Mostafa Elshazly Senior Associate- Zaki Hashem and Partners Law Firm- Visiting Lecturer of Business and Energy Law.
Egypt’s integration history in the oil and gas sector dates back to late of the eighteenth century when the Egyptian Government was able to dig oil from Ras Gemsah in 1886, which marked the beginning of the country’s oil industry. Since then, a long journey of attainments and failures shaped today’s history of the Egyptian petroleum sector.
It is worth mentioning that the Egyptian petroleum sector plays a vital role in the Egyptian economy. According to Central Bank of Egypt data for the first half of (H1) 2019/20, the petroleum sector accounts for 12% of Egypt’s Gross Domestic Product (GDP), 37% of its exports and 17% of its imports. It also accounts for 10% of total investments. The petroleum sector implemented nine projects with investments of EGP 11.7 billion in H1 2019/20, according to the Ministry of Planning and Economic Development.
With the advent of COVID-19, the world economy was negatively affected, as the pandemic imposed unparalleled financial pain and endured uncertainty across most businesses. Those in the transportation, hospitality and energy sectors rank among the most severely impacted. “A crisis like no other.” This is how the International Monetary Fund (IMF) described the COVID-19 crisis. The Egyptian petroleum sector was not far away from the negative impact of the pandemic on the global oil and gas industry, it faced severe challenges; the pandemic paved the way for a staggering decline in the global oil prices, which made the year of 2020 began at around 63$ per barrel($/b), and dropped dramatically, reaching ed 20$ in April 2020. Meanwhile, demand for oil has dried up due to a slowdown of global business activity, reduction in international and domestic travel, all resulting from the lockdowns and other policies to contain the spread of the pandemic. Such situation had led to the glut of oil in the market and drove international oil and gas companies to cut back on their capital expenditures in petroleum E&P projects.
The year 2021 witnessed a slight increase in the oil price which coincided with the spread of Covid-19 vaccines, the gradual stepping down from lockdowns, and Organization of the Petroleum Exporting Countries (OPEC)`s decisions to increase production after limiting it due to decreased demand for oil during the pandemic. All the foregoing would be a crucial tool to bring the oil and gas industry back to normal situation.
The full impact of the gradual increase in the global oil price on the Egyptian petroleum sector, will unfold over the coming months, and I do believe that the longer the oil prices remain high, the more positive impact will be on the exploration and production segment. International Oil Companies (IOCs) might even benefit from a modest temporary price spike, as today’s massive decline in investment will result in tomorrow’s spot shortages. Thus, wise companies would seize the opportunity to tackle the weaknesses prevailed during the pandemic, so they are better prepared for a peak oil demand scenario by unlock the production.
Despite the global initiatives related to transitioning to a low carbon economy and the development of renewable energy projects, the Egyptian authorities have great hopes towards the oil and gas exploratory industry in Egypt; The industry still seems attractive and represents high potential for IOCs. That is why Egypt has announced, earlier this year, new international bid rounds for petroleum exploration and production (E&P) in 24 Blocks with high potential at the Gulf of Suez, Western Desert and the Mediterranean. Such bid rounds would be managed by the Egyptian General Petroleum Corporation (EGPC) and the Egyptian Natural Gas Holding Company (EGAS).
From legal perspective, Egypt`s laws and regulations regarding foreign investment in the oil and gas sector, alongside with other financial incentives beside the recent legislative reforms related to the liberty of the gas market are capable of creating a favourable environment for foreign investors to attract the foreign funds required in the upstream projects. Moreover, according to the 2020 Ease of doing Business Report, the process of starting a new business in Egypt became easier over the past year with the improvement of our “one-stop shop” system.
The constitutional framework for the exploitation of oil and gas resources organised briefly under the Egyptian Constitution of 2014, leaving the relevant laws to regulate the specificities of the oil and gas legal framework. Article 32 of the Egyptian Constitution stipulates that ‘All oil and gas resources, are within the control of the state […] Granting the right of exploitation of natural resources or public utility concessions shall be by virtue of a law for a period not exceeding thirty (30) years.’. In fact the Egyptian constitution states for special treatment for investment and its protection.
Apart from that, the model agreement, which has been adopted, by EGPC and EGAS for the development of its oil and gas resources is based on production sharing scheme. It has been often said that the production sharing model agreement with some regular updates/amendments has succeeded in attracting big players into the oil and gas upstream sector (e.g. BP, ENI, Shell, Apache, Chevron and Exxon Mobil).
All concession agreements in Egypt shall be promulgated by virtue of private laws, which supersedes any other legislation, and this is considered another layer for protection for investors.
To promote investment and introducing financial incentives for foreign investors, Egypt signed a large number of Bilateral Investment Treaties. This number makes Egypt on top of African countries who signed BITs. In addition, Egypt is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a valid arbitral award is enforceable without retrial of the merits if it fulfils the conditions of the New York Convention and the Egyptian Arbitration Law (no 27 of 1994). The conditions set out in the Egyptian Arbitration Law are the following: the arbitral award does not contradict a judgment previously rendered by the Egyptian courts on the subject in dispute; b it does not contravene Egyptian public policy; and c it was properly notified to the party against whom it was rendered.
From technical perspective, the blocks which are presented in the recent bid round enjoys high potentiality being located nearby producing wells with high productivity. In this respect, it is worth mentioning that Egypt enjoys a well-established infrastructure that ease the exploitation of the petroleum resources, i.e. the country maintains the largest refining capacity in Africa. Moreover, Egypt has two LNG export facilities with a combined capacity of 586 billion cubic feet per year (Bcf /year). As for the roads, Egypt’s road quality, according to a statement by Prime Minister Mostafa Madbouly now ranks second in Africa and 28th place globally, rising 90 ranks since previous years when it ranked 118th .
The significant increase in the domestic oil and gas consumption, resulting from the rise in the industrial and commercial sectors and increasing population is another key driver that encourages pumping investment in the E&P works.
The success stories occurred during the recent years in the Egyptian Petroleum Sector whether in the upstream or the downstream sectors prove in a clear way the favourable investment climate in the country and the fact that Egypt is an ideal destination for foreign direct investment. This is clearly shown in the development of the huge reserves in the Egyptian territorial water and the Exclusive economic zone in Mediterranean Sea, alongside with the enhancement and the expansion of the Egyptian refineries to increase its capacity and efficiency.
From social and political perspective, the relative stable political situation in Egypt, comparing to other neighbouring countries in the Middle East and North Africa (MENA) region, will pave the way to attract more investment in the Egyptian upstream sector in the coming few years.
To conclude, despite the challenges accompanied to COVID -19 pandemic, Egypt is still considered a promising investment destination for oil and gas investments.