EGPC strives to lure investors with a new bid round
Last year was a trying period for Egypt's leading petroleum agency in charge of exploration and development of petroleum resources, Egyptian General Petroleum Corporation (EGPC).
EGPC's Deputy CEO for Exploration Ahmed Abdel Fattah says all EGPC managers have worked around the clock, sometimes weekends, since the revolution began last year. Abdel Fattah says the petroleum industry has continued its operations as usual and the new bid round is on track with the same procedure as before.
In November of last year, EGPC has also conducted its first road show laying out new basins for conventional as well as unconventional exploration, the so-called "new play concepts" in the Western Desert, Sinai, Gulf of Suez and the Eastern Desert.
While EGPC, the Petroleum Ministry and Egyptian Natural Gas Holding Company (EGAS) largely succeeded in mitigating disruptions to supply and ensuring the oil and gas sector continues its operations as usual, EGPC continues to face multiple challenges. It is also striving to lure investors for new initiatives as well as securing financing for some of the existing projects.
"Egypt is going through a transition period, in which we see rapid changes and to some degree uncertainty within state approvals and guidance," says Dirk Warzecha, General Manager of RWE Dea Egypt.
Over the past year, EGPC has found itself strapped for cash as it sought to meet growing demand for international petroleum products and the costs of subsidizing these. As a result, it struggled to pay its obligations to foreign oil and gas companies, according to analyst reports and industry sources speaking on condition of anonymity.
In one case, Dana Gas issued an official request demanding payment from EGPC for supply of natural gas early last year, as reported by Egypt Oil & Gas.
"It is our understanding that Dana's receivables problem in Egypt is partly a result of EGAS and EGPC holding back payments to Dana Gas," wrote Dubai-based analyst Daniel Abood at the Royal Bank of Scotland (RBS) in a note to clients last year. "We believe this is because they are not being paid due to their inability to deliver gas due to pipeline disruptions and their own receivables problems with the electricity sector and the Egyptian public."
RBS estimated Dana's total outstanding receivables at $207 million (LE 1.25 billion). The outstanding debt is a sign of the ongoing liquidity strain. In a statement issued in January 2012, Dana Gas said it "maintains strong positive relationships with its host governments and is progressing [toward] constructive discussions with the Egyptian government covering the delayed payments due from government-owned entitities owing to the unrest in that country over the past year." In 2011, a total of $177 million (LE 1.07 billion) in cash attributable to its share of receivables was collected from Egypt and Kurdistan, according to Dana Gas. Dana Gas did not respond to a request for comment.
There are reports that other foreign companies have reached private agreements with EGPC. British Gas has denied issuing stern claims to EGPC, saying other arrangements are in place and declining to elaborate.
Minister Abdullah Ghorab acknowledged the issue recently, pledging greater fiscal austerity. "I have met with most investors to exchange views concerning this critical problem, and I have already discussed the ministry's plan to solve it," he told Egypt Oil & Gas. "The core problem of the current financial deficiency arose when the petroleum sector used to receive loans from banks and financial institutions for other entities that couldn't commit to the repayment of these loans, which eventually led to this predicament."
EGPC declined to comment on the debt issue.
EGPC is also striving to lure new investors amid ongoing political uncertainty and a heightened risk environment.
"Any investor at this time is facing problems finding the financing, the loans for these projects because they need a big sum, several billion for each one," says Osama Mostafa, Projects General Manager for Investment at EGPC.
THE NEED FOR NEW CONCESSIONS
As Egypt's oil consumption has been steadily increasing over the past decade, production has been uneven.
In 2010, consumption increased by 5.4% at 757,000 barrels per day compared to a previous year, which surpassed production in 2010 at 736,000 of barrels per day according to BP Statistical Review 2011. The total oil production in 2010 made up 35 million tons, which was a 0.6% decline from the previous year.
In FY2009/10 the majority of discoveries came from the Western Desert, which contributed 80% of the total added reserves from the new discoveries according to EGPC annual report for FY2009/10.
Last year, there were a total of 62 discoveries, including oil and gas, which is in line with the number for the previous fiscal year at 64 discoveries. In FY2010/11 the accumulative total oil production was 247 million barrels, according to EGPC data.
As oil production and reserves decline overtime, Egypt's petroleum industry plans to expand its refining capacity, upgrading existing facilities and establishing new refineries.
In December 2009, EGPC signed a agreement for an Assiut refinery project during the Joint Egyptian-Libyan Higher Committee held in Tripoli. "This project is affected by the revolution because they need an investor," says Mostafa, acknowledging there is delay in securing financing for the project.
In FY2009/10, EGPC launched a hydrocracking project in Mostorod with a capacity of 4.2 million metric tons per year. Egyptian Refining Company signed a $2.5 billion (LE 15.1 billion) loan agreement with EGPC. The project's total investment cost is estimated at $3.5 billion (LE 21.14 billion) and is still expected to commence operations in 2014.
Mostafa acknowledges financing of some of the existing and new projects requires more political and financial security. "With the current situation, there is a little bit of a slowdown until the stability [returns] to secure funding from big banks," he says. "These funds need stability."
