Gulf investments stand behind the wave of oil mergers

A series of mergers and acquisitions have been carried out in the Egyptian oil and gas sector over the past five years, bringing in a large number of newcomers to the scene of exploration, production or the provision of services related to the sector. As a matter of fact, the key acquisitions over the past year were pushed forward by what we call hot Gulf money

Over the past five years, two major acquisitions, which took place in 2006, were seen by many experts as redrawing the oil and gas map at the local and global levels. The first was UAE-based Dana’s acquisition of Centurion in a $950 million deal. While, the second was the purchase of major stakes in four companies operating in the transport of natural gas in the local market by the Citadel Capital, a leading Egyptian private equity firm, in transactions worth $90 million.

Mustafa Oki, a business advisor to the US Company Nexant, described the acquisitions in the Egyptian market as being instrumental in attracting an inflow of foreign investment into the local oil sector, which is a major magnet of foreign investments. He added that such investments generate several results, mainly boosting the capability of the oil sector to make use of the reserves accumulated from the gas and oil discoveries.

Rashed Seif Al-Garwan, General Manager of Dana Gas, investment in the oil and gas industry in Egypt has grown remarkably over recent years. Al-Garwan cited diverse opportunities for his company in exploration for oil and natural gas in Egypt. “The company aims at making use of the capabilities and expertise of Centurion to expand operations in exploration and production in the Gulf and the Middle East as well as in Northern Africa,” he added. Dana is the sixth producer of natural gas in Egypt through the exploration and production operations carried out by Centurion, which it wholly owns.

“International oil companies endeavor, through their activities in the local market, to develop works of production and exploration and help develop local gas reserves to the benefit of the Egyptian economy and society as a whole. This (aim) is pursued through boosting oil and gas reserves,” highlighted El-Garwan, adding that the current output has yet to cope with the enormous reserves, rising to 70 trillion cubic meters over the past five years.

It is worth mentioning that the Egyptian oil industry has succeeded in meeting the local needs of oil and gas products valued at $20 billion, and setting a record total of oil and gas exports of $10.6 billion, originally planned to be attained by 2010. The figure accounts for 55% of the Egyptian commodity exports, thereby standing out as the highest in the history of the Egyptian oil sector.

As for the Citadel purchase deal, it is considered as a move set to change the landscape of gas transport and distribution in Egypt. The company bought 49% stake in Genico, a leader gas distribution which has four subsidiaries, including City Gas; the gas supplier to the governorates of Suez, the Red Sea and Southern Sinai.

Back to 2006, Citadel Capital took the business community by surprise when it wholly bought Nile Valley, which has exclusive rights to supply natural gas to some 880,000 houses and commercial enterprises in Egypt’s southern valley. Targeting a strong position in the market of gas transport and distribution, the company has later on purchased the entire shares of Global Energy, which operates in the production, transport and distribution of electricity.

The deals sealed by Citadel Capital also included buying 93% of Trans Gas owned by the Egyptian businessman Farouk Makram Ebeid. Similarly, it acquired a 50% stake of the foreign partner in OSCO for gas exploration and production, in which the Egyptian General Petroleum Corporation (EGPC) has an equivalent share. This have paved the way for Citadel Capital to start its activities in gas production in the Gulf of Suez.

Commenting on the wave of acquisitions revitalizing the petroleum sector, Hani Nassar, Deputy Chairman of EGPC, said that acquisitions and mergers usually bring along huge investments poured into the industry by partners, who seek to exploit the facilities they have acquired by upgrading the potential of exploration and production. They also seek the consolidation of their assets in the Egyptian gas sector through expanding the exploration and production operations, noted the official.

The acquisitions, especially those clinched by the Arabs, ensure the Egyptian Government at least a suitable share of the Gulf flow of investments into the global oil industry, said a senior official at the Ministry of the Petroleum. He added that the Arab companies and investors vigorously seek to make use of the high oil earnings in oil ventures with the aim of taking advantage of the presently high prices in these projects.

However, Mokhtar El-Sherif, an economics professor at the Delta University of Mansoura drew attention to the fact that most mergers have been concentrated in promising natural gas firms in the local industry due to the enormous reserves in the field and high revenues. “These investments do not generate cash gains for the local economy, which do not get any revenues in terms of taxes or from the profits earned from the deals because the majority of oil companies operate under the free zone system, which involve exemptions from taxes on profits. They have also the unrestricted right to transfer their earnings abroad,” clarified El-Sherif.

An official source at the Ministry of Petroleum highlighted that “the huge deals and hefty bids to buy a number of companies reflect the success of the gas market in Egypt to become a major attraction for Arab investments”. He attributed the inflow of investments into the Egyptian oil and gas industry to mainly the diversity of business opportunities generated by facilities available in the sector. This is seen by the Egyptian government as one of the main earners for the national income.

It is worth mentioning that Egypt seeks to increase its exports of the liquefied natural gas and high-quality products. The value of liquefied natural gas exports since January 2005 until mid-2006 has reached around $892 million. The oil sector saved $3.86 billion as a result of readjusting the gas pricing policy. In addition, projects of the first phase of a national plan for petrochemical industries have been carried out. The plan envisages the creation of eight major projects with investment of $5.3 billion.

By Ashraf Fekry


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