By Emad El-Din Aysha, PhD
In February of 2015 we posed the question on the Egypt Oil & Gas website whether Data Packages for new bid rounds should be free, with these answer categories – Disagree, Agree, and Strongly Agree. The results have come in: 64, 109, 74. The majority agreed with our proposal while those who disagree were still outnumbered by those who strongly agree!
Remember that one of the arguments for pricing data is that it functions as a filter to screen out weak or bogus candidates. The Egyptian system is built on a series of filters or safeguards – beginning with data pricing, followed by bid rounds, and capped off by Production Sharing Agreements (PSAs), insuring the Egyptian side is in control of the whole process. The reality, however, is that these lines of defense can and have been breached thanks to flaws inherent at each stage of the process. Dr. Shawky Abdeen, PICO International Petroleum’s General Manager, has been a long-time advocate of providing seismic and well data for free or minimal cost, not least in these pages. His argument—as always—is that even a small oil or gas field discovery is “much more valuable than a few thousand dollars to collect from data sales.” This doesn’t mean that free data is a panacea though; there are still defects in the system. Information has to be combined with auction design (tenders and competitive bidding) and modifications to the overall regulatory framework.
Dr. Abdeen himself advocates studying the different country models on offer and the legal mechanisms involved to see which is most suited to Egypt’s situation. It’s all a question of balancing long-term revenue streams with short-term profits, issues that are now being raised round the globe by oil producing nations—and even by oil companies.
Size and Seismology
As we have established before, overpricing seismic and well data scares away the smaller, innovative, more flexible firms that can actually accommodate themselves to an individual country’s needs. This creates problems for the bidding process and even for PSAs. A 100-page study of auctions in the Indian petroleum sector by Anupama Sen and Tirthankar Chakravarty, of the Oxford Institute for Energy Studies found that companies in bid rounds actually had more information than the government, resulting in a handful of already well-established Indian operators dominating upstream oil and gas. E&P was being starved of foreign knowhow and money, with charges of corruption and collusive behavior to boot.
Part of the problem is that India’s Directorate General of Hydrocarbons does not enjoy a clear mandate over overseeing data collection or setting prices for bid rounds, in marked contrast to the US Lease Licensing Authority or the Norwegian Petroleum Directorate. Data is too dispersed across the system, with the Indian Directorate “staffed through secondments from ONGC and OIL,” meaning that there is “no clear separation of the regulatory function.” As a consequence the country’s oil and gas sector liberalization policy (from 1999) failed to boost reserves. Only estimated reserves went up; while actual commercially viable finds were few and far between, leaving India a net importer of fuel attempting to satisfy ever rising local demand.
Sen and Chakravarty were writing in 2013, before the January 2015 corporate espionage scandal that rocked the entire energy sector in India. According to Reuters, the government documents leaked by corrupt civil servants and former oil consultants were “used by some of India’s biggest oil companies to pre-empt unfavorable decisions or hurt rivals.” Even data on India’s coal production, power projects, and matters pertaining to national security—budget statements and top-level ministerial papers—were found, with fears that such “secrets may have fallen into the hands of foreign intelligence agencies.”
In Egypt’s case data packages and studies conducted on them are already traded internationally, during the duration of a concession contract, as the foreign companies in question legally own that information. An anonymous source, with experience in the public and private sectors, adds that IOCs only hand over a copy of the new data they have compiled to EGPC once their contract expires, although they are obliged to purchase the latest data packages for an area to enter a new bid round. This leads to needless duplication of effort, and expenses, while opening up even more perfectly legal avenues for information to be traded around thanks to mergers and acquisitions. EGPC and the Petroleum Ministry, moreover, have no way of knowing if a new entrant has access to this data, while companies that fail to strike oil don’t even have to hand over the original data packages when they leave.
Therefore, the Sen and Chakravarty position that seismic and well data should be treated like a “public good”—in line with Dr Abdeen’s opinion—is not to be trifled with. They also recommend that governments, as much as is possible, generate their own data instead of relying exclusively on the seismic studies conducted by international oil companies (IOCs). An example worth referencing here is Indonesia, said Lauti Nia Sutedja, Head of Information and Socio Cultural Affairs at the Indonesian embassy. The Center of Data and Information at Indonesia’s Ministry of Energy and Mineral Resources is in charge of seismic data generated by companies operating in the country. The Special Task Force for Upstream Oil and Gas (SKK Migas) at the energy ministry, however, produces its own “seismic line” data, information that is later turned into data packages in preparation for offering oil and gas blocks.
