On October 16, 2006 Egypt signed an agreement with China whereby the latter would produce three oil rigs for Egypt in 2007, seven in 2008 and 20 a year in 2010. This feature explores the motivation behind the agreement based on recent Chinese relation-building efforts with Egypt and its surrounding neighbors.
In his Little Red Book, Chairman Mao Zedong once wrote, “The people of the countries in the socialist camp should unite, the people of the countries in Asia, Africa and Latin America should unite, all peace-loving countries should unite, and all countries subjected to U.S. aggression, control, intervention or bullying should unite, and so form the broadest united front to oppose the U.S. imperialist policies of aggression and war and to defend world peace.” In the past few months it seems that China is continuing its legacy of relation building between Africa and Asia, the camps might no longer be divided into socialist and capitalist, but much has remained the same.
U.S. presence in many African and Middle Eastern nations has become an unwanted reality. Resistance to such presence has taken several forms, chief of which is violence. However, resistance comes in various forms and is based on several levels. On the international level, it appears the latest form of resistance to one country’s ambitions of global influence is simply cooperation between those countries which face the economic or political aggression of the U.S.
For years China has been economically giving the U.S. a run for its money, now it has taken its opposing strategies to new heights. In an effort to proclaim its economic supremacy to the world, China has taken its communist capitalism abroad. Starting with cultural exchange through a radio station in Kenya, which was launched on February 27, 2006 and the proliferation of the Confucius Institute in Africa, which promotes Chinese language and culture, China appears to be preparing for its long term presence in the African continent.
As opposed to a decade ago, China’s cooperation in Africa and the Middle East is no longer solely based on economy and trade, but also culture, education, science and technology and soon enough will follow military. It is however the economic ties which seem to be generating the most discourse.
Strengthening Sino-Arab Economic Ties
In 1991 Sino-Arab trade stood at $1.5 billion, this has skyrocketed to $33.8 billion in 2005. In 2004 negotiations on a free trade agreement began while the new China Arab Forum, consisting of 22 states from the Arab League and China, commenced. By the end of 2005, Arab investment in China was worth $700 million and Chinese investment in Arab countries stood at $5 billion. China is hoping to reach $100 billion in trade by the year 2010. The Chinese government is taking all necessary steps to assure that their goal is met. With Iran alone China has signed deals reaching more than $100 billion.
In terms of trade, China is the world’s second-biggest energy consumer and third-biggest importer and so their main motivating factor in Sino-Arab trade is securing energy sources for the years to come. At the moment, the Middle East and especially the Gulf deliver the majority of China’s oil, 58% to be precise. Seventeen percent of this figure comes from Saudi Arabia (equaling close to 500,000 barrels per day), making the country China’s biggest oil supplier, followed by Iran and then Oman. Specialists predict that by the year 2015 China will be importing 70% of its oil from the Middle East, which presents China with an inevitable relationship with the region. China’s largest oil refiner, Sinopec, is becoming the leading entity in most of China’s energy deals. With approximately 120 projects in the Middle East, the company is constantly seeking more opportunities in the region. The biggest joint venture in the petrochemicals industry was recently created between Sinopec and Kuwait Petroleum Corp. The $5 billion agreement was made in an effort to invest in China’s downstream infrastructure in the country’s southern Guangdong Province. Sinopec has recently signed another large agreement with the Egyptian government, as well as several deals with the strategic Arab state.
In 1956 Egyptian President Gamal Abdel Nasser was the first Arab leader to recognize the existence of communist China. On September 17th of the same year the first Egyptian Ambassador, Hassan Ragab, was received by Chairman Mao Zedong. The relationship between Egypt and China has truly stood the test of time; hence, recent cooperation between the two entities should come as no surprise.
In 2004, Egypt’s Ain Shams University initiated a Chinese studies center wherein students can learn politics, economics, tourism, culture and art in the Chinese language. The cultural exchange between the two nations was a telling sign for things to come.
In the same year the Minister of Trade and Industry, Rachid Mohamed Rachid, signed a memorandum of understanding worth more than $2 billion in Chinese investment in Egypt. In the first half of 2005 Chinese-Egyptian trade stood at $1.96 billion almost doubling the previous year’s outcome. Today, Egyptian exports to China range from cotton to plastics while Chinese exports to Egypt range from tobacco to radio transmission equipment.
The Chinese government is not solely basing its relations with Egypt on trade and investment; it is also pursuing technological relations with the nation. During President Hosni Mubarak’s November visit to China, the two nations signed an agreement for cooperation on the peaceful use of nuclear energy. However, the most lucrative and interesting agreement signed between the two countries would have to be the oil rig agreement signed with Sinopec.
Sinopec in Egypt
On October 16, 2006 an agreement creating a 50:50 Egyptian-Chinese joint venture with Sinopec was signed by the Egyptian Minister of Petroleum Sameh Fahmy. The new company, named Sino-Tharwa, was created in order to produce oil rigs for Egypt. Production will begin with three rigs in 2007, seven in 2008 and 20 a year in 2010. The rigs will be the first to be manufactured in not only the Middle East but Africa at large.
