Funding Egypt’s oil projects

2010 has seen an increased focus on revising banking and financial policies for Egypt’s current oil and gas projects. In the midst of reforms, budget adjustments and pending projects for the quarter, some key developments are underway to bolster the country’s oil and gas fueled economy.

With an anticipated growth rate of 5% in regional oil revenues for the year, the heightened focus on petroleum project funding should come as no surprise. As Reuters reports, “Cheap subsidized fuel has encouraged rapid energy consumption growth that some regional governments have struggled to meet.” This means the issue of private funding and bank loans remains a pressing item in Egypt’s current projects, as it must work hard to keep up.

The Egyptian General Petroleum Corporation (EGPC), along with the Ministry of Petroleum, is being urged to revise borrowing patterns in both foreign and domestic markets. The needs comes with a new sense of urgency as Egypt’s oil economy seeks to capitalize on what some believe will be a quarter of increased earnings in oil refinery.

Unlike petrol giant Saudi Arabia, who anticipates a 3.8% GDP hike in 2010, Egypt faces hopes of more modest gains, and must rally for an effective banking policy to enable a fruitful relationship between financial institutions and companies seeking to carry out oil and gas developments.

The Ministry of Trade and Industry has reported plans for a staggered removal of energy subsidies for non-energy heavy industries, to take place in July. The policy targets factory subsidies, and comes as part of a plan implemented in 2007 that is newly resumed after halting due to the global economic crisis.

After a LE60 billion/USD 10.95 billion dent in government spending for fiscal year 2007/2008, the call for revised banking and financing policies towards funding oil and gas projects, as well as energy intensive organizations, has garnered increasing importance.

With moves such as the Arab African International Bank’s (AAIB) drafting a responsible lending policy, there is bound to be a shift in oil industry-banking relations in the coming year. The AAIB’s policy is part of an initiative spawned last year that pledges to adapt lending policies to encourage building of socially and environmentally sensitive plants. While this may pave the road to improved social implications of national spending, it does create yet another step in the lending/funding process of companies seeking loans for oil and gas endeavors. AAIB is but one example of the changing scene, as the IFC has backed the initiative in Egypt since the early 2000s as a means of improving restrictions on lending policies for commercial institutions.

These reforms are based on the simple policy that increased social awareness of spending will help boost business by both qualitative and quantitative measures. As Abdel Kader of AAIB stated recently, “From a banking perspective you have to make sure your profit is sustainable. And what we’re saying is if you lend to someone who undertakes social or environmental violations, it is quite probable that you’re not going to get your money back.” But do these changes mean more profits for petroleum companies? If so, how should banks and financial institutions proceed from here? Egypt’s economy remains mostly cash based, which means bank lending remains distinct from the majority of credit-based economies. According to financial reports, this means that banks and monetary institutions play a somewhat less influential role in the state of the economy as a whole.
Egypt’s oil and gas economy is currently facing some contradictions. On one hand, it appears that being out of the loop has had its benefits in an economy that continues to receive attention for being relatively unscathed by the financial crisis.

As hopes remain high for improvements in this year’s oil production gains at a projected 8.4% increase of sales in 2010, banks should be optimistic about lending gains. Still, simultaneous fear of failure is clouding the lending front, even while production rates could increase to as high as 720,000 barrels per day (bypassing 2009’s numbers of 644,000 barrels per day). A measure of caution remains crucial for lending institutions.

The Ministry of Petroleum has bolstered these expectations of success by recently commissioning two projects by US Apache Corporation and EGPC. The project entails drilling 13 exploration wells in Egypt’s Western Desert. The projects will receive a USD 55 million investment by Apache. This comes as part of the ministry’s plan to increase oil excavation and refinery in the region over the coming decade. The region currently produces 40% of Egypt’s oil production.

This and other projects are evidence that the finance and petroleum sectors continue to enjoy attention from foreign investors, where Egypt’s petroleum industry continues to be a safe bet. State fuel subsidies have further ensured solid returns for the future.

On the other hand, the recent report of Egypt’s fuel being 47% imported indicates that companies are struggling with supplies, and banks may respond by taking a cautionary note. Heavy borrowing from international and local banks, as well as considerable dependence on foreign investment, mean that Egypt’s oil and gas industry runs the risk of an unbalanced ratio of foreign expectations to domestic resources and market power.

The Ministry of Petroleum maintains the industry is in the midst of an upswing, with 19 new agreements signed in recent months, with a USD 4 billion worth.

Others speculate that it is naïve however to claim Egypt’s oil industry is so unscathed by the economic crisis; recent production stalls on local projects reveals skepticism on the part of the private sector and regional banks. One indication that the industry may be overextending its borrowing limits is the June 2009 report published by the Ministry of Economic Development, which requested a halt to all in process startup companies in the petroleum industry. The stall would supposedly give existing companies a fighting chance at the highly competitive bid for bank loans.

Such developments have struck a chord with the EGPC, giving rise to efforts to find new funding strategies to appeal to banks and lenders. These developments have also meant that fewer banks are engaging in sole risky lending, deeming the potential loss too great to go it alone. While lending as part of a consortium might diminish risks for banks and lenders, however, multiplying loans, payments and interest rates could mean disaster for the companies heading the projects.

Recent red flags in the industry include the withdrawal of the Kuwaiti Al-Kharafi group from a recent oil refinery project, along with Citadel Group of Egypt pulling out of a sizeable project, and talks of further withdrawals from regional refinery projects looming on the horizon.

Regional banks such as the Arab African Bank, the Arab International Bank, Egyptian Gulf Bank, Societe Arab International Banque and the National Bank of Egypt, however, have recently signed loans to EGPC for future projects, further indicating a gap in lending perceptions. Many speculate, however, that these loans are no more than a temporary band aid for a deep seated issue that cannot be remedied by short term solutions and hiked loan rates.

While investment in the petroleum industry continues to thrive, talks of a long term solution for Egypt’s oil and gas financing become more urgent.

By Clarissa Pharr


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