Information also helps level the playing field for small players competing against oil majors as it tempers larger companies bargaining power. Nigeria is a case in point, since a contributing factor to the civil war was the federal government’s 1965 decision to increase taxes levied on oil companies, which Royal Dutch Shell actually supported. The US embassy later discovered that Shell had been in “super-secret” negotiations over this law for over a year, hoping to harm its smaller American competitors, to cite Kairn A. Klieman.
Egypt almost fell into this trap with Bechtel, reveals Dr. Mustafa El-Rifai, former Enppi CEO and Egypt’s Minister of Industry and Technology from 1999-2001. In his book Crossing the Technological Gap he documents how Bechtel objected to rival companies from Europe or Japan partnering with Enppi. It dragged its feet over agreements previously made and busied itself instead with cataloguing the composition of the Egyptian petroleum sector, trying to cultivate connections at the ministerial level, specifically to scare off competitors.
Auctions and Alternatives
Egypt, like India, could do with a dose of data centralization too. GUPCO Chairman Abed Ezz El-Regal, at the EOG optimization convention, himself advocated for the pooling of data between Egyptian petroleum companies and authorities, along with the revisiting of old data for closed wells. This data could be shared with foreign firms, on occasion, speeding up the E&P cycle considerably, especially for marginal fields in the Gulf of Suez and Western Desert.
The Indian—and Egyptian experience—becomes all the more clear in light of the resounding failure of Mexico’s first experiments with competitive bidding, part of its own energy liberalization policy. Juan Carlos Zepeda, head of the country’s National Hydrocarbons Commission, told the Financial Times that this time around they made sure to disclose the “minimum price” early on. This is what is known as the “reservation price, below which you refuse to sell,” an important hedge against collusive behavior, says journalist and author Tim Harford.
Previously in these pages Harford had argued that auctions by themselves could not eliminate the possibility of cheating, especially when the number of bidders is small. Here bidders “only pretend to compete but instead are taking turns to win or instead share the prizes with each other.” A reasonable reserve price “limits the loss to cheats.” Note that with Mexico’s first auction only 2 out of 14 blocks were awarded, a predictable result given the small number of contestants. Sen and Chakravarty noted early on that a failing in the Indian system is that it does not rely on “reserve prices”—a character trait shared with the Egyptian oil sector. They advocate penalties for “defaults on commitments to drill wells” as another hedge against cheats, including non-financial punishments such as “requiring defaulters to carry out surveys in lieu” or imposing “restrictions on bidding.”
That being said, auctions’ underperformance is not the only problem. Another curious finding Sen and Chakravarty made was that many bidders regularly overvalue blocks “based on other objectives (sources of valuation), such as increasing an asset portfolio in the short term, or maintaining market share.” This can also result from internal corporate wrangles, to cite Dr. El-Rifai again. He found this in his experience with Braun Egypt, a joint venture company established in 1979 between Braun, EGPC and Petrojet.
Much like the Enron fiasco, Braun Egypt was practically bankrupt after a spending spree in under a year and half—to the point that both Braun and the Egyptian authorities had to send in crisis teams to audit the company accounts and purge managerial staff. Braun Egypt had its own accounts that were independent of the home company’s supervision, creating an opportunity for business figures eager to climb the corporate ladder and jump ship at the first sign of trouble.
General Manager of Beach Energy Samir Abd El Moaty voices other criticisms of the Egyptian bid rounds system. The whole process of relinquishing blocks, evaluating bids, and approving and ratifying new concession agreements can stall production for up to three years as these procedures are only sorted out one by one. Operators are already winding down their activities as contracts came to an end—disinvestment caused by cost-recovery considerations. A way to avoid these problems entirely is to grant extensions for 5 or more years as an incentive to drill new exploration wells, provided a company has a proven track record. As for bid rounds, the authorities now have a substantially large enough database to calculate what a block should cost, another tool to speed up the process.
On average it takes 3-6 months for a tender to take place and that is not taking into account the timeframe for approval by the Exploration Management and Bid Committee, adds Dr. Abdeen, noting that added incentives are called for with high-risk investments such as deepwater and offshore exploration.
