Gas contracts review… Weighing the pros and cons

Whether it is due to public pressure or a necessity that should have been done long time before, the current review of all gas contracts has been the key to put an end to the ongoing controversy in the petroleum sector. Weighing all sides of Egyptian gas exportation is the challenge now to stabilize the gas investments once more.

The Egyptian petroleum sector faces a state of unrest following the January 25th revolution that has led to economic and political changes in the country. As a result of this chain of events, the Egyptian public pressure has been a challenging factor affecting the decision-making in the country. In the petroleum sector, this pressure has been calling to stop supplying Israel with natural gas despite, however, on the other side, the Egyptian General Petroleum Corporation (EGPC) denied any financial losses due to the gas exportation to Israel, as claimed by most of the public.

The issue of exporting gas to Israel is taking a great consideration not only in the petroleum sector, but also in all Egyptian sectors because of the extreme importance of these operations in increasing the financial revenues of the national economy.

This is the reason why Egypt Oil and Gas exposes the file of gas exportation to Israel and investigates the truth behind the accusations of corruption.
Currently, the former minister of petroleum Eng. Sameh Fahmy is accused of several cases of illegal commissions, and wasting public money in the mentioned file.

As a matter of fact, there is a controversy between the experts of the petroleum sector; some are supporting, while others are condemning the whole deal. The mixed reactions towards this issue have been crowned by a latest study that estimated the pros and cons of abolishing the Israeli deal.

The first group of oil experts pointed their consent to stop the Egyptian gas supply to Israel in return of importing huge quantities of diesel, highlighting that the industry growth rate is 8% higher compared to the gas production growth rate. Hence, providing diesel to factories is more vital for the time being.

On the other hand, some opponents believe in the necessity of exporting gas to Israel and believe in the financial benefits that can support the Egyptian economy, taking into consideration the amendments of prices. This group quoted the Minister of Petroleum Eng. Abdallah Ghorab, who declared, “The main target we are working for is to achieve the best financial return of the agreements as long as they are already signed”.

There are two solutions for the Ministry of Petroleum; either increase the price of gas exported to Israel or abolish the whole gas deal, said a top official at the Ministry to Egypt Oil & Gas Newspaper. “The Ministry should raise the annual cost of exported gas to $290 million, which match the international prices, instead of the $90 million received in 2009.”

The top official, who asked to be anonymous, believes that the Ministry will resort to the first solution of price increase to ease the public tensions. “Despite the public pressure, the way to deal with this controversial issue should be based on economic and commercial factors, rather than the political ones, since that the country is going through a very critical period,” highlighted the source.

According to Article 11 of law 20 of 1976, it is the right of the Ministry of Petroleum to manage and set terms of contracts signed by the EGPC, as the chairman of the board of directors inform the minister of petroleum about the board decisions for accrediting. Therefore the authority has no power to amend or cancel contracts without returning back to the superior political leadership, and, in case of any changes or amendments made by the minister, he should inform the EGPC within 30 days.

Another group of experts that are sustaining the review of all gas exporting contracts in general, calls for an intensified program to develop all the discoveries achieved to be put on the production line as quick as possible. The aim of this request is to increase the natural gas production in order to satisfy the domestic market needs for the coming years and keep enough reserves stored in Egypt. As such decisions contradict the working frame applied with the foreign petroleum companies in Egypt, the Ministry will then resort to import gas from abroad.

According to sources, there was a preliminary decision from the Ministry side to abolish all gas exporting contracts, however the initiative made by the Jordanian authorities to willingly amend the gas prices of its contracts reversed the situation. As a matter of fact, the Egyptian Ministry of Petroleum signed two gas-exporting contracts with Jordan. The first, signed in 2004, stated that egypt to export 77 billion cubic feet of gas at $ 1.27per million BTU, while the second contract, signed in 2007, Egypt agreed to export 32 billion cubic feet at $ 3.06 per million BTU. This latter contract had a term that give the Egyptian side the right to amend the gas prices but not before the year of 2019, prior to that there will be penalties on the Egyptian Ministry.

“The willingness and understanding of the Jordanian side to drop all penalties and accept to amend the prices of Egyptian exported gas was a key element to affect the Ministry’s decision to abolish all gas contracts,” declared the official.

Asked about the exact figures of Egypt’s gas reserves, he clarified that the proven gas reserves can last for the coming 20-30 years and that the daily gas production counts for 6.5 billion cubic feet.

“The Ministry of Petroleum along with the EGPC are jointly working on a study to consider the losses that would occur in case of stopping gas exportation to Israel compared to importing diesel that cost $1200 per ton, according to the international prices. And in the case of proving that the cost of exporting gas is less than importing diesel, then the operation of exporting gas will end by next summer.”

Moreover, the source expected an increase of gas production up to 340 million cubic feet per day, in addition to approximately 3000 condensate barrels daily.
Besides, the source asserted that the EGPC suffers from the difficulty of getting its financial dues at some working oil companies in Egypt, which use the local gas and export it instead of consuming it in the local market only, with respect to the Egyptian laws.

It is worth mentioning that Article 7 of Gas Pricing states that if the second party (companies) is to export domestic gas, the pricing system should be then changed according to the ministerial decision and be agreed upon a new pricing mechanism. Referring to exporting the subsidized gas is considered violation of the law; the EGPC and the Egyptian Gas Holding Company (EGAS) should receive a share of the financial revenues, resulting from exporting gas by any company.

He also added that EGPC in the coming period is working on eliminating companies that violate the law out of new tenders, especially that the coming period will witness a great respect to laws and regulations to reach quality standards in all working petroleum companies, within the competition that exists between old and new competitors in the market of petroleum services.

Finally, he assured that all the workers in the oil sector are working hard to fulfill the local market needs of natural gas in the coming period, reducing the rate of gas exports down to 29% compared to the past year total production.

According to latest reports, the plan of the fiscal year 2010 – 2011 aimed at pumping EGP 38.2 billion investments in the petroleum and gas sector, including 15% for oil supplements and EGP 25.2 billion for gas production, which is 66% of the investments of the sector and EGP 10.1 billion for oil crude production, which represents 26% of the sector investments.

This new plan is considered a strong supporter to the Egyptian petroleum sector that plays an utmost role in the Egyptian economy, as the oil and gas sectors are the main source of generating electricity in Egypt. Meanwhile, the proven reserves ratio of natural gas reached 47 million tons during the last fiscal year 2009 – 2010.

In addition, the Ministry of Petroleum implements an annual plan to increase natural gas reproduction through the attraction of foreign investments into the country, by signing new agreements with foreign companies, taking into account commitments to the domestic and international needs. Clarifying the impossibility of reserving the natural gas for a long time, therefore it is necessary to always set a production plan to be directed to the local market.

By Shady Ahmed


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