THE NEW BID ROUND
The latest bid round, the first since 2009, was originally scheduled to close at the end of January. The delay has been due to technical evaluation and acquiring approvals from different authorities, according to EGPC. "Before acquiring the approvals, we have to evaluate the blocks technically," says Adel Said Kamel, deputy CEO for Agreements at EGPC. The closing date for the bid has been postponed through the end of March at the request of prospective bidders to have more time to evaluate new concessions.
The new concession area includes 15 exploration blocks, including three blocks in the Gulf of Suez, three blocks in the Eastern Desert with the rest in the Western Desert.
More than 20 companies are expected to participate, according to EGPC. The bulk of the new concessions offer a predominantly conventional exploration potential, as laid out in the roadshow presentation materials.
In terms of types of agreements, EGPC has not revised procedures significantly.
"We are using the same model of production sharing agreements," says Kamel. "The process is the same: after presenting the technical presentation to the management of EGPC and the Petroleum Ministry, we evaluate the financial offers."
Kamel acknowledges that there is more investor interest in the oil-driven exploration right now because of the costs.
"The drilling cost in the Western Desert is very cheap if we compare it to the cost of drilling in the Mediterranean," he says. "Some of our blocks are in the Gulf of Suez, which is oil-prone so the potential for oil there is more than the gas potential in the Gulf of Suez. Exploring for gas takes time and also a lot of investment."
The standard production sharing model is the same model that has been in place since 1973. The model includes a 30% cost recovery, two to three phases for exploration and 25% of the lease taken away after three years if technical or financial commitments are not met.
According to energy analysts and exploration and production companies, the area presented would require a lot of investment in characterization so that exploration companies can determine where high-quality reservoirs are located with economic volumes of oil or gas.
The exact resource potential then could be technically produced from the source rocks in the region remains unclear since at times existing oil is washed away by underground water inversions, or is dissipated when the formations are brought to the surface during geologic events.
Egypt's total proven reserves in 2010 were at 4.5 billion barrels or 0.3% of global reserves according to BP Statistical Review 2011.
NEW STRATEGY TO LURE INVESTORS
According to the Petroleum Ministry, FY2011/12 has already brought in $7 billion (LE 42.28 billion) in committed investments in the upstream sector.
EGPC aims to boost production by applying new technology on a wider scale. Abdel Fattah sees potential in shale and fracking technology applied widely in the US, Canada and other regions as global oil reserves are depleted.
The potential reserves of shale gas are estimates and have yet to be proven. EGPC, along with the Petroleum Ministry and private service contractors, is currently undergoing a study to determine the quality of shale resource development in Egypt. "Very soon we will have an idea about the quality of this resource," Abdel Fattah says.
While many operators see potential in shale and have already been pursuing shale drilling, others remain skeptical about the government's efforts so far to encourage investment in shale resources.
"Egypt has a lot of investment potential in both, the conventional and the unconventional energy sector. It will be [up to] the new government to lift these opportunities," Warzecha says.
The so-called fracking process or hydraulic fracturing, which is banned in certain states in the US due to links to drinking water contamination, is also cited by EGPC as having potential to boost production and reserves. "By applying a new technique, we can get what we were not able to recover before," Abdel Fattah says.
The petroleum agency is also working to lure new players, like China, Malaysia, South Korea, and Russian companies which are not currently operating in Egypt.
"We tried to attract Chinese investors because they did good work in Sudan," Abdel Fattah says. "So we hope they join this bidding round and offer some blocks." China, which operates in Sudan through China National Petroleum Corporation, has pursued an aggressive oil exploration strategy in the region.
The existing operators see potential for revising existing concession practices. "I see room for improvement regarding the approval process of concessions and the transfer of concessions," Warzecha says. "Also, the current joint venture system slows gas and oil developments."
Despite setbacks of the last year, the Petroleum Ministry has an optimistic outlook. "For those publicizing such concerns, I can guarantee that Egypt would be generating more production for longer than they expect," Petroleum Minister Abdullah Ghorab has told Egypt Oil & Gas in a January 2012 interview. "The number of foreign investors that apply in our bid round does reflect the fruitful potential of this industry."
PROPOSED REFORM OF EGPC
Ghorab has publicly proposed reform of EGPC and merging the agency with EGAS.
"In my opinion, the functions and activities of the upstream sector should be gathered under one roof, which is the EGPC, while EGAS should be functional in the gas projects and the downstream only, the dimensions of this view are still being evaluated," he said in the same interview with Egypt Oil & Gas newspaper. Ghorab, who was the head of EGPC prior to his appointment at the ministry, also said EGPC needed 'structural changes'.
EGPC confirmed the proposed plan, but did not elaborate on the type of structural changes. The Ministry of Petroleum did not respond to an interview request.
Most operators are optimistic about the proposed changes, even though few of these have yet to materialize.
"We are working together with EGAS and EGPC for many years as partners," says RWE Dea. "I don't think that this would change if they are united."
© Business Today Egypt 2012