Sen and Chakravarty themselves cite how a “giant” offshore gas find made in 2004 took “two full exploration cycles” for the discovery to be made following the launch of the liberalization policy in 1999. Production itself only began in 2009, and the development currently has just three producing blocks. More generally they found that auction results vary widely when it comes to “onshore, shallow-water offshore, and deep-water offshore.” Note that Egypt has been in competition with Israel and Cyprus in the Mediterranean since 2004, with internationally funded seismic studies going back to 1999.
The two authors also caution that offshore and deep-water auctions are more susceptible to collusive behaviour. Researchers, and regulators have repeatedly found that implicit market-sharing schemes often develop with firms that remain outside of the bidding process partnering with the winners afterwards. Restrictions on joint bids and the size of bidders are additional safeguards that have been used in the past. Israel’s persistent failure to market its natural gas finds, the largest in the Mediterranean until Egypt’s 2015 Zohr discovery, have resulted in part from anti-monopoly considerations and with some justification. There have been “rumors” of market-sharing schemes from the very beginning with data being traded around too, reveals another anonymous source.
The solution—again—is information; as the sheer size of offshore exploration blocks and the technological costs scare off medium and small companies from participating, says Michael Enachescu in the Canadian Society of Exploration Geophysicists (CSEG) Recorder. The oil juniors, moreover, are more sensitive to price fluctuations. In the 1990s many Canadian offshore E&P firms went bankrupt due to low oil prices, prompting many to “donate” their geological data to universities and government agencies so that future explorers would not have to start from scratch. Many in the industry then have advocated expanded models similar to the National Data Library used in Norway and China and the revival of the older Canadian system over the “mandatory release” of information—“reports and data resulting from most offshore technical programs, including seismic surveys”—with terms of confidentiality varying from 5 to 10 years from the date a program is completed.
It must be understood that foreign investors are data-hungry, says Dr. Magdi Nasrallah, energy expert and petroleum engineering professor. Even surface data is of use to them since such regional studies give them critical geological and geophysical information that helps reduce exploration costs considerably and avoid blowouts and other environmental costs. Tertiary or enhanced oil recovery (EOR) is particularly data-sensitive, explains Dr. Nasrallah, since specialized EOR firms need accurate estimates of how much oil is left in a depleted reservoir. Regular oil companies likewise need such data to avoid such costly reservoirs and tap into “virgin” wells instead.
According to Dr. Ahmed Noah of the Petroleum Research Institute, such generic regional studies are conducted in Egypt to gather geological data from time to time, but the studies are not proper seismic surveys. The high-tech equipment needed is simply out of the country’s financial reach. Mexico’s energy reforms, reveals The Oil and Gas Year, are in part meant to draw in companies with seismic expertise, both to generate new data and integrate “old” data into new models.
Enachescu cites the Australian model too as it relies on reinvesting the royalties governments earn from offshore leases into their own seismic research facilities, as well as hiring specialized seismic firms to build up their databases over time. Ahmed Farid Moaaz, Country Manager and Director for Sea Dragon Energy Inc., has argued before that the Tax and Royalty system should take the place of the PSA model for offshore E&P. The share of profits and production spelled out in the PSA system simply won’t cover the risks and costs involved, Moaaz argues. The same holds true of tertiary oil recovery, he says, preferring a gradual move from PSAs to service agreements to royalty payments over the duration of an oilfield’s lifecycle.
PSAs technically leave the government in control, but as Dr. El-Rifai found, the devil is always in the details. The Egyptian side has to insist on oversight over staffing and accounts, both during negotiations and after the contract signing stage. He even lists access to the foreign company’s mainframe and engineering blueprints as key criteria for approving partners to a joint venture, from experience with other recalcitrant IOCs and service providers who prefer to keep such critical information to themselves. Other preconditions he lists include a detailed appraisal of a company’s assets, contractual fees, engineering facilities and staff, their willingness to train Egyptian graduates and—last but not least—how “flexible” a company is when it comes to participating in projects requested by the Egyptian side.
Money, then, is no guarantee of sincerity. The larger the corporate winner, the more negotiating power it has over the government. The money Egypt makes from selling data is negligible when weighed against the long-run hidden costs of the policy. Moreover, the ultimate objective is to accumulate knowledge. That information can then be turned into profitable opportunities, and even more data along the way.
Special thanks to Wael El-Serag and Dr. Mahmoud Abu El Ela.