Over the last two months, the Egyptian petroleum industry has been under attack, specifically the former ministerial board, being accused of giving special incentives-privileges to foreign companies on the expenses of the Egyptian ones. On the other hand, many foreign investors condemned the old system for not fulfilling its financial commitments towards them and that many modifications, especially contracts-agreements, should be made for a more advantageous work environment

Under the theme of “Strengthen your investments. Listen to the Future”, the Egypt Oil & Gas Campaign seizes the opportunity to discuss means to answer all complaints concerning the foreign investments and draw the new road for a fruitful environment. After the January 25th Revolution, the wave of reform and development has dominated every sector in Egypt. Hence, this is the right time to be part of this change and strengthen the foreign investments in such a dynamic field.

Contracts Dilemma
Dr. Hany Elsharkawi, Dana Gas Egypt President, wonders if the petroleum sector laws, specifically the concession law, are still valid anymore after the collapse of the Egyptian old regime and constitution.

Marwan Al-Ashaal, SiPetrol Legal Advisor answered this controversial question by confirming that all laws are on pause now. “There is a state of confusion concerning current laws, yet there are two main concerns nowadays; the production flow, drilling and commitments.”

Dana Gas Egypt President asked whether commitments should be reviewed amid the current unrests in the country. Al-Ashaal clarified that SiPetrol did ask the top heads of EGAS to review commitments, yet the official reply SiPetrol received is that EGAS can extend the terms concerning the period of times, but no commitment review can be made.

“Bottom line, even if we bargain to amend any term in any agreement, such as gas prices for example, there is no official body whether EGPC or EGAS who can implement any amendments since there is no parliament to approve them!” added Dr. Elsharkawi.

“The Egyptian petroleum sector is really strange; the apparent structure is concession, while in fact it is a production sharing one. Worldwide, there are four determined E&P structures, which are Production Sharing Agreements, Concessions Agreements, Contracting and Mild-Contracting Agreements,” clarified Al-Ashaal. “We do need a clear petroleum law, which we currently lacks in order to have a precise scheme to follow to enforce the petroleum operations and investments in Egypt.”

“if we support the idea of having a separate petroleum law, this law should take into consideration all kinds of challenges hindering the operations progress, such as the hassles of approvals we need to get before initiating our operations,” said Ahmed Al Shamy, Kuwait Energy Egypt Operations Manager, shedding light on the areas that fall under the Egyptian Military supervision. “Military approvals are mandatory in various concessions, without them we do not get the drilling approval.”

Al Shamy suggests that the EGPC, before initiating any bid rounds, should study what kind of approvals will be needed and handle this issue instead of making these approvals a burden on investors.

Elsharkawi pointed to the environmental associations as being another reason behind delay of operations in some areas, specifically in the Red Sea. “The Military approvals are not the sole ones required, sometimes we have to address the environmental association to receive needed official documents to start our E&P programs.” He further added that sometimes investors may even fail to get the approvals and hence the wheel of work is forced to be postponed. “There is a problem of miscommunications between the different governmental entities, such as Military Forces and EGPC.”

Al Shamy clarified that investors should not be involved in such miscommunications. “This should be the role of the EGPC.”

Talking about the solutions for the coming period of time, “instead of a general law to govern the various sectors of the petroleum industry, we should work now on the current regulations and agreements to modify as a short-term strategy to ensure the work flow,” said Eng. Tawfik Diab, PICO International Petroleum Managing Director. Evaluating the role of the Ministry of Petroleum and the EGPC, Diab believes that both institutions have a general institutional resistance towards the changes needed given Egypt’s changing profile as a mature oil producer, increasing gas projects and a capex intensive exploration country (Med). “Both features require very specific incentive and fiscal structures, such as the EOR benefits, the sharing of excess oil for mature fields to curb expenses and share hard earned rewards, and higher gas prices for costly or risky gas exploration and/or exploration projects in addition to the need for a quick recovery schemes for high risk exploration projects or tail end mature projects.”

