By Alessandro Bacci, Independent Energy Consultant
1 — What is Egypt’s role in the O&G business on a global scale?
Egypt has been one of the first countries active in the petroleum extraction. In fact, the country has been producing crude oil for more than a century; Egypt’s first commercial crude oil production started in 1910 in the Sinai Peninsula. Today, according to BP Statistical Review of World Energy 2017, the country owns 3.5 billion barrels of proven oil reserves, which position Egypt as the 6th and 27th largest holder of proven oil reserves in Africa and in the world, respectively. Almost 50% of the oil production occurs in the Western Desert, while the remaining production is located in the Mediterranean Sea, the Nile Delta, the Gulf of Suez, and Upper Egypt (the latter is the southern part of the country).
Despite being a medium-sized oil producer with 691,000 b/d in 2016, Egypt’s oil consumption at 853,000 b/d is higher than its production (this is not surprising because Egypt has a population of 95.5 million), so Egypt has been recently obliged to import oil from other countries—mainly from Middle Eastern countries. Over the last forty years, oil’s share in total primary energy production has consistently been reduced (it was 95% in 1970 while it is today 44.6%)—of course, oil is the main fuel used for transportation.
However, the real added value in the O&G business for Egypt derives from the country’s natural gas reserves, which at 65.2 Tcf position Egypt as the 3rd and 16th largest holder of proven natural gas reserves in Africa and in the world, respectively. In 2016, Egypt was the third African natural gas producer with an overall annual production of 41.8 Bcm. Egypt’s natural gas sector started to expand at the end of the 1990s because of increased domestic demand and of the idea of exporting the excess natural gas as L.N.G. In 2009, Egypt’s natural gas production peaked at 62.7 Bcm, but, then, in 2010, production started to decline. The reason was that some of the offshore production areas in Mediterranean Sea had reached the maturity level while at the same investments were lacking because Egypt was slow in reimbursing the foreign contractors. On top of this, the oil price reduction in 2014 did not help attract foreign investments in the country.
The whole picture changed completely in 2015 when Italy’s E.N.I. announced the discovery of the Zohr field, a giant offshore gas field in the Mediterranean Sea at a depth of 1,450 meters with 30 Tcf of gas in place, of which 22 Tcf of recoverable reserves. In December 2017, E.N.I. started production at the Zohr field at the level of 350 MMcf/d. From this level, daily output is set to rise to about 1 Bcf/d in June 2018 and then 2.7 Bcf/d by the end of 2019. In addition to the Zohr field, other gas fields—West Nile Delta (recoverable reserves of 5 Tcf), Noroos (estimated reserves in place of 530 Bcf), and Atoll (recoverable reserves of 1.5 Tcf)—are increasing Egypt’s natural gas production. And the Egyptian Natural Gas Holding Company (EGAS) intends to launch soon a new licensing round centered on 9 blocks in mature areas in the eastern part of Egypt’s Mediterranean Sea. Later, this round will be followed by another round covering frontier areas in the western part of Egypt’s Mediterranean Sea. Summing up, there is a complete commitment toward discovering new gas reserves.
2 — In addition to O&G reserves, what is Egypt’s added value?
Geography and infrastructure. In fact, not only is Egypt gifted with O&G reserves, but also it is strategically located so that it is one of the world’s most important transit points for the physical trade of hydrocarbons. The Suez Canal is a transit waterway for oil and L.N.G. shipments, while the Sumed Pipeline (whose book capacity is set at 2.5 MMb/d) is the only alternative route in proximity of the Suez Canal to transport crude oil from the Red Sea to the Mediterranean Sea if tankers are not able to pass through the Suez Canal. If it were impossible to navigate through the Suez Canal or to use the Sumed Pipeline, tankers would be obliged to navigate around the Cape of Good Hope in South Africa. This would mean to increase both the costs and the shipping time. The Cape of Good Hope route would mean 15 more days of navigation to Europe and 8 days to 10 days more of navigation to the United States.
However, the recent natural gas discoveries throughout the eastern Mediterranean Sea in the offshore of Egypt, Cyprus (Aphrodite field, 4.5 Tcf; Calypso field, believed to hold 6 Tcf to 8 Tcf), and Israel (Tamar field, 10 Tcf; Leviathan field, 22 Tcf)—and with the future possibility of natural gas discoveries offshore Lebanon—for the time being, offshore Syria is completely out of the picture as a consequence of the civil war ravaging the country) has additionally increased the geographic importance of Egypt, which might become in the near future a regional energy hub with particular attention given to the trading and export of natural gas. The World Bank supports the development of Egypt’s role as an energy hub. It’s plausible that Egypt will be again a gas exporter in 2019. In any case, it is premature to know for how long Egypt will be a gas exporter—it depends on whether there will be new natural gas discoveries and on the country’s population growth. However, in addition to exporting its own gas, Egypt could export Cyprus’s and Israel’s gas. In fact, all the above-mentioned gas fields, the Zhor field included, are located very close to one another.
And, of all the mentioned countries, in addition to its advantageous geographical position, Egypt has already in place an export infrastructure. Egypt has two L.N.G terminals, one in Idku and one in Damietta. These terminals, which have a combined capacity of about 19 Bcm per year (Idku, 11.48 Bcm; Damietta, 7.56 Bcm) are currently not used. These terminals might well be used for exporting Cyprus’s and Israel’s gas. In addition, if Egypt were able to find a solution to its confrontation with Israel regarding Egypt’s shut off in 2012 of its gas exports to Israel via the El Arish-Ashkelon Pipeline, this pipeline (9 Bcm per year) would be again an important natural gas infrastructure in the region. Three arbitrators at the International Chamber of Commerce ruled that Egypt’s natural gas companies will have to pay Israeli Electric Corp. $1.76 billion for halting gas supplies. Instead, the future of the Arab Gas Pipeline, which connects Egypt to Syria and Lebanon, is difficult to understand considering the present conflict in Syria.
