Industry overhaul: A call for reform

A team of energy professionals explore challenges facing Egypt’s petroleum sector and debate solutions for the industry at the Egypt Oil & Gas Reform 2011 roundtable discussion.

Egypt’s oil and gas industry has long been in need of reform. While many issues facing the sector have been ignored for too long, the fall of Mubarak’s presidency earlier this year brought with it a call for change in the industry. Public discontent with foreign gas deals have already resulted in the renegotiation of Egypt’s contract with Jordan, and our February issue featured a roundtable discussion focused on the need for increased government transparency. Delving further into the issues facing the oil and gas market, a team of industry experts debate the future of Egypt’s oil and gas industry.

Opening the reform discussion, Dana Gas Egypt President Dr. Hany El-Sharkawi praised the favorable aspects of the Egyptian petroleum industry, noting that there is much to be thankful for and expressing gratitude for the “opportunity to exchange opinions, brainstorm new ideas and share suggestions with authorities,” in order to affect meaningful reforms. He went on to explain that while it is important to recognize the positives, top officials and experts must commit to solving negative issues and eliminating undesirable elements that hinder the progress and prosperity of the industry’s future.

PICO Energy Managing Director Sherif Abdel Wadoud agreed that this is the right time for submitting an effective plan to the petroleum officials. “During this critical period of time, the government and authorities are helpless, I believe they need help rather than demands. And this is our role.” He further elaborated, “we need to rise to the heat of the moment and contribute to reforming the sector, especially now that the Minister of Petroleum is overwhelmed with this wave of demands…people have been camping in tents for months at the Ministry headquarters, which is a heavy issue facing him.”

Eng. Dirk Warzecha, General Manager of RWE Dea Egypt, spoke briefly about the prominent company’s affairs saying, “currently, our biggest daily production comes from our operations in the Gulf of Suez, which is estimated at 20,000 barrels.” He added, “We are also very active, along with BP, in the West Nile Delta project and have partnerships with other companies in the Western Desert.” He assured the group that RWE Dea Egypt has plans for continued investments in the country, but made sure to include that, “any foreign investor seeks two main factors before initiating a project in any country: sustainability and reliability.”

Challenges facing the petroleum sector
The roundtable’s conversation about the upstream sector focused on a number of issues, mainly payment delays and lack of transparent strategy. Abdel Wadoud spoke about the difficulties created by a lack of clear strategy for the future in regards to Egypt’s market. “From a contractor’s point of view, ambiguity surrounds the strategies of this sector,” explained Abdel Wadoud, attributing this lack of strategy to low performance. “How would I study the market and figure out the volume of my investments, when there is no clear five-year plan for drilling operations, technologies needed and costs,” he asked the participants of the roundtable discussion. He went on to voice frustrations from producers’ points of view over the level of bureaucracy in the upstream sector, and also referred to cash flow issues plaguing the production sector.

“This sector has been an enclave and has managed to survive trembles,” said Abdel Wadoud, praising the oil industry’s ability to avoid nationalization over the past 50 years. “But nowadays, there is a level of uncertainty due to payment delays. Over the last 7 years, the Egyptian petroleum sector took a lot of loans to finance operating expenses, which shows that we do have a financial issue,” he continued.

Dr. El-Sharkawi agreed that payment delays were a cause of trouble for the upstream players. Noting the troubled state of the Egyptian economy and the hesitancy of banks to provide financing, he asserted that the upstream operators and the government need to be cooperating to solve the problem. “There are several solutions for this issue,” he offered, “one of which we have already agreed to by accepting that part of our payment is given in Egyptian Pounds, which is a violation of the contract.” Yet he is sure there is a solution that will be agreeable for both parties. He gave examples of several companies who have agreed to reschedule payments noting, “we have to be very pragmatic about how to fund our operations, yet at the same time, we should be helping the government.”

