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Oil on slippery ground

The global economic crisis has cast its shadow on Egypt's oil sector, writes Amr Kamal Hamouda*
The international economic crisis has tightened its grip on the Egyptian oil sector and disrupted its calculations and plans to expand and renovate within the sector. These calculations are based on two main factors: a reliance on attracting foreign investments; and borrowing from international financial institutions and banks located in Egypt and abroad. Thus external factors and resources have considerable greater weight compared to the sector's own resources and capabilities.

Over a month ago it was announced that the construction of the second unit for liquidising natural gas at the Damietta LNG (Liquefied Natural Gas) plant has been put on hold. Although this announcement came from a source within the Egyptian Natural Gas Holding Company (EGAS) , it was later denied. The government's oil sector said that the second LNG production train had been put on hold until further gas resources were developed.

Observers have raised questions and doubts regarding this explanation. The reason behind these doubts is that Israel announced the signing of three new contracts for Egyptian natural gas, over and above the now famous first contract for $1.25 per million Btu signed in 2005.

Yossi Maiman, the Israeli partner in Eastern Mediterranean Gas (EMG) , stated to the Israeli newspaper Yediot Aharonot in October that EMG had signed three new contracts to export additional quantities of Egyptian gas to Israel at a price of $3 per million Btu and for an 18-year period from the date of signing the agreement. This means that there are sufficient quantities of natural gas available and for a long period. This announcement has raised suspicions that the oil sector is resorting to exporting gas to make up for a shortage in investments.

These facts have tended to corroborate the fact that the real reason behind freezing the second LNG production train is that the oil sector has not received the needed investment for this project, rather than needing to develop new natural gas resources.

An important indicator in this respect is the statement made last May by Farouk El-Okda, governor of the Central Bank of Egypt, during a press conference (27 May 2009) pointing to a "drop" in net direct investments to the oil sector to reach $2.8 billion compared to $3.7 billion the previous year. Sameh Fahmi, minister of petroleum, denied this "drop" stating: "The impact of the international crisis on the Egyptian oil sector has been limited and foreign investments have not fallen compared to last year but have reached $7 billion during this year as well."

The minister based his denial on the fact that Egypt had signed 19 new oil and gas exploration agreements covering areas in the Mediterranean, the Western Desert and Upper Egypt and totalling $4 billion. However, the minister later stated that because of the international crisis, Arab banks and the private sector had withdrawn from investing in the construction of an oil refinery.

There has been agreement between the ministries of investment and petroleum to submit a draft bill to the People's Assembly that would help attract foreign investments for the oil- refining sector and for the construction of new refineries through the provision of tax exemptions. However, the Planning and Budget Committee in the People's Assembly categorically refused the granting of any form of exemptions to foreign refining projects based on the fact that investors have other elements they can benefit from, such as cheap labour, land prices, strategic location and considerable gains from selling refined oil products.

The position taken by the People's Assembly led to the withdrawal of Kuwait's Al-Kharafi group from investing in the construction of an oil refinery in Ain Sukhna and Egypt's Citadel Group from constructing four new refining projects with a projected capacity of 4.2 million tonnes per year. There is further news that a Libyan group is also backing away from the construction of a joint refinery between Egypt and Libya.

Moreover, the Ministry of Economic Development indicated in its report published in June 2009 covering the third year of the Sixth Five Year Plan (2007-2011) that it had requested the Ministry of Petroleum to stop the establishment of any new companies. This is an indication that the oil sector has expanded in its borrowing beyond safe limits.

Recently, the Egyptian General Petroleum Corporation (EGPC) was granted considerable loans from a number of banks, foremost of which is the Arab African Bank, the Arab International Bank, the Egyptian Gulf Bank, the Société Arab International de Banque (SAIB) and the National Bank of Egypt. The availability of these loans from the domestic banking sector is a result of sizeable liquidity in the banking sector searching for investment.

This leads us to raise an important question: Will the oil sector be capable of absorbing these loans from domestic banks while having to bear the burden of sizeable debt to foreign partner companies in crude oil production that has reached $7 billion?

On another level, reports indicate that EGPC is ready to issue, in agreement with the Ministry of Finance, new oil bonds in US dollars for $1 billion in cooperation with the American financial services firm Morgan Stanley. The duration of the bonds will be three years, ending in 2014. Sources at the Ministry of Petroleum have indicated that this new bond issue focuses on funding EGPC's general needs in addition to current capital expenditures, among which are funding petrochemical and gas projects.

The US dollar bonds issue is backed by exports of crude oil and petroleum products such as naphtha and jet fuel.

The issue of oil bonds underlines the difficulties faced by the petroleum sector in obtaining the necessary funding for new projects or for the expansion of existing projects. This underlines the fact that the implications of the international economic crisis have been significant and that there is a need for a serious reconsideration of the situation to address these implications. A strategy to confront the impact of the international economic crisis is called for, rather than relying on short-term measures and tactics.

© Al Ahram Weekly 2010