Joint Ventures’ Aptness for UPSTREAM Projects

Joint Ventures’ Aptness for UPSTREAM Projects

By Sarah Samir

The notion of partnerships in the oil and gas industry is considered a key to success. It is no different in Egypt. There are different shapes of partnering in hydrocarbon projects – joint venture companies, joint stock corporations, and individuals partnerships. Yet, one form is much more suitable for the Egyptian industry than the other.

Any foreign investments in Egypt’s oil and gas industry must take the form of a joint venture with the Egyptian government represented by the Egyptian General Petroleum Corporation (EGPC), according to ‘Oil and Gas Regulation in Egypt,’ an overview published by Practical Law. And “the number of joint ventures that are currently working on the Egyptian upstream is 47,” specified in an exclusive interview with Egypt Oil&Gas EGPC’s Deputy CEO of Production, Diaa Eldin M. Kassem.

Why and how do joint ventures stand out in Egypt?  And in what way can the JV model be seen as a suitable business arrangement for the Egyptian upstream sector in particular?

The Parties of JVs

Almost 100% of the Egyptian upstream projects are handled through joint ventures. JVs in Egypt have more than one joint stock company that is totally owned by Egyptian firms. In the case of the Egyptian Projects Operation and Maintenance (EPROM), the shares are distributed with 50% held by EGPC, while Alexandria Petroleum Maintenance Company (Petromaint), EMC, Engineering for the Petroleum and Process Industries (Enppi), and the Petroleum Projects & Technical Consultations Company (Petrojet) each have 10%, and Alexandria Petroleum Company and Amrya Petroleum Refining Company own 5% of shares each. Having a 50% share in most of oil and gas companies, the Egyptian Ministry of Petroleum and Mineral Resources keeps a close surveillance of the country’s wealth, both through joint stock corporations and joint ventures.

EGPC’s Deputy CEO, Kassem, explained the ways in which an exploration joint venture is formed: “A concession’s work first enters a bid round. According to the existing regulations, companies compete in tenders until one of the international oil and gas companies (IOCs) wins the tender based on the best operational and financial plan. Subsequently, the IOC informs the EGPC and offers the development plan to be assessed by EGPC, and accordingly a joint venture agreement for a concession area is signed.” Through this process EGPC ensures that it is choosing its partners itself.

Following the contract signature, “once there is a commercial discovery, a joint venture is established to be 50% for a contractor and 50% for EGPC or the Egyptian Natural Gas Holding Company (EGAS),” noted Sharkawy & Sarhan’s Associate, Reham Eissa.  “The percentage is neither a part of profit nor a part of production; it is a percentage of shares as the joint venture does not own anything. The production percentage is always agreed upon in an article in the concession agreement.” The contracts specify that expenses of a project are meant to be covered by the IOC itself in the initial stage before a commercial discovery. Accordingly, the government is not borrowing money to invest in its own land, in return, it divides production between the country and the IOC.

In terms of the decision processes, the joint venture’s chairman is appointed from the local partner firm and the joint venture’s board is divided between the two partners proportionally, yet, any decision taken by the joint venture should be approved by the Egyptian partner before it is processed, Reham Eissa further noted. This arrangement is based on the fact that the joint venture itself “plays [merely] the role of an operator in the Egyptian concessions,” as Deputy CEO of Production Diaa Kassem stressed.

JVs and Other Partnerships

Joint ventures are bound by a certain timeframe and a specific project to achieve their goals. Therefore, in Egypt, there is a shared rationale that JVs would represent the most viable partnering scheme.

In comparison to JVs, joint stock corporations and individual corporate partnerships are not limited in their duration to the same level. These other forms of partnerships may last for many years until the parties decide to close their operations. A joint stock company is a long-term commitment, according to Neil Kokemuller’s article Joint Venture Partnership vs. Corporation, published by Houston Chronicle Website. By incorporating different entities into a joint stock company, each partner is committed to continue running its own company with “the purpose of earning profit or serving the public” for an unrestrained period of time.

Given the nature of Egypt’s hydrocarbon fields, with a majority of the existing concessions being mature areas, these two forms of an industry partnership appear to be less suitable for the country’s upstream sector. Therefore, the Egyptian upstream sector has long before opted for the JV formula to execute hydrocarbon projects, as Deputy CEO, Kassem, stated.

