Upstream Anxiety: A Commentary on the Current Challenges within the Upstream Business Sector of the Egyptian Oil and Natural Gas Industry

The 2011 revolution transformed the Egyptian government and left a sense of vagueness in the upstream business sector in Egypt. Revisions of the current gas export agreements resulted in amendments to increase gas prices in order match the current international benchmarks.

The current political situation along with other factors represents a major concern to foreign investors. Although they view Egypt as a potential market for oil and gas investments, they are reluctant to invest because of the serious political and socioeconomic instability that significantly impacts their spending decisions and investment plans.  Consequently, major oil and gas producers in Egypt have been negatively affected by liquidity shortages caused by the significant declines in cash flow and foreign currency, the inevitable result of production decline. Some oil and gas companies witnessed a decline in gas production last year and are expected to fall short of expectations for next year.  Broader sectors that are high-energy consumers (construction and industry), not to mention the service companies that support the oil and gas sector, have also been affected as their operations are directly linked via supply to oil and gas exploration and production.

Simultaneous to decreasing rates of production and supply, domestic consumption of natural gas increased by approximately 5 percent in 2012 compared to the previous year, causing the government to reduce gas exports in an effort to meet growing domestic demands.  Ironically, Egypt reported an increase in natural gas export revenues by an average of 4 percent over the previous years’ reported figure (according to the Economic and Social Indicators report released in February 2013 by the state-run Information and Decision Support Centre (IDSC)).  The revenue increase is the result of gas price amendments implemented after the Egyptian revolution in early 2011. Cumulatively, these factors indicate that gas production in Egypt will y be utilized to satisfy insatiable domestic demand.  As such the government decision to import liquefied natural gas (LNG) was not altogether shocking.

In January 2013, the Egyptian government issued an international tender to import liquefied natural gas to meet domestic demand and announced that the industry will be allowed to import liquefied natural gas for the first time in the second half of 2013. The shift from exportation to importation produces several issues.  First, the issue of cost is considerable. The Egyptian government would need to pay about $10 per million British Thermal Units to import, based on Poten and Partners prices.  Second, the peripheral costs associated with LNG such as liquefaction, transportation, re-gasification and distribution, all factors that result in substantial price increases.  Third, Egypt doesn’t have a liquefied natural gas receiving terminal for LNG re-gasification, a substantial infrastructural problem. Taken cumulatively these issues prompt an important question: Can Egypt, given its current liquidity issue, afford to pay for imported liquefied natural gas?

One of the main challenges facing upstream business in Egypt is the huge debt owed by the government to international oil companies.  The Egyptian General Petroleum Corporation (EGPC) owes disconcerting amounts, in the range of 7 – 9 billion USD although the exact figure remains a mystery.  Taking into consideration that the Egyptian Pound, subject to a managed float, has weakened about 1 percent according to prices compiled by Bloomberg.  The estimate represents the lowest level in eight years and brings the decline of the Egyptian Pound, since the start of the January 2011, to 5.4 percent which coincides with a 58 percent plunge in foreign reserves over the period. These broader economic concerns when combined with the arrears problem have resulted in major multinational companies in the upstream sector to drastically decrease activities until the debts are paid.  One of the solutions the Egyptian government is using to reschedule debt is dependant on several short and long-term strategies. This includes securing a $4.8 billion loan from the International Monetary Fund (IMF), which is seen as the best rescue plan to restore trust in the Egyptian economy and get it back on track. In order to secure the loan, the International Monetary Fund (IMF) urged the Egyptian government to end its fuel-subsidy regime, which consumes nearly one-fifth of the country’s budget. Egyptian politicians have been reluctant to implement the measures, as it offers cheap food and fuel to tens of millions of impoverished Egyptians and will more than likely incite further political unrest.
Can Egypt overcome the liquidity shortages, debts and unrest?  I sincerely hope so, as broader stability will have the biggest impact on improving the upstream sector of the Egyptian oil and gas industry.

By: Ahmed Rashwan – Director of Assurance & Attestation Services – PricewaterhouseCoopers


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