Layers of Dust… The Antiquated Practices Standing Between the Petroleum Sector and Transparency

The organic development of the Egyptian petroleum sector has long been curbed by the venal administration that has festered over the last decade, and keeping the public at arm’s length remains an essential tool in maintaining the status quo and quelling any shot at genuine reform; the public is on a need-to-know basis, and in the eyes of the government, the public seldom does.

“We need to have more transparency in the petroleum sector,” were the hopeful words of Eng. Sherif Ismail, CEO of the state-owned Ganoub El-Wady Holding Petroleum Company, stated during his speech at the North Africa Technical Conference of last month. The reiteration of these familiar words by a high-ranking ministry official raises the question of how transparent the petroleum sector really is.

Calling for completely transparent governance is simply unrealistic, but there is certainly room for improvement. Therefore, identifying which aspects of the sector are in dire need of transparency is key in taking the first steps towards constructive reform.

Where do we need transparency the most?
The lack of a coherent problem-solving strategy in the Egyptian petroleum sector is the main stem from which most complications grow.
The rapidly growing LNG crisis that has currently gripped the nation is a perfect example to the lack of problem-solving strategy. The petroleum ministry has yet to identify the source of the shortage. Instead, conflicting statements are issued from various government officials creating fear, confusion and panic-buying.

Eng. Hani Dahi, head of the EGPC, is blaming black-market operations for inciting an artificial crisis and expects the problem to fade away as the winter does, claiming that “demand reaches its peak during the last month of winter”; The Minister of Supply and Domestic Trade is condemning the Ministry of Petroleum for not providing the needed quota; The latter is putting the blame on the Ministry of Finance for not allocating money in the budget for importing the amounts needed to compensate for the shortage. Every minister is passing the hot potato to avoid facing the music while the public hangs by a thread.

Government procurement is another major area in which significant lack of transparency is evident. In the 2007 National Trade Estimate Report on Foreign Trade Barriers, a report published annually by the Office of the United States Trade Representative (USTR), several improvements were reported on the part of Egypt: US goods trade surplus, US goods exports, and US imports from Egypt all significantly increased. However, a point of contention was found in government procurement.

It is widely known that bids and tenders regulate almost all sector activities. In 1998 a law regulating government procurement was passed, stipulating that technical factors, and not just price,will be taken into consideration in awarding any contract. And while the law grants certain rights to investors such as, “a speedy return of their bid bonds and an explanation as to why a competing investor was awarded the bid over another,” the USTR report concluded that such explanation is rarely straightforward and is often misleading rather than informative. This unfortunate and counter-productive practice remains in use until today. And the failure to provide investors with clear guidelines to winning bid rounds is a major deterrent to their much-needed investments.

Another source of substantial anxiety for foreign investors is the issue of outstanding debts. Their concern, however, is not the actual debt, but rather the apparent lack of a transparent strategy that envisions the settlement of such debt. In the absence of a clear vision, investors naturally become more reluctant to hold a bigger stake in Egypt’s economy.
The pricing scheme of natural gas in the country is another critical aspect in need of more transparency. Professor Robert Mabro, a former director of the Oxford Institute for Energy Studies spoke at a Distinguished Lecture Series regarding some of the crucial issues found in the Egyptian oil and gas industry.

In his speech Mabro states, “there are EGPC supply contracts to Union Fenosa and Jordan. The prices are not published. It is said that the price to Union Fenosa is low. The highest number mentioned by observers of the Egyptian gas scene is $0.90 MBtu. Lower numbers, such as $0.65 MBtu are sometimes quoted. This is the price at the point of entry to the LNG plant. If these numbers are gross underestimates, EGPC/EGAS would be wise to publish the true figures in order to set the record straight.”

What Mabro is emphasizing is the problem of a lack of transparency on a much grander level of international deals. In essence, the Union Fenosa deal might involve the sale of gas at a lower cost than its domestic replacement cost. In fact, among the suggestions given by Mabro in his speech is the re-opening and re-negotiating of deals that might be unjustly costing the Egyptian government and thus the Egyptian people. However, the lack of transparency means there is little pressure on the government to ensure maximum benefit for the public from these deals.

How disastrous can lack of transparency really be?
In 2005, the International Monetary Fund released a Selected Issues paper on Egypt entitled Arab Republic of Egypt: Selected Issues. The fourth part of the paper discusses the oil and gas sector in the balance of payments. The introduction of this section lists two reasons as to why the sector plays a more prominent role in the country’s economy than what is depicted in the balance of payments data.

The first reason is that “crude oil exports are not recorded accurately. As a result, the oil trade balance consistently appears weaker than it should be.” This inaccuracy has misleadingly presented Egypt as a net importer of oil from 1998/99-2001/02. The second reason given to the distortion in the role of oil and gas in the balance of payments data is that “foreign direct investment in the oil and gas sector is also not recorded accurately.”

While an obvious lack of transparency is discussed in the paper, the problem is not presented as corruption, but rather the utilization of an outdated and inept mechanism of record-keeping. The paper states that the source of data used for the compilation of the country’s balance of payments is the International Transactions Reporting System (ITRS). The use of this system underestimates the inflows of Foreign Direct Investment (FDI), negates the sales of oil and petroleum products abroad by foreign companies, distorts financial transactions between the Egyptian General Petroleum Corporation (EGPC) and its foreign partners, and does not separate exports of gas in the official balance of payments.

The paper concludes, “due to the deficiencies in the recording of oil and gas exports, export revenues appear to have been underestimated by more than $1 billion per annum in recent years. Weaknesses in the recording of FDI inflows in the oil and gas sector have also led to under-recording, possibly by as much as $3 billion per annum.”

Almost a year ago Egypt Oil & Gas hosted a roundtable discussion in the presence of Eng. Said Zaki, then Marketing Manager of Weatherford, Eng. Hazem El-Shafie, Country Manager of MI SWACO at the time, Eng. Magdy Wedad, Managing Director of PICO Energy Petroleum Integrated Services and Eng. Ahmed Anwar, then Assistant Deputy CEO for Drilling in EGPC. When asked to name the first decision they would make if they were appointed Minister of Petroleum, they all pointed to the issue of increasing transparency as the first order of business, except of course for Eng. Ahmed Anwar, whose diplomatic answer neither confirmed nor denied the existence of a transparency problem.

Tackling a systemic problem such as transparency will always remain a challenge. Petroleum sector or otherwise, the issue is deeply rooted in the business culture of Egyptian society. Eradicating such an impediment, therefore, can only be achieved if approached in a top-to-bottom manner. In other words, it can only be realized when the highest ranks in the government decide to abandon the old way of doing business and allow room for genuine reform to develop.

By Shady Ahmed and Mohamed El-Bahrawi


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