Another agreement which has been signed by Fahmy involves the exploration and discovery of oil and natural gas. The agreement was signed with Sinoc to cooperate in international tenders for the resources. These agreements have been signed in hopes of bolstering exploration and production of energy sources in the country. The agreements come at a time when the search for energy is brazed in the global imagination.
In Search of Energy: The Global Trend
In 1956 Marion King Hubbert proposed a theory to the American Petroleum Institute, which generated much skepticism from its audience. Today, not only is his theory etched in the minds of most professionals and academics, but it stands as a stanch warning to the people of the world. Hubbert’s theory was simple: based on the fact that world oil reserves are finite, oil reserves will follow a curvature life-line. Hence, after initial exploration and the intensification of infrastructure, oil production will increase reaching a peak point after which oil depletion will begin.
“Peak oil” has become the term of the century. Governments deny it, producers await it, citizens fear it and economists do little to prove or disprove it. In 1971 the U.S. announced that it had reached its peak point. Thus began the international search for oil. What some called diversification of oil supplies; others saw as securing what little energy the world had left to offer. Eight years later and the OPEC oil price shock occurred. The world began to notice a certain propensity that associated oil with political instability.
More recently, following the war in Iraq and the Israel/Lebanon war, the latest concern is whether Iran will be the next target of international aggression. This concern has caused states to preemptively defend their energy needs. Iran currently controls 10% of the world’s total proven oil reserves and has the world’s second largest proven natural gas reserves and while it might seem a sound idea to be on the country’s good side, being part of the all too topical “axis of evil” makes the nation an unpredictable oil provider.
As one of the world’s biggest oil consumers China is taking all necessary steps to assure that it does not rely on just one oil supplier, especially if that supplier might soon be going to war. Following in the global trend of diversification, the nation has decided to play a greater role in exploration and not only consumption. The prime example of this can be found in Egypt, where China has invested not only in already produced oil, but more importantly in the exploration for that oil.
In Search of Rigs: The Egyptian Bend
As most intelligent businessmen do when it comes to investment, China has found a country with energy potential, located a weakness and decided to invest in strengthening that weakness. The country with energy potential is Egypt; the weakness is its rig market.
In 2000 the Egyptian Ministry of Petroleum decided to restructure its activities and give natural gas more attention. Since their ministerial renovation, Egypt has made 227 new oil and gas discoveries. Exploration, and consequently discoveries, requires rigs. The Egyptian rig market today consists of 89 rigs. This is an improvement on the 76 rigs of 2005, but for the potential of Egyptian natural resources this figure leaves much to be desired. Eighty-nine rigs can barely cover proven reserves, let alone new discoveries.
It can be said the new agreement with China will partially solve the problem. And as a short term solution it seems to be apt, but for the long term, the introduction of 20 rigs by the year 2010 does not do much for a market which has just had more than 200 new discoveries. For the short term, this agreement seems to work on several levels. It provides much needed rigs, strengthens relations with a new and powerful ally, and boosts investment in a country trying to develop in hopes of catching up with advanced economies.
There is also another problem with the rigs that will be produced under this agreement: they will all be land rigs most of which are work over rigs. These rigs cannot be used for exploration, which is what is truly needed in our overly consumptive age; if new reserves are not found then conservation efforts must be pursued and it would be foolish to believe that such efforts are being seriously pursued by the world at the moment.
But why not manufacture rigs here at home? Technically speaking, Egypt has the know-how and the resources to build their own rigs. Simply put, it all boils down to economics. China’s steel is incredibly inexpensive, especially compared to Egyptian steel, an industry which relies on subsidized energy. So, the rigs that Egypt would produce using their own steel would consume as much oil as it would produce. Also, China has numerous rigs, which just need to be renewed. There is also a political strategy at play; while China is engaging in diversification of energy sources, Egypt is engaging in diversification of international relations.
The problems of the rig market become even clearer when the figure of total rigs is dissected. Forty-six of the 89 rigs in Egypt are contracted by the Egyptian Drilling Company (EDC). EDC’s virtual monopolization of the market makes new contractors hesitant to enter into a seemingly restricted field; when your main competitor is the government it is highly unlikely that the natural laws of an open market will prevail. However, the above is just the tip of the iceberg when it comes to the problems of the Egyptian rig market.
Problems of the Egyptian Rig Market
In 2005, Egypt had approximately 14 rig contractors: the Egyptian Drilling Company (EDC), the Egyptian Chinese Drilling Company (ECDC), Atwood Oceanics, Dasco, Gharib Oil Company, Global SantaFe, Precision Drilling, Pyramid, SAPESCO, Challenger, Transocean, Saipem, China Shengli and K. Energy. In 2006, this figure has slightly dwindled, with contractors either not operating in Egypt, as is the case with Challenger, or having sold off their international divisions, as in the case of Precision Drilling.
For the utilization of international rigs, figures have been encouraging. In 2005 utilization was 83%, this year it has climbed to 95%. Regionally speaking, utilization in Africa has increased 26% rising from 73% to 99%. This improvement however was mainly due to Algeria’s augmented utilization. It is of great importance to note that when utilization of rigs increases so does the need for new rigs. But, in the Egyptian market it is not only the amount of rigs available that present a problem for potential investors.
