Settlement of Outstanding Debts: The EGPC’s Sole Solution Sustaining Steady Foreign Investment

Amid these unprecedented and turbulent times Egypt is undergoing, the Egyptian Petroleum sector continues to face significant obstacles that threaten to impede the stability of oil and gas production. At the forefront of these obstacles stands the problem of outstanding debts owed to foreign petroleum corporations by the Egyptian government, which have currently reached over $4 billion

The gravity of this problem is reflected in the ultimatums given by foreign companies to suspend all drilling and exploratory operations in Egypt for the coming period.
The issue now has the undivided attention of the public opinion and experts in the field. There is shared anxiety over the complications that might arise as a result of these payment delays; the promise of continuing to attract foreign investment is now threatened by a debt crisis, a major detriment to the Egyptian Economy. 

In response, Egypt Oil & Gas Newspaper continues to investigate the challenging issues facing the Egyptian petroleum sector. Our team aims to present the public with a transparent view of the current situation in order to bring significant questions to light and seek their much needed answers from all parties involved, namely the Petroleum Ministry, the EGPC and the petroleum companies operating in Egypt. 

Alas, all these entities are forced to operate within a fragmented, corrupt and tremendously indebted sector, one that has ethically deteriorated during the leadership of the previous Petroleum Minister Sameh Fahmy. Therefore, any issue that threatens the sustainability of petroleum production in Egypt needs to be addressed with the utmost vigilance.
Experts and professionals in the Petroleum field have described the debt problem as a catastrophe since it adds a considerable strain to an already complicated issue mainly caused by Egypt’s chaos and instability, a byproduct of the revolution and its aftermath. Therefore, the EGPC is starting to move quickly to mitigate the damage and put an end to the debt crisis through setting a strict timeframe for settling all its debts, hence preventing any problem that could disrupt the flow of foreign investment into Egypt.

The Emirati Dana Gas has issued an official request demanding its overdue compensation from the EGPC for its supply of natural gas at the beginning of 2011. Yet, in spite of the increased tension, none of the companies have suspended production operations in Egypt.

Through its sources, Egypt Oil & Gas found that the EGPC has commenced a deal with BG (British Gas) to pay a total of half a billon USD from its outstanding debt, structured into three yearly installments with an interest rate of 1.5%. Furthermore, BG stresses that any further invoices are to be strictly settled at their scheduled time. This decision came after the Central Bank of Egypt approved the EGPC’s request to seek a $1.5 billion loan from international monetary organizations.

Experts in the petroleum sector noted that the EGPC’s initiative to set a timeframe for the settlement of its outstanding debts is the only solution for rescuing the production companies.  Thanks to an international cooperative effort, the required finances to accomplish such initiative are now being made available through three independent consortiums formed by JPMorgan, Morgan Stanley and BNP Paribas, which are said to provide the EGPC-owned International Petroleum Expert Ltd. with the needed liquidity to settle a portion of its debt.

A swift resolution for the outstanding debt issue is a priority, experts say, in order for petroleum companies (Both Arab and foreign) to shift their focus back to the development deals already commenced with the EGPC.

The EGPC’s decision to set a strict timeframe for settling its outstanding debts to production companies is integral in alleviating the tension between production companies and EGPC, says a high-ranking source in a major petroleum company. In an exclusive comment to Egypt Oil & Gas Newspaper, the source explains that debt accumulation is a result of the EGPC’s current inability to adhere to the contractual 45-day payment schedule.

The source then moves to explain the protocol by which invoices are usually settled.   The foreign partner firstly presents an invoice containing the quantity of produced oil and gas, which then goes through technical revision and assessment. If the assessment is positive, payment is delivered. In case of payment delays, contracts usually stipulates that the EGPC pays a delay charge that ranges from 1.5% to 2.5%.

The source adds that the EGPC’s initiative to set a schedule for debt settlement came after examining its fiscal status across both the financial and petroleum ministries. Since the beginning of 2011, the EGPC has been suffering considerable financial burdens; the increased demand for foreign petroleum products, which are purchased at international prices and then subsidized to meet the domestic market price, has left the EGPC in alarming condition, unable to remain on schedule for debt settlement.

The established protocol for compensating owed companies requires the foreign partner to administer the exploratory operations and preform the necessary technical assessment to determine the viability of the well. If the preliminary results of such assessment do not indicate a capability of consistent and steady production, the foreign partner is forced to relinquish his right to any compensation.

Conversely, if the preliminary tests on the well indicate a viability of steady production for three months, the well is then declared commercial and the responsible company is compensated from the profits of the well. Still, the allocation of profits to compensate production companies is also dependent on what is agreed upon in the contract. The source illustrates that while some production companies are paid 50% of the well’s profits (including the cost of exploration), veteran companies tend to receive up to 80% of the production profits. Production cost, he explains, is divided into investment cost that customarily settled within 4 to 5 years, and operational cost that is usually repaid within a three-month period.

Our sources in the Petroleum Ministry have confirmed that the EGPC has succeeded in coming to an agreement with international petroleum companies operating in Egypt. The agreement concludes that only 50% of the outstanding debt would be settled during the current fiscal year (2011/2012) while the rest would be paid a year later. Thankfully, the international companies agreed to delay the payment of $1.9 billion while continuing to operate in Egypt will full capacity.

Such an agreement a positive step towards safeguarding the EGPC and the sector as a whole, assuring that international companies don’t resort to lowering their budget for exploration and drilling in the wells they own in Egypt. Experts from the Petroleum Ministry note that the patience and flexibility shown by international companies is indicative of their interest in proceeding to invest in Egypt. The agreement can now allow the Egyptian petroleum sector to satisfy the market needs while still being able to proceed with exploratory and production projects, yielding stability in production and increase in Egyptian oil and gas reserves.

Experts consider the Egyptian Central Bank’s approval to raise the debt limit for the EGPC a significant step that would not only facilitate the importation of various petroleum products, especially butane gas, but also ease the EGPC’s process in acquiring loans. Such loans would also factored into the EGPC’s settlement schedule to assure the steadiness of exploration and production.

The Ministry of Petroleum needs to act quickly and with caution to resolve the debt issue, our sources add, in order to receive its expected reserves for the coming period. The petroleum industry holds great promise as it is managed through a well-defined strategy allows the industry to dodge threatening financial losses.

Several companies in field have also voiced their concern over this debt crisis, elaborating that such problem sits at the top of the challenges faced by the domestic and foreign entities operating the petroleum field. Not the mention the inefficient bureaucracy in commencing contracts and settling tenders, which usually causes tremendous financial losses to the companies, involved.  Moreover, the great delays in debt forces drilling and production companies to push back their operation schedules for the year, which negatively affects the total outcome of the sector.

International companies are doing their part to ease the situation by temporarily accepting compensation at a lower rate or in currency other than what is stipulated in their contracts while forging ahead with production operations. It is now up to the Ministry of Petroleum to ensure that they and the EGPC utilize the new loans toward repaying their debts while forming a long-term solution to prevent this problem in the future if they want to maintain interest and investments in Egypt’s reserves.

By Shady Ahmed


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