Intangible Credit

The ministry of petroleum is relying on its long-standing relationships with investors based on a history of mutual success, but this will not be enough to provide reassurances for current and future investments if the industry’s finances remain unbalanced.

The debts and overdue payments issue has an effect on the entire petroleum sector and those who work in it, as the finances of the sector, as any sector, are what keeps it operational. The true threat it poses to the sector, however, lies in the effect it has on investors and their willingness to participate in and contribute to the sector. The end result of the financial mess afflicting the EGPC, EGAS, and to a lesser extent GANOPE is that investors do not get their receivables on time, as a consequence of the government not being able to get its financial house in order.

The traditional agreements model in Egypt stipulates that if the investor makes an oil or gas discovery, they are entitled to recover all of the costs paid in the operation from the government. The Egyptian government, represented by one of its entities (the EGPC for example), is to pay in either cash or in a percentage of its share of the resource itself. The latter is a problem due to the already crippling strains of local demand. The former has also become problematic due to the government’s liquidity problem, particularly in the petroleum sector.

At the core of the complications involved in paying back investors is the issue of cost recovery. The overwhelming majority of debts owed to investors are overdue cost recovery payments, which may discourage investors from committing further capital to the Egyptian petroleum sector.

BG Group for example, one of the biggest oil and gas companies operating in Egypt and one of those most heavily invested in the country’s petroleum sector, is rumored to be owed a number in the region of $500 million by the Egyptian government for exploration operations. Royal Dutch Shell recently handed back a Mediterranean Deepwater concession it had acquired after deeming it uneconomical due to the costs involved weighed against the potential gain provided by the current agreements model.

Another company owed money by the Egyptian government is Dana Gas, a UAE-based natural gas producer with significant investments in the country. Admitting that the company has had issues with receivables in Egypt, Dana Gas Egypt Chairman Dr. Hany El Sharkawi stated “We all know that the country is going through a financial crisis, and its not going to go away overnight. The whole issue is what the government is doing about it.”

He pointed to the fact that the government is speaking to the ministries from which it expects late payments, and that the issue of subsidies was currently being discussed, expressing overall optimism regarding the fact that the government was taking action to resolve the problem.

And it is this reputation for being a reliable partner that is currently serving as the Egyptian petroleum authorities’ last true asset to fall back on. Experts assure that the companies are not looking to pick fights with the governments despite the occasional tensions due to the fact that there is a long-term relationship in place. Foreign investors have been working with the Egyptian government and seeing desirable results for years, and the government is using the trust it has accumulated to counterbalance worries stemming from financial woes.

The second source of comfort for investors in Egypt’s petroleum sector is a policy that is relatively unique to Egypt. Petroleum agreements in Egypt are akin to law, requiring parliamentary review and approval. Once passed, they are considered to be on par with any other law in the country’s legal system, meaning that there is a direct legal obligation by both parties to abide by it. This means that effectively the investor’s receivables have to be delivered by the government as a matter of legal necessity within the framework of the Egyptian legal system.

But the guarantees will not last forever, particularly if facts on the ground indicate an inability to meet financial obligations by the Egyptian ministry of petroleum. Steps being taken are encouraging, but they are not all that can be done to salvage the situation.

The agreements model in place has got to be amended to take into account the rising costs of production, particularly with regards to deepwater and unconventional drilling, which requires highly advanced, highly costly technologies. Secondly, the issue of subsidies must be addressed, not only to rebalance the sector’s budget, but also to boost the image of the ministry of petroleum and the Egyptian government as a party that can be trusted to make the difficult but economically sound conditions.

Another area that can be looked into is LPG imports. In order to improve capital flow and boost liquidity, the ministry should work to expand the natural gas grid currently providing gas for domestic use, minimizing the need for LPG imports and saving on costs in the process.

A final proposition, made by a source within one of the major oil companies who refused to be named, was for the government to replace the ineffectual and illogical system of dividing its petroleum entities by area (EGAS, GANOPE), and instead adopt the model used by private companies. This would involve establishing entities for upstream, mid-stream, and downstream operations, allowing for more efficiency and transparency, as each organ would deal with the other as a financially separate entity, creating internal capital flow.

Whatever the government chooses to do, it must do it swiftly, as its long-accumulated credit of trust with investors will begin to run out if the debts keep building.

By Ahmed Maaty


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