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Unreasonable amendment

During the month of June, the Ministry of Petroleum very quickly submitted to the People's Assembly a number of amendments to two agreements with British Petroleum (BP) . Opposition members of the People's Assembly had criticised these new amendments with BP and a strong row ensued with MPs from the National Democratic Party (NDP). The opposition has long accused the Ministry of Petroleum of wasting the country's oil resources and favouring Israel in selling it gas at cheap prices.

While independent and opposition MPs refused the latest amendments, NDP MPs hastily approved them though it would have been worthy of the parliament to hold a number of hearings to examine, study and analyse these unprecedented amendments and their impact on the course of Egypt's oil policy and interests in the field of energy.

Noteworthy is the speed with which these amendments were passed at a time in which BP is facing a storm of international criticism following the oil spill in the Gulf of Mexico which has resulted in a massive environmental disaster in the region. Thus, it would have been logical to be cautious in signing these amendments, especially that they concern offshore operations north of Alexandria, a situation similar to that of BP 's crippled oil well off the shores of the US city of Louisiana.

Caution was necessary to monitor BP 's situation and how it would deal with this disaster and its repercussions. Obviously, BP 's initial efforts to stop the leak had failed and it was clear that safety measures had been inappropriate. This has prompted the US government to launch a criminal probe into the spill to investigate the truth about the whole operation.

BP has lost $17 billion as a result of this disaster and has had to sell assets in Egypt, Pakistan, Vietnam, the US and Canada. It has also allocated $32 billion to cover the costs of the oil spill, while its chief executive resigned and a new American CEO took over for the first time in the British company's history.

In the midst of this stormy atmosphere, how was it possible to speedily sign these amendments with BP and have them approved by the legislature? This question is especially valid given that the agreement comes just days after US politicians approved a bill that could see BP banned from any new drilling in US waters for seven years. Did Egyptian MPs ascertain that the Ministry of Petroleum had duly ensured the inclusion of sufficient safety provisions and guarantees for offshore drilling north of Alexandria?

Also noteworthy is that BP did not give up this offshore concession despite the fact that it sold other concessions in the Western Desert to the US Apache. The reason for this is that the North Alexandria concession included many favourable conditions and provisions for BP . Thus, in case of its resale to a third party, the gain will be significant, and its value will increase over time.

The amendments include, in my view, unjust provisions for Egypt and reflect a weakness in the quality of negotiations. On the surface, the amendments appear quite innocent, but a closer look depicts a very unfavourable situation.

Under the amendments, the existing terms for oil and gas exploration and drilling will be changed from the "production sharing" model to granting BP full rights to most of the production for a period of 35 years. The agreement provides for BP to obtain the initial reserves of five trillion cubic feet of gas and 55 million barrels of associated condensate in exchange for BP 's investment expenses during the previous years before the amendments amounting to $800 million. This begs the questions why these quantities were not divided between both the Egyptian side and BP after recovering the costs. Regarding additional new reserves, these will be divided 61 per cent for BP and 39 per cent for the Egyptian side for a period of 35 years.

The Egyptian General Petroleum Corporation ( EGPC ) has the right to internally import the entire output and at special prices. This includes the condensate at a price of $140 per barrel (bp). This estimate is very peculiar because -- and as pointed out by many oil experts -- condensates have no use except to be added to crude oil to reduce its viscosity and improve its quality. EGPC is the sole buyer of this product. BP was careful to include the price for condensates in the amendments, starting at $140 pb. This is a ridiculous rate to purchase condensates given the fact that crude oil is currently traded between $70 and $80 per barrel.

EGPC is obliged to present a letter of guarantee to be opened through a first class international bank to guarantee payment of its purchases of gas and oil to BP . That means that Egypt will not only pay but also has to guarantee that it will pay. Is this reasonable?

The agreement stipulates for the first time the setting up of a separate bank account for BP to receive payments directly from EGPC for the purchase of gas and oil. BP requested this to avoid that accumulation of EGPC debts.

Under the agreement and as stated by an official source from the oil sector quoted by Al-Masry Al-Yom on 5 September 2010, the Egyptian government is estimated to pay some $1.2 billion on an annual basis to the British company for its gas purchases. This is a large amount to be paid to a foreign partner operating in the local market, unlike the current system which allows the government to obtain needed quantities of oil and gas, and to pay for them later depending on the circumstances of the state budget.

Moreover, these amendments which the Ministry of Petroleum has supported and endorsed, challenges the court ruling by the Supreme Administrative Court which stipulates that gas should not be exported to Israel or any other country unless development and domestic market needs are met, in addition to safeguarding the share of future generations.

It is noteworthy to mention here that according to detailed calculations, the officially declared proven oil and gas reserves are estimated at 16 billion barrels, of which 12 billion are gas. Thus Egypt's share of the reserves after the foreign partner obtains their share can be depleted by 2020. By then the country will have to turn to importing its entire oil and gas needs and the government and people will be obliged to pay a bill that will reach $90 billion if not more.

Among the surprising elements in the amendments is that the price can be amended every five years, but this is conditional on "the occurrence of fundamental changes". However, who will determine and explain what "fundamental" means and what are the limits of this term? Also this condition is linked to limiting any amendment to 15 per cent of the previous price. This is a clear limitation on the interests of the Egyptian side.

Thus it is clear that the amendments accepted by the NDP parliamentary majority overlooked all the adverse and unfair provisions explained above. There was a failure to carefully examine and scrutinise all the provisions in the amendments or study the risks involved or organise hearing sessions for experts to ensure the inclusion of sound safety provisions and criteria and also to ensure banking guarantees to cover Egypt's interests in case of a disaster similar to that in the Gulf of Mexico should occur.

Given the abovementioned factors, it becomes obligatory that these amendments should not be endorsed by the president unless a thorough reassessment of the amendments and the quality of the negotiation process is first examined by parliament.

Amr Kamal Hammouda is director of Al-Fustat Centre for Developmental Studies and author of a number of books dealing with the oil market and the future of energy in the Arab region.

© Al Ahram Weekly 2010