Oil and debt in Egypt

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Debt Problem

Egypt has been delaying payments to oil drilling companies as it struggles with dwindling currency reserves, rising food bills and sliding tourism revenues since the 2011 revolution that overthrew former president Mohamed Hosni Mubarak. The government owes at least US$5 billion to international oil companies, half of which is overdue. The growth of debt owed to IOC's highlights the country's struggle to meet soaring energy bills while subsidizing prices to avoid public unrest. The government's delay in paying its debts to oil and gas producers could hold back investment in the sector and potentially endanger Egypt's energy security. [1]

The debt problem is directly linked to the energy crisis that has taken place in Egypt, as IOC's were forced to export their share of crude oil directly to third parties rather than sell it to the Egyptian General Petroleum Corporation (EGPC) and risk further debt exposure. This has not only deprived Egyptian refineries from feed-stock but has also triggered a surge in imports from foreign suppliers.[2] Moreover, the increasing demand caused by Egypt’s on-going fuel shortage has exacerbated the problem as EGPC has been redirecting oil resources, otherwise intended for export to the international market, for local consumption. The lost revenue from decreased exports in addition to the need to subsidize increasing imports has worsened EGPC’s struggles to pay foreign drilling companies.[3]

The central problem is Egypt’s practice of importing oil and gas at international market prices and selling locally at subsidized prices. This not only encourages waste but also means that the state oil industry is now operating at a loss. The state bill for energy subsidies has climbed to almost US$16 billion a year, representing about a fifth of the government’s entire budget. The cost of imported petroleum products was US$5 billion in the 2012 fiscal year.[4]

According to official figures released by the Ministry of Finance in its March 2013 monthly publication, the total external debt reached US$38.8 billion at the end of December 2012, in addition to US$5 billion provided by Qatar and Libya during the April 2013, which brings the total debt to nearly US$43.8 billion.[5]

Egyptian General Petroleum Company

EGPC has been facing difficulty in repaying its obligations to foreign oil and gas companies on time, and so in 2011 it came to an agreement with foreign companies to continue operating while paying the overdue obligations on a timeline that extended through the end of the 2012 fiscal year at interest rates between 1.5% and 2.5%. Despite the deal, in October 2012 a number of companies requested that EGPC settle its debts in a single payment. Financial obligations to international oil and gas exploration and development companies are one of the largest consistent burdens on the state-run company. In July 2012 alone, the EGPC settled almost US$1.2 billion on payments to exploration companies.[6] Egyptian oil Minister Osama Kamal was quoted by the Egyptian newspaper Al-Mal in March 2013 saying the government recently paid US$1 billion in debt to foreign energy firms and that another US$1 billion would be paid shortly after.[7]

Concerning local banks, EGPC repaid a total of US$3.2 billion towards outstanding loans during the first quarter of the 2012 fiscal year and the last quarter of the 2011 fiscal year, bringing EGPC’s total debt to banks down from US$10.8 billion to US$7.6 billion. Nonetheless, EGPC remains the most indebted entity within the Egyptian government. In May 2012, EGPC failed to gain new loans from both the Central Bank of Egypt and National Bank of Egypt (NBE), with both banks citing that the EGPC had breached its credit ceiling.[8]

In late 2012, EGPC was discussing the details of a plan with the NBE that would make an immediate single payment possible. NBE proposed that it buy EGPC’s debt to foreign companies allowing it to repay the debt in a timelier manor. While estimations of the debt in the media have ranged from US$4 billion[9] to US$9 billion,[10] the NBE deal set the sum to be paid to the oil and gas companies at US$4.5 billion. EGPC already owes NBE approximately US$3.6 billion of its outstanding US$7.6 billion to banks. EGPC also has loans from Morgan Stanley, BNP Paribas, and Islamic funding agreements with the International Islamic Trade Finance Corporation.[11]

International Oil Companies

Financial disclosures by firms such as BP, BG, Apache, Edison and TransGlobe Energy show Egypt owed them more than US$5.2 billion at the end of 2012. BP was owed US$3 billion as of the end of 2012, of which around US$1 billion was overdue. BG was owed US$1.3 billion, of which US$600 million was overdue. Edison has US$400 million overdue, followed by TransGlobe and Dana with over US$200 million each.[12]

As political and economic conditions deteriorate, some companies have taken precautions. Apache has purchased a multi-year political risk insurance from the Overseas Private Investment Corp and other insurers to cover Egyptian risks. "These insurance policies provide approximately US$1 billion of coverage to Apache for losses arising from confiscation, nationalisation, and expropriation risks, with a $263 million sub-limit for currency inconvertibility," Apache said.[13]

Where most oil firms hope to recoup the debts in full -acknowledging it could take years, they are still planning to invest in new projects in Egypt that will help it avoid an energy meltdown. Companies that are able to withstand higher levels of debt are still attracted by Egypt’s oil and gas potential. For instance, BP decided in September 2012 to invest US$11 billion in an Egyptian gas project that is expected to produce 40 percent of the country’s natural gas output when completed.[14]

Playing Down the Debt

Egypt is working to secure oil supply deals on favourable credit terms from major Arab producers in an attempt to ease fuel shortages and the governments' cash crunch. Libya has agreed in principle to offer 900,000 barrels a month of crude supplies on a one-year credit term, with the first shipment expected in May 2013.[15] Nouri Berouin, chairman of the Libyan National Oil Company, said that Libya will provide Egypt with the equivalent of one million barrels of crude per month at world prices to support the economy.[16] Another member of OPEC, Iraq, has also agreed on a draft contract to supply Egypt with 4 million barrels of crude a month, said officials from both countries. However, Iraq rebuffed Egypt's request for a nine-month period of credit and a price discount, and will instead supply the oil at market prices on three-month interest-free credit.[17]

References

  1. "Egypt Debts to Oil Firms Highlight Subsidies Struggle" Aswat Masriya, 12 April 2013.
  2. "Egypt’s Untold Diesel Story" Daily News Egypt, 23 March 2013.
  3. "EGPC Struggles to Stay Afloat" Daily News Egypt, 28 October 2012.
  4. "Egypt Struggles to Pay Oil Bill" The New York Times, 3 October 2012.
  5. "Egypt Seeks Oil Deals to Ease Shortages" The Wall Street Journal, 29 April 2013.
  6. "EGPC Struggles to Stay Afloat" Daily News Egypt, 28 October 2012.
  7. "Egypt to Import Libya Oil, Pay Down Energy Debt" Reuters, 27 March 2013.
  8. "EGPC Struggles to Stay Afloat" Daily News Egypt, 28 October 2012.
  9. "EGPC Struggles to Stay Afloat" Daily News Egypt, 28 October 2012.
  10. "Egypt Debts to Oil Firms Highlight Subsidies Struggle" Aswat Masriya, 12 April 2013.
  11. "EGPC Struggles to Stay Afloat" Daily News Egypt, 28 October 2012.
  12. "Egypt Debts to Oil Firms Highlight Subsidies Struggle" Aswat Masriya, 12 April 2013.
  13. "Egypt Debts to Oil Firms Highlight Subsidies Struggle" Aswat Masriya, 12 April 2013.
  14. "Egypt Struggles to Pay Oil Bill" The New York Times, 3 October 2012.
  15. "Egypt Seeks Oil Deals to Ease Shortages" The Wall Street Journal, 29 April 2013.
  16. "Egypt to Import Libya Oil, Pay Down Energy Debt" Reuters, 27 March 2013.
  17. "Egypt Seeks Oil Deals to Ease Shortages" The Wall Street Journal, 29 April 2013.