It should be obvious that an increasingly palpable sense of worry is creeping into the Egyptian energy market. Many observers feel that the existing mechanisms and policies are not sustainable let alone designed to facilitate growth and development.
Arrears resulting from governmental spending on energy products represent one such obstacle. In response to the ominous possibility that foreign, as well as national investors, will abandon the country’s energy sector unless debts are repaid, the Egyptian government recently took action. The government signed agreements with several foreign investors to reschedule petroleum debts, partially in an effort to signify to the broader sector that officials are trying to resolve existing problems.
The restructuring was also an attempt by the government to resolve current shortages. It was widely believed that declining production during the last period was the result of ambiguity concerning how and when payments would be made. International oil companies (IOCs) have intentionally fixed their production rates in the past due to delayed payments. An altogether unsurprising move, as Egyptian General Petroleum Corporation (EGPC) cannot demand increased production without paying the necessary receivables required to pay labour and import materials.
EGPC paid the equivalent of $1 billion as a tranche of the debts to the IOC’s. In consideration of the alarmingly low levels of foreign currency reserves in Egypt (down 50 percent since 2011), in April 2013 the government optioned to repay 25 percent of its debt to the IOCs in Egyptian Pounds. Although such payment is not a large amount compared to the overall debt, it shows that EGPC is taking steps to solve the problem of outstanding debts that constitutes a substantial obstacle to increased oil and gas production in Egypt. Whether the payments were enough to increase production remains to be seen.
The delayed payments have also taken a significant toll on upstream service companies. Seismic testing, drilling, equipment production, transportation, auditing, consultancy, logistics, environmental solutions and risk analysis are just some of the responsibilities of the upstream service companies that employ thousands of Egyptians. Recently, The Economist referred to such service companies as “the unsung masters of the oil industry” due to the fact that large oil explorers and producers are becoming increasingly dependent upon the technical expertise of these service companies. The current problem of arrears inevitably trickles down to service companies and acts as a disincentive via the decline of project volume and general stagnation in the sector. Liquidity, margins, and quality versus cost need to be addressed. Inactivity will inevitably result in service companies leaving the Egyptian market.
The abovementioned factors result in significantly increased operating costs for IOCs. It is not possible to compensate the IOCs for increased costs under long-term contracts and this will inevitably hinder future investment in Egypt. In order to avoid this and overcome current challenges, the government needs to develop strategies, mechanisms and polices for the petroleum sector. Increased exports, price adjustment, agreement reform, the promotion of technology and resolution of the subsidy issue will go a long way promoting economic recovery growth and development.
Ahmed Rashwan, Director of Assurance & Attestation Services, PricewaterhouseCoopers