Future Investments in Egypt
“The petroleum sector is going through critical period of time and we do need to admit that the sector is facing serious issues,” warned Diab. “as investor, I will not feel comfortable if you bring me the best minister in the world and reinforce a general petroleum law, without giving me exact and accurate moves to modify the current stagnation we are facing,” doubted Diab.

Asked about the petroleum model that should be followed in the Egyptian petroleum sector, Elsharkawi referred to the North American Petroleum Sector as one of the most successful models worldwide. “ He added, “From my personal experience, although they are extremely restricted regulations related to their natural resources, yet they do not face any problems.”

One of the problems we face in Egypt is the PSA in general, which is not a really god concept, clarified the Country Manager of the UAE gas producer. “in fact, this type of agreements is a heavy burden on the foreign investor as he is required to take an excess luggage, which is the joint venture… looking back to the tax royalty regime, which was applied in Egypt long years before this PSA, you will find out that both parties (government and investor) share almost the same profits, outcomes…etc.”

“There is much less headache in the tax royalty regime compared to the PSA,” confirmed Alsharkawi. “Forget about the cost recovery, I would prefer to review my profit and even be audited by the ministry, pay my taxes and share the rest with the ministry rather than implement the PSA model.”

Moreover, he shed light on the monopolization system imposed by the government to be the sole client/buyer of the produced gas.  “The government should play the role of an organizer and not being part of every single aspect.”

He further explained that before 2001, gas prices were linked to Brent price, but in 2001, the Ministry asked the companies to set a gas price ceiling, which has been a really bad decision. “You had to abide by this ceiling or else the Ministry will not buy your produced gas.”

Challenging petroleum progress
Asked about the current petroleum situation and the ongoing challenges affecting the sector as a whole, diab summarized the list of challenges into few factors; payments delay, lack of commitment and coordination, amendments of concessions agreements and structure of joint venture.

“As a matter of fact, some factors have been challenging our investments and such challenges are still persisting. I can list too many factors, such as delayed payments for oil and gas sold by EGPC on behalf of Contractor, lack of support by EGPC for Contractor to find alternative means to market products such as export to make up for delay in payments, lack of commitment and coordination between different Government entities (i.e. MOP and Military) in honoring existing agreements and promoting investments, the structure of joint venture that does not align interests of Government and Contractor and extraordinary employment burdens to satisfy general Government employment policies leading to redundancy and extra costs, in addition to the prolonged negotiations for Concession amendments and extensions,” explained Diab.

As a suggestion to solve some of the current barriers, Al Shamy proposed the strict implementation of a concession law that would avoid any Ministry sudden intervention or amendment of a signed concession agreement. “We do need a crystal clear law that would solve the miscommunication problem as well. As mentioned earlier, there is a lack of coordination between the Ministry of Petroleum, the environmental associations and the Military Forces,” added Al Shamy.

One of the current challenges facing the Egyptian petroleum sector is the state of market unstability that followed the January 25th revolution. According to Diab, there is a lot of uncertainty in the sector, which may lead to instability if realized. “The officials of the petroleum sector have a key opportunity to maintain stability now but face several challenges, such as government does not to seek to pass the buck on national issues such as employment and the need for innovative ideas to be implemented to resolve ongoing payment issues,” clarified Diab. “Besides, there should be a clear statement that all agreements will be honored by all governmental institutions, including the Military officials.”

The Managing Director or Pico International Petroleum explained that PICO, like all other peers in Egypt, had to slow down or shift high expenditure activities “until the course of things becomes c clearer and we get a better understanding of how EGPC and the Ministry are planning to tackle these issues”. As for the company’s upcoming plans, “Given that things clear up and things are back to normal we have plans to, we are planning to spend over $300 million over the next three years in FDP’s in our current assets in addition to around $500 million in acquisitions in Egypt during the same period.”

At the end of this round-table discussion, all investors share a common vision that investments commitments should persist in Egypt, because this is out of their responsibility towards the country and not only out of seeking profit.

By Yomna Bassiouni