It’s necessary to underline that duplicating L.N.G. export infrastructure in all the involved countries would be economically illogical. At a time when it is quite important to limit both capital expenditure (capex) and operating expenditure (opex) per MMBtu of produced natural gas, building in Cyprus and/or in Israel export infrastructure already present in Egypt would eat away at the profitability of Cyprus’s and Israel’s gas exports. So, despite all the difficulties of the eastern Mediterranean geopolitics, collaboration among the involved actors—and, in specific, between Cyprus, Egypt, and Israel—would really go a long way in maintaining eastern Mediterranean natural gas prices competitive on the world markets.
3 — Is Egypt’s O&G fiscal framework attracting to international companies?
Egypt is one of the oldest oil producers in the world, which means that in the country there is a lot of experience in managing petroleum operations. Hydrocarbon production is by far the largest single industrial activity, representing approximately 16 percent of Egypt’s G.D.P. And the energy sector is the most important sector for foreign direct investment (F.D.I.) in the country.
Egypt’s petroleum fiscal framework has changed over the decades to reflect the evolution in the way of thinking how to structure a petroleum fiscal framework. Until 1962, Egypt based its framework on a royalty/tax system, then between 1963 and 1972 it moved to a participation system, and lastly, since 1973, it has been using a production sharing system.
The production sharing contracts that Egypt has signed over the years have had in general terms a positive result for both Egypt and the foreign companies—although it must be clear that unless a petroleum fiscal system has a lot of flexibility, which is always difficult to implement, it is improbable that it may always remain the same and give the same results over the years without any amendments.
One of the Egyptian P.S.C.s’ most attracting features to foreign companies is that in Egypt the P.S.C.s are enacted into law. In practice, this feature has always given foreign companies a lot of confidence that their investments are protected and upheld by national law. The downside is that, because of enacting contracts into law, it is then more complicated to renegotiate or amend the contracts—in fact, it’s required the approval of the Ministry of Petroleum and of Parliament. In addition, investments in Egypt are generally protected against expropriation, especially if there is a bilateral investment treaty between Egypt and the home country of the foreign investor.
When there is a commercial oil and/or gas discovery, a non-profit joint venture (J.V.) between the contractor company (50% stake) and Egypt’s competent company (50% stake)—the competent company may be the Egyptian General Petroleum Corporation (E.G.P.C.), the Egyptian Natural Gas Holding Company (EGAS), the Ganoub El Wadi Petroleum Holding Company (Ganope)—is established as a special joint stock company (the Operating Company). In all the contracts, the government is entitled to a 10% royalty calculated on the total quantity produced. However, Egypt’s competent company, and not the contractor company, pays the royalty. Similarly, the contractor company is subject to the Egyptian corporate income tax (C.I.T.), which for the O&G sector is set at the rate of 40.55%. However, who pays the contractor company’s C.I.T. is Egypt’s competent company, which pays the tax out of the competent company’s share of the petroleum produced and saved as defined in the P.S.C.
One of the challenges that continue to trouble the foreign companies investing in Egypt’s O&G sector is the issue of delayed payments. The Egyptian government is currently trying to pay out the remaining backlog of arrears to the I.O.C.s to encourage more foreign companies to invest in exploration and development activities, but this issue is still far from being fixed. The government had a peak of arrears at $6.3 billion in 2013, reduced to about $3.5 billion in March 2017.
In the past years, to increase hydrocarbons production, Egypt has offered more generous percentages for profit and cost recovery (expenditures with respect to exploration, development, and related operations). In specific, it raised cost recovery percentage from 35% to 40%. Still, along the same line, it was decided the abolition of the mandatory abandonment of part of the concession area every two years—the contractor can now present a new exploration plan for the concerned area and not abandon it.
This strategy has paid off because Egypt has signed several oil and gas exploration deals in the past years. With reference to natural gas, Egypt has signed natural gas deals according to which it pays foreign companies a higher price for the natural gas the companies produce—before the price was $2.65 per MMBtu, while the new prices range from $3.95 to $5.88 per MMBtu. In fact, before this contractual modification, some relevant gas discoveries remained undeveloped because foreign companies had not found any profitability in developing those discoveries at the previous prices.
The Ministry of Petroleum has established a joint committee to redraft the P.S.C.s and to introduce amendments that may incentivize foreign companies to enter Egypt’s O&G sector. According to the current timeframe, the committee should be able to present its result by the end of this year. One of the most important modifications should concern a reduced reimbursement period to stimulate foreign investment. The foreign companies already working in Egypt may forward suggestions to the committee. The basic idea is to provide the P.S.C.s with more flexibility, for instance, sharing production or surplus and, with natural gas, being able to modify over the course of the contract the price per MMBtu that Egypt pays to the foreign companies.
About Alessandro Bacci
Alessandro Bacci is an independent energy consultant in relation to business strategy and corporate diplomacy (policy, government, and public affairs). Much of his activity is linked to the MENA region, an area where he lived for four years. Alessandro is now based in London, United Kingdom (www.alessandrobacci.com), and he is a member of the Association of International Petroleum Negotiators (A.I.P.N.). A multilingual professional, Alessandro holds a Bachelor of Laws and Master of Laws from the University of Florence (Italy), a Master of Public Affairs from Sciences Po (France), and a Master in Public Policy from the Lee Kuan Yew School of Public Policy (Singapore).
(Source: Oil & Gas Council)