eissa, Associate, Sharkawy & Sarhan Law Firm.
Moreover, the new gas law is considering setting up an independent gas regulator that will monitor the functions of the market in this new setting. “In addition to monitoring the market; the gas regulator’s role is to set tariff methodologies for regulating activities, issuing licenses, and resolving disputes,” said Eng. Amira El-Mazni, EGAS, Vice Chairman for Gas Regulatory Affairs, in a high-profile on July 19th, 2016. Therefore, a Gas Regulator is to be an independent entity that will abide by the principles of transparency and neutrality, while having legal powers and authority to perform its role satisfactorily.
Furthermore, Egypt’s Minister of Petroleum and Mineral Resources, Tarek El Molla, described in many occasions the new gas law as a real breakthrough in enhancing the industry’s regulatory framework, the major feature of which is the gradual liberalization of the country’s gas market; as the state always confirms that a lot of work should be applied to further modernize the existing legal framework to boost international investments.
The new gas law is a serious step in the government’s effort to liberalize the Egyptian economy, following the economic reform program adopted by the government, which has been approved by the IMF. The government says their reform program will lead to a liberalized free market, by achieving a flexible foreign currency exchange rate, cutting fuel subsidies, and the privatization of the public sector.
In addition, Anastassios Gentzoglanis, a Professor of Economics at the Université de Sherbrooke, said that liberalizing the Egyptian gas market will be the first step towards transforming the sector’s efficiency and competitiveness. Adding that the independency of the new gas regulator is essential, as well as assuring the investors that there won’t be a risk of policy reversal, which in turn will provide incentives for further investments within the gas sector, according to Daily News Egypt.
“Egypt’s commitment towards the reform of the Egyptian gas market took a few steps towards the development of a new regulatory framework to promote creation of a liberalized gas market, which is characterized by competition in the downstream gas segment,” said Eng. El-Mazni. She further explained that “reasons for regulating the gas market are to encourage investments and infrastructure, facilitate additional gas supply, and diversify sources by introducing new suppliers that are eager to compete fairly for the benefit of the consumers, who eventually become free to choose their own [gas] supplier.”
“The new gas law is expected to attract more investments to the Oil&Gas industry. Yet we cannot expect if the new gas law will conflict with the Egyptian objective of reaching self-sufficiency or not till the transitional period passes”, added Reham.
Public Private Partnership
Public Private Partnership (PPP) in Oil&Gas industry is a deal between the government and the independent private sector including IOCs, pursuant to which the delivery of a public service is transferred from the public sector to the private sector. PPP recognize that there are some activities that the public sector does best and other activities where the private sector has more to offer. Only by allowing each sector to focus upon what it does best, can the government provide the quality services that the public want and expect. Hence, PPP encourages the IOC’s to participate in development projects, increase productivity, improve the quality of services, and facilitating the transfer of knowledge and experience from IOCs to NOCs. PPP indeed has many pros such as; higher cost efficiency arising from private ownership of infrastructure asset, bundling & life-cycle planning, and sharing of risks and rewards, but there are cons as well. Cost savings may reduce service quality and there might be higher transactions costs along with capital freed for other expenditures and institutional and administrative capacity requirements.
Budget deficits and the increasing pressure to develop oil and gas infrastructure makes Egypt an attractive investment opportunity for the private sector and IOCs. Egypt has a well-established PPP legal framework, which applies to all projects in all sectors, as well as older legislation dealing with the grant of concessions in the oil and gas industry. It’s worth noting that, Egypt’s PPP Central Unit is responsible for implementing its PPP projects and currently has around $39billion worth of projects in its pipeline.
Generally, law No. 67/2010 regulates PPP in Infrastructure Projects, Services and Public Utilities are the basis of the PPP legal framework. This PPP Law is a comprehensive and reasonably workable legal framework for PPPs, but the same cannot be said for the granting of concessions in general; these can still be taken under numerous pieces of older legislation. The PPP Law only applies to projects procured on a PPP basis with a minimum investment value of EGP 100 million. There are no legal restrictions on the sectors eligible for PPP: projects can be concluded in commercial sectors, such as energy, and oil & gas. If any of the criteria for dealing with a project under the PPP Law are not met, the relevant sector-specific law applies. The law may overlap with other procurement or sector-specific laws, such as the Tenders and Bids Law of 1998, and several public authorities other than the ones it identifies may request oversight on projects or procure under different regimes. The legislative framework for PPPs therefore remains to be streamlined.
PPP in oil and gas downstream, particularly in marketing, had been specifically encouraged by state regulation since 1990, with a 1997 law extending this approach to gas distribution. While many experienced local companies support, the petroleum sector equipment, engineering skills, and ancillary services distribution to household was almost entirely delegated to seven private companies under long-term franchises. As a result, the private sector took a leading role in building the national low pressure network of pipelines delivering gas to households and many industries. Private participation in gas distribution has been reinforcing as the building of national grid as district levels takes shape. However, it will be some time before the private sector expands its contribution to mining GDP.
As a successful model of oil and gas PPP; The Egyptian General Petroleum Corporation (EGPC), Cairo Oil Refining Company (CORC) and Petroleum Pipelines Company (PPC) have agreed to sell to ERC atmospheric residue to be used as feedstock for the project, purchase all the high value petroleum products from the ERC project, and provide all the necessary storage and transportation capacity for all products.This PPP will enable ERC to deliver products which will decrease Egypt’s dependency on petroleum imports.
However to date, there is no legislation covering liquidation and decommissioning activities in Egypt. In practice, farm-out agreements usually set out the parties’ agreement relating to the abandonment of activities or decommissioning. Typically, all assets under the concession revert to EGPC or Ganope and all liabilities and obligations, whether ﬁnancial or contractual remain those of the contractor, including any assignees.
Foreign Direct Investments attraction and private sector development in Egypt are very important elements of economic development and generating strong and sustained growth, employment creation, and poverty reduction. In this spirit, the government of Egypt took serious steps to liberalize the petroleum sector and significantly improve the business climate for the IOCs in recent years. One of these steps is the new gas law, which supports the regulatory framework of the gas market in Egypt and allows the private sector to contribute in the gas industry, which will surely reflect on the performance of the NOCs and enhance their capability to compete in international markets. The Egyptian Parliament did not approve the law yet, which creates an urgent need to push the issue and get an approval as soon as possible to be able to maximize the benefits from the new era of producing natural gas from Zohr field and other newly discovered fields.