The group spoke next about the Personal Sharing Agreements (PSA) applied by the petroleum officials. Wadoud claimed that Egypt’s PSAs are “extremely generous,” speculating that “public authorities will probably be complaining in the future from the split of revenues and profits. This happened in vain in various parts of he world and it will likely take place in Egypt as well.” Wadoud, however, did mention the lack of transparency of the PSAs as a growing concern.

El-Sharkawi disagreed however, disputing the claim that PSAs in Egypt are too generous. “Our PSAs are standard ones, which come originally from Indonesia. The terms are similar and are applied in about half of the world,” he said, while explaining that the other hemisphere follows the Tax-Royalty system. Dr. El-Sharkawi proposed a public justification from the Ministry to clarify the reasons behind the system of PSAs and to explain how the shares of production are allocated. “I believe,” he affirmed, “that the terms of the PSA are a masterpiece, but their application is the concern.”

The Dana Gas Egypt President elaborated that a PSA should provide “contractual stability” since it is a law; modifications and approval must be made by either the Egyptian president or the parliament. “Cases of contract violations, from both parties have been documented,” he stated, “which is a very dangerous sign for investors.” El-Sharkawi warned that honoring PSAs is even more crucial than political stability, pointing out that “some countries are tremendously volatile, such as Yemen during the civil war, yet the businesses were not affected operations ran steadily with both the government and our company respecting signed contracts,” he insisted.

Turning the topic to the joint venture dilemma, Dr. El-Sharkawi stated that he is “not really a fan of joint ventures in Egypt in terms of structure. They tend to be more like employment schemes.”

Meanwhile Warzecha stressed the importance of the sector’s reliability as a core factor in attracting foreign investors to conduct upstream operations in the country. He noted that contract reliability is “extremely vital for foreign investors as it enables them to securely implement a time-planned project.” He highlighted that investors will be encouraged to initiate bigger projects, increase their spending and deliver high-end products. “For instance, the company’s portfolio in Egypt is very important for us compared to our portfolio in other regions, due to reliability factors,” he concluded.

Weighing in on the same issue, INA Exploration & Production General Manager Mario Weisser asserted that the Egyptian authorities respect their commitments with foreign investors. “Major changes have been taking place since the Revolution of January 25th and though the current conditions are not quite stable, the petroleum sector makes many efforts to maintain its contractual reliability,” he offered.

Warzecha explained that one of the obstacles that has come up due to current political instability is the lack of efficient decision making. “This can lead to the postponement of major projects and can affect the sustainability of the whole sector,” he warned. “Such a problem should be immediately solved.” He noted that some government entities are trying to overcome this issue. RWE is primarily involved in the natural gas sector and Warzecha insisted that EGAS has been in close communication with the company and pushing their operations forward to “avoid any delay or reschedule of any plans.”

Eng. Mamdouh Mahfouz, President of Amak Company agreed with the general sentiment of the roundtable participants that “bureaucracy, lack of quick decision making, payment delays… all have existed since the January 25th Revolution.”

Geologist Magdy Wedad, PICO Energy PIS Managing Director agreed and went as far to say, “The Ministry of Petroleum lacks a clear policy. What are the rules, objectives and long-term plans? No one knows! All we hear is that the Ministry is working hard to lure more investments into the country. But how and what types on investments? This is undisclosed!.” He continued, “the service companies in Egypt lack a strategy because all decisions are made internally. The announced targets of the Ministry [of Petroleum] are very vague and hence we cannot set our own goals for the petroleum industry.”

Tendering System
A brief discussion about Egypt’s tendering system brought a few concerns to the table. Dr. El-Sharkawi spoke specifically in terms of cost recovery. “It was suggested that we should renegotiate our contracts and cancel all terms related to cost recovery in order not to go through the tendering process and accept lower quality just to save money.”
Weisser’s comments on the tendering system clarified that INA ran out of concessions and is looking for new bid rounds, whether or not the tendering system will be modified. “We are eager to reinforce our investments in Egypt and this why we want to get listed in new bid rounds and acquire new concession areas. The petroleum authority will definitely respect its commitments with foreign investors in order to avoid sending any negative messages that would certainly harm the rate of investments,” he declared.