In terms of the purpose, the structure of JV partnership is further determined by projects. Every joint venture is established to work on one. An overview of EGPC’s joint projects, published by Funding Universe, draws attention to Eni’s subsidiary in Egypt, the Italian Egyptian Oil Company (IEOC), which runs two joint ventures with EGPC processing two different projects in the country. One of them is Agiba Petroleum, which was founded as an operating JV to be responsible for exploration in West Razzak area in the Western Desert. Second one is Belayim Petroleum Company (PETROBEL) to process the operation of the Belayim field in Sinai and Belayim Marine in the Gulf of Suez.

Even though the two joint ventures are both formed by EGPC and Eni’s subsidiary, each of them is designated to process only one project in a given timeframe.

Governing Constraints

Joint ventures have some constraints that govern their operations on different levels. One relates to the government’s effort to supervise any action performed with the country’s hydrocarbon wealth. “A joint venture does not have the right to take any task or drill any well without referring to EGPC first,” Deputy CEO, Diaa Kassem, emphasized.

Similarly, while IOCs have flexibility in selling their stock, the supervision is implied. Diaa Kassem explained that “as the IOC finances the joint venture, sometimes it is unable to provide the needed capital or needs to invest his capital in a different country, and in that case it can give its shares in the joint venture to another company.” Hence, “IOCs have the right to sell their stocks in a joint venture to another partner, but it must be agreed by the EGPC,” he added. The government thus has the authority to inspect its partners and observe how their assets move. Under the same predisposition of government’s control of hydrocarbon production, “although a joint venture is to write its own agreements, yet those agreements should be approved by the Egyptian parliament before taking effect,” CEO, Kassem, said.

In similar veins, the Egyptian government wants to ensure that possible disputes within and without JV structures are handled carefully, again for the purpose of rational, effective, and efficient exploitation of the country’s hydrocarbon wealth. Therefore, it offers its supervision through the legislative process, which specifies the terms of dispute resolutions for JVs. In case of a dispute between the contractor and EGPC, it should be processed through arbitration in front of an Egyptian arbitration court. And disputes that erupt between the contractor and the Egyptian government are to be referred to the Egyptian judicial courts, such as the Cairo Court of Appeal.

These constraints are seen as the way to preserve the Egyptian wealth and establish good governance practices that would prevent undesirable ruptures in the industrial and business processes. Speaking of limitations, the issue of taxation necessarily comes into play.

Contractors are subject to Egyptian income tax law and must comply with the requirements such as the obligation to prepare tax declarations for the tax authority within the required timeframe. The advantage for JVs refers to the practice in which EGPC pays income tax on behalf of the contractor out of EGPC’s share of the petroleum, under the terms of the concession agreement. According to an article – Guide to Doing Business in Egypt – prepared by Lex Mundi member firm and Shalakany Law Office, the profits realized by oil exploration and production companies, are subject to a higher tax rate of 40.55%. Upon payment, EGPC provides the contractor with official receipts to confirm the transaction of IOC’s income tax within 90 days from receiving the following year’s tax declaration

Suitability of JV Model for Upstream Projects

It is no secret that oil and gas upstream projects comprise of a variety of risks; geological, operational, financial. Therefore, sharing these risks within a JV between partnering entities could guarantee that possible negative effects are mitigated. In the oil and gas industry, which relies on operations of a massive scale, both financially and practically, risk sharing mechanisms seem to make the JV model apt for the upstream sector. This would be the case for Egypt in particular.

Upstream sector in the oil and gas industry yearns for more joint ventures. Reasons are simple. Joint ventures allow for business expansion and growth without borrowing money. Moreover, members of joint ventures in general are not liable for each other’s debts.

The JV model further helps in developing new products and services. Furthermore, JVs are thus a productive framework for gaining access to additional resources including specialist staff and technology, sourced through the parties involved in the venture. JVs are even more attractive as they represent merely a temporary commitment, as mentioned in ‘What is the Difference Between a Joint Venture and a Partnership,’ published by Legal Vision website.

Unlike other forms of partnership companies, where the parties are “jointly liable for the partners’ obligations,” JVs are different, because “partners are not bound to other partners,” as mentioned in a Law Path’s article ‘What’s the Difference between Partnership Agreement and Joint Venture Agreement.’

A joint venture allows partners to share markets, to share profits, property, and assets, and to split risks. For Egypt, it is perceived as a mutually beneficial structure, which is helping the hydrocarbon industry to thrive.

Sarah Samir 3226 Posts

Sarah has been writing in the oil and gas field for 8 years. She has a Bachelor Degree in English Literature. She has three years of experience in the banking sector.


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