Operating Environment in Egypt

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Overview

Reportedly, there are around 100 international oil companies active in the Egyptian extractive industry with British Petroleum (BP), Apache, Eni and the BG Group being the largest. Terms for international oil companies (IOCs) are considered favorable, according to the Revenue Watch Institute, and the sector is generally managed by the Egyptian Ministry of Petroleum and its subsidiaries.[1] Oil and gas concessions are usually granted on the basis of production sharing arrangements between the Egyptian Government and the Egyptian General Petroleum Corporation (EGPC) in particular, which is serving as the state-owned oil and gas authority under the Ministry of Petroleum, and an exploration company. Agreements ordinarily grant the IOCs an initial exploration period of two to four years, which are awarded with a development lease in case of commercial discoveries, followed by the establishment of an operating company with both the contractor and EGPC sharing in the joint venture.[2]

Criticism

From the side of IOCs, the system of production sharing agreements has often been criticized. Hany Elsharkawi, Dana Gas Egypt President, for one, commented in 2011 that "in fact, this type of agreements is a heavy burden on the foreign investor" and that a tax royalty regime would allow governments and investors share to almost the same profits while overcoming the system of forming joint ventures.[3] In what has been celebrated as a revolutionary deal between BP and German partner RWE Dea in 2010, the two contractors bear full cost for exploration activity under a royalty tax system, which Moataz Darwish, a board director for Shell Egypt, sees as attracting more investors and increase exploration. Besides generic demands to further deregulate the extractive sector in Egypt, industry officials have critized army restrictions in particular, claiming military officials to have final say over exploration activities.[4]

On the other hand civil society organisations have been warning the Egyptian authorities about continuing the trend toward deregulation and less public control, asking for more transparency in the sector,[5] as well as for stricter governmental regulations on the environmental impacts of oil and gas production.[6] While political unrest since 2011 did not affect foreign investor presence in Egypt and oil and gas production remained largely unaffected,[7] analysts have urged country officials not to rush into reworked contracts, as the country is seen as in a weak position to negotiate concessions with the economy deteriorating since the 2011 revolution.[8]

Government debt

As of early 2013, the Egyptian government is reportedly been negotiating over the repayments of debts owed to international oil and gas companies.[9] While the total amount of debt is disputed, figures range from 5 to 9 billion dollars.[10] Because its local consumption has been rising rapidly, the country uses most of its production share for the domestic market. With Egypt importing oil and gas at international market prices and selling locally at subsidized prices, energy subsidies are amounting to around 16 billion dollar and are considered a major reason for the government's debts. However, foreign energy firms that are able to withstand higher levels of debt are still investing into Egypt's extractive industry.[11]

References

  1. "Egypt country analysis", Revenue Watch Institute, retrieved 29 March 2013.
  2. "Doing Business in Egypt Report", Baker & McKenzie, 2011.
  3. "Foreign Investments under public attacks", Egypt Oil&Gas, April 2011.
  4. "Majors vie with Egypt's generals over oil", The Daily Star, 14 April 2012.
  5. "The scramble for Egypt's oil" Egypt Independent, 23 January 2013.
  6. "Is fracking responsible for the flooding of an Upper Egyptian village?" Egypt Independent, 29 January 2013.
  7. "EIA Country Profile" US Energy Information Administration, retrieved 1 March 2013.
  8. "The scramble for Egypt's oil" Egypt Independent, 23 January 2013.
  9. "Egypt to import 900,000 barrels of Libyan oil per month" Reuters, 27 March 2013.
  10. "Egypt's fuel shortages demonstrate perfect storm of economic pressures" Egypt Independent, 5 March 2013.
  11. "Egypt Struggles to Play Oil Bill" The New York Times, 3 October 2012.