Oil & Gas Finance
Helmy Ghazi, Head of Structured Finance for HSBC Bank Egypt, who has 13 years of experience with the petroleum industry, answered some questions related to the involvement of private banks in financing the petroleum industry. “Most of today’s discussion revolved around the problem of payment delays, but unfortunately I do not have a solution for it. In my opinion, there is always a first step to solve any issue and in this case, I would recommend having more transparency of finances.” Ghazi suggested. He mentioned that national companies provide clear figures to assess credit risk as an initial, durable solution. Employing a reputable auditing company would provide in-depth assessment of each company’s financial statements as well as consulting services regarding any resulting difficulties, he argued. He assured the group that “transparency will undoubtedly open diverse financing channels for national companies.”

When asked by Mahfouz about the financing of projects led by private oil and gas companies, Ghazi explained that the private sector provides all needed documents, including financial reports and assessments conducted by well-known auditing organizations, which makes them more attractive to banks. Ghazi recommended the Central Bank of Egypt’s list of accredited auditing firms for these services.

Ghazi touched again on the subject of payment delays, but noted that they are not the sole financial obstacle facing the petroleum sector. He cited the bill of subsidies as another heavy burden on the industry. Additionally, he referenced the dilemma facing the oil and gas sector regarding accuracy of assessments of Egypt’s reserves. “The Ministry of Petroleum publicized specific counts for the country’s oil and gas reserves, which contradicted the ones announced by Wood Mackenzie.” Ghazi finished saying, “it all leads back to the core issue mentioned earlier: transparency of finances.”

Developing Human Resources
Ms. Hanan Abdel Moneim, Assistant General Manager for Business Development at the Petroleum Marine Services (PMS) stated that the driving force behind any successful entity lies in the capabilities and competitiveness of the organization’s human resources. Currently preparing to discuss her PhD thesis on the topic, Abdel Moneim addressed the main issues that should be resolved in order to create a professional and productive work environment. She spoke about the decentralization of authority, the effectiveness of organizational charts, supervision, performance evaluation, equality and justice, interactive and transformational leadership and fair distribution. “Decentralization of authority is a roadblock that the petroleum sector has been facing for a long time,” explained Abdel Moneim, “the sector used to be run under the concept of circle of trust and connections.”  “The decentralization of authority will definitely have a positive impact on the employees’ competitiveness, which would in turn be an incentive for them to improve and enhance their work performance and have a fair and equal chance for promotion.”

Abdel Moneim urged top management to allow more room for middle management to take part in the decision making process. “This is a key variable for a professional and competitive organizational climate. The right of expression and contribution in the decision making process should not be exclusively for the top management. There should be a kind of integration between the A and B levels in order to convey experience to new generations who are supposed to take the lead one day.”

Abdel Moneim suggested a complete new organizational structure that would serve to strengthen all employees’ skills and improve their work performance. “Moreover, top officials should work on ways to improve decision making and work to increase the involvement of workers in making decisions and solving problems. There should be no centralization of authority’ on the contrary, there is a surging need for the delegation of authority to lower administrative levels to achieve the objectives of the sector” Abdel Moneim concluded.

Round-table Speakers

Discussion Chairman
Dr. Hany El-Sharkawi
Dana Gas President

Speakers (In alphabetical order)
Eng. Dirk Warzecha
RWE Dea Egypt General Manager

Mrs. Hanan Abdel Moneim
PMS Assistant General Manager for  Business Development

Mr. Helmy Ghazi
Head of Structured Finance, HSBC Bank Egypt

Geo. Magdy Wedad
PICO Energy PIS Managing Director

Eng. Mamdouh Mahfouz
Amak President

Mr. Mario Weisser
INA Naftaplin General Manager

Eng. Mohamed Fouad
EOG President

Eng. Sherif Abdel Wadoud
PICO Energy Managing Director

By: Yomna Bassiouni


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