If the government was asked to name the problems of the rig market their answer besides the lack of rigs would be that operators do not fulfill their obligations when it comes to rig rental contracts. They hinder the full efficient utilization of rigs by extending their duration due to poor planning and execution. However, if one were to ask contractors what the problems of the rig market are they would say that there are two main predicaments that face the market; the first is the pricing rate.
The Problem of Pricing
According to Ayman Abbas, managing director of the Egyptian Chinese Drilling Company (ECDC), regarding the Egyptian rig market “the major drawback that we must stress on is the low price rates of rigs in the Egyptian market which are 30-35% lower than other surrounding countries.”
To comprehend the pricing strategy of the market one must keep in mind that, as contradictory as it might sound, pricing does not always amount to money. Egypt as opposed to surrounding markets provides a stable environment in which a contractor can operate. The possibility of a coup or a drastic change in policy is more unlikely than in the surrounding areas of Africa and North Africa.
Not only is Egypt more politically stable, but it is also more contractually stable. Rig contracts in Egypt are long-term and are ratified by the parliament, giving them more permanence in legal terms. The government assures contractors their due payments, an assurance which is not always provided in other nations. In addition, there are more proven wells in Egypt to work on.
So, while Libya might have an average daily rate of $120,000, a contractor is not guaranteed his payment, nor is he guaranteed his stay in the country. However, in Egypt where the daily rate might be $50,000, the contractor will receive his money and is assured his prolonged stay.
The Problem of Personnel
The second predicament that confronts the market is personnel. In Egypt, as it is around the world, finding reliant and experienced crew members presents a problem. But unlike other countries, Egypt’s educational system does not properly develop its abundant human resources. Abbas makes an apt comparison between Egypt and China, yet another nation with copious human resources. He states that “in Chinese universities, for instance, graduates can get a degree in petroleum engineering with a specialization in rigs only.”
China has a mass amount of rigs, so it seems only natural that they have a specialization in an industry which they obviously dominate. Egypt has 89 rigs; to have a specialization in a field that barely exists seems a bit odd. This does not justify the exclusion of knowledge in any field, but it does explain the situation.
In Egypt, there are some universities, including the renowned Cairo University, that have petroleum engineering departments, but they have yet to enhance their specializations. According to Dr. Ashraf Sabry, a Mechanical Engineering professor at the American University in Cairo, the university is currently “studying the possibility of creating a petroleum engineering Major.”
Until more universities accommodate for the rising need for trained professionals, the private sector will just have to solve this problem themselves. And for the time being, they have. Abbas along with other contractors, chief among them being the EDC, have compensated for the lack of experienced personnel by creating training centers.
These training centers however are based on experience. A person learns on the methods of trail and error and not on specialization. People are trained to operate the machines that are available and not to operate all machines; their level of expertise is not as honed as actual professionals. But, for the moment, it suffices for the purposes desired.
According to Dr. Ahmed Rashdan, President of Tiba Investment Group, another problem that faces professional labor is “immigration of experienced personnel; many people work abroad due to the higher salaries they get in addition to the more advanced technology that is provided there.”
Language is yet another problem that faces personnel. The rigs provided by China come with Chinese manuals; these manuals cannot be comprehended by Egyptian workers. This means that in either case, even if Egypt did have trained professionals, they would still confront a lingual barrier. This is solved by bringing in Chinese workers. Egyptian labor laws regulate the amount of foreign labor that can be brought into any company. The ceiling is put at 10%, meaning that if a rig has 100 workers, ten of them can be Chinese, and usually are, but on the bright side 90 are Egyptian signifying emerging employment with the recent agreement.
The Chinese are Coming!
The recent agreement with China and Egypt is a telling sign of a political shift in the international arena and an economic shift in Egyptian policies. China is swiftly becoming a dominate force in the global market. From its stance, it sees economic cooperation as a foot in the door towards political and military cooperation. This is an accurate attitude; China has managed to make several agreements with close U.S. allies without putting the nations in any awkward position where it must choose sides, after all they are only trade agreements and the U.S. cannot very well stand against its founding principles of capitalism’s open markets.
China is also strategically securing its growing energy demands by not solely purchasing oil and gas, but helping in the process of its exploration. The recent Egyptian agreement signed with Sinoc to cooperate in international tenders for the resources is an excellent example of this.
From the Egyptian standpoint, the reliance on one international power, namely the U.S., is perilous, whether this reliance is economic or political. Egypt’s rig market is satiated with problems. A few more rigs, while they will not completely solve the problem, do alleviate the pressure off the market providing time to think of other solutions.
This agreement benefits both sides equally. In basic terms, Egypt needs China as much as China needs Egypt. The cooperation between the two countries provides each side with a certain assurance towards the future. For China, this assurance is energy, for Egypt it is trade and investment. This is a strategic alliance that goes far beyond the mere need for rigs: these agreements directly tackle the real issue for the entire East, and it is the need for development through cooperation. While not as militant as Chairman Mao Zedong, Chinese policies are uniting what were at once marginalized international entities not to “defend world peace” yet, but to develop world economies.