More flexibility needed to lure investments, Oil refining companies will not be exempted from taxes

Egypt was about to take a step towards expanding its refining sector after the financial crisis and a new tax regime applied to the country’s industrial zones have already hampered plans to upgrade Egypt’s refining capacity

The economic committee of Egypt’s People’s Assembly (PA) was arguing to exempt oil refining companies from taxes for 10 years, but the last minutes witnessed the rejection of Ahmed Ezz, the Chairman of the Planning and Budget Committee of the People’s Assembly.

In the presence of leaders of oil companies and some of the People’s Assembly, it was agreed to respond to the proposal of the Parliament Member Ahmed Ezz which granting the refining companies all the benefits of the free zones but won’t grant the full tax exemption. 

The exemption is limited to taxes and customs duties on products that are exported to the Egyptian market, local only, and it was agreed to print a report of the Committee to provide Assembly’s discussions with it during the amendments of the law. 

The last month has witnessed a controversy because of the insistence of the Ministries of Petroleum and Investment to grant full exemption to the oil refining companies, especially after two refining companies have pulled out their investments in Egypt in the last period after knowing the abolition of tax exemptions, particularly as Egypt is one of the countries that a number of investors are eyeing as a strategic location for new refinery facilities.

Eng Sameh Fahmy, the Egyptian Minister of Petroleum, has also asked that oil refineries should be exempt from Law 114/2008, which stipulates higher fuel prices for energy-intensive industries. Moreover, he stated that oil refining should not be considered energy-intensive.

“The parliament had originally wanted to continue without those incentives for energy intensive industries but we reached a compromise to reinstate them for 10 years,” Hamdi Abdel Aziz, a spokesman for the Egyptian Ministry of Petroleum, said. “The breaks could be renewed later on.”

Tax and customs breaks for refineries in the free zones were cancelled in May 2008, adding 20 percent to refinery costs. Oil investors complained that the taxes could dent their plans to invest in the expansion of Egypt’s refining industry.

“Several planned projects were brought to a halt after investors feared they would not be making enough profit,” Abdel Aziz added.
Egypt has the largest refining industry in Africa, with nine refineries that have a combined crude oil processing capacity of 726,000 barrels a day.

However, in light of international demand trends, the country needs to investigate opportunities to further expand this capacity. Hence, there are two ways to achieve this goal: either to raise the capacity of existing refineries or to add new ones.

The maintenance of existing refineries and some increases in their capacities are the responsibility of the government. However, increasing the efficiency of government-owned refineries is a good but costly option.

In choosing to add new refineries, there are two possible ways of approaching the issue either to build more state-owned refineries or to encourage private investment in the sector. If you cannot approach the private sector, you will have to do your own projects for new refineries. While approaching the private sector is the new concept since seven out of the eight refineries in Egypt are controlled by the Egyptian General Petroleum Corporation (EGPC) – and the government has a stake in the eighth, MIDOR, which is located in Alexandria.

There are at least four refinery projects in the works in Egypt. According to the EGPC, there are two projects to build new refineries currently in the pipeline. Both projects are to be established through a partnership agreement between private investors and the state-owned oil company. The Egyptian Refinery Company (ERC), the first of the two projects, which is primarily owned by private equity firm Citadel Capital with a minor stake owned by the EGPC, will set up a refinery with a capacity of 4.2 MMT annually.
For the second project, Sokhna for Refining & Petrochemicals will establish a refinery with an annual capacity of 6.157 MMT.

Last July, Eng Sameh Fahmy announced plans to build a third refinery, which will be established by the EGPC in partnership with unnamed investors for $9 billion. The minister said that the refinery and petrochemical complex should be operational by 2010 and will either be located in Port Said or Gamasa. While the investors have not been named, there has been speculation by some that the Indian Oil Corporation Ltd. will be among the partners involved. The Indian company has been reportedly considering investing $9 billion to build a refinery near Port Said or Gamasa.

The fourth planned project will be in cooperation with the Libyan government as part of its plans to invest up to $10 billion in Egypt. Plans to build an oil refinery west of Alexandria were announced by the Libyan government last year. And involving the private sector to expand refining capacity is highly likely to translate into profits.
Egypt possesses a number of characteristics that make it a congenial location for foreign investors to build these refineries. There’s a possibility for exporting some of the oil products, real estate is cheaper, labour is cheaper here than elsewhere and there is already an established refinery industry.

There are other factors that make Egypt well suited for refinery projects are that we have know-how in Egypt, so we have the people aspect. In addition to that we have a good location, we have good supply lines and we have the ports for export, besides having a large consumption in the local market and in the surrounding markets in the northern Mediterranean. Nevertheless, we still need a more flexible tax system to complete the chain and to attract and approach the private sector if we are targeting to expand our refining capacity.

Moreover, recent changes in free zone regulations for energy-intensive industries have also altered the calculus for foreigner investors. As part of legislation to fund salary increases and increased government spending passed on May 5, the free zone status of energy-intensive industries has been revoked, although some existing projects have been allowed to keep their free zone status. These changes were the primary reasons behind the Kuwaiti Al Kharafi Group’s decision to pull out of plans to build a refinery complex in Egypt. It is also rumoured that two Indian companies – Essar Global and Reliance Industries Ltd. – are reconsidering planned investments in refining facilities in Egypt for the same reasons.

However, if these obstacles can be overcome, Egypt has the potential to become a more powerful player in the worldwide oil and gas industry.

By Ahmed Morsy


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