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Towards a new oil policy

Hussein Abdallah* says sound plans are needed to postpone the time when the oil and gas wells run dry

It is no secret that Egypt has become a net importer of oil and gas, since its share of production no longer suffices to meet its domestic needs, forcing it to cover the deficit by purchases from the share of foreign partners. For example, oil and gas production in 2007 reached almost 76 million tonnes, of which Egypt's share was some 47 million tonnes, while local consumption nearly hit 60 million tonnes. Thus the shortfall amounted to 13 million tonnes, which Egypt had to purchase with hard currency from the allocations of foreign companies.

Since energy consumption is forecast to grow at an average annual rate of five per cent, Egypt's annual oil and gas requirements could reach some 100 million tonnes or 750 million barrels of oil equivalent by 2020. Total local requirements (i.e. cumulative consumption) could thus reach 1.1 billion tonnes over the period 2006-20. Since oil and gas reserves are put officially at around 2.2 billion tonnes of oil equivalent, Egypt's share of these reserves, after the foreign partners take their share, could run out during the first half of the 2020s.

Since the price of oil is expected to be no less than $120/barrel by the beginning of the 2020s, if Egypt becomes an importer of all its oil and gas requirements, it will face an annual bill of $90 billion or more, besides being forced to compete with other countries whose thirst for oil and gas is increasing as their expected depletion approaches. It makes no difference if the alternative is nuclear energy, since the cost and dangers involved are greater than those of oil and gas, and the component paid to foreign companies is 70 per cent of the cost.

Fortunately, the 25 January Revolution has paved the way to take positive steps to extend the depletion period. The foreign oil companies were well aware that the government under the National Democratic Party and Hosni Mubarak could collapse at any moment. In the light of this outlook, those companies began to ramp up production and exports, particularly of gas and at extremely low prices, in order to garner maximum profits.

However, the companies must know for sure that the young revolutionaries of the Tahrir Square have a long life before them and that they will have a sound awareness of the facts of life based on science and technology. The companies can therefore cooperate with them in the certainty that their investments will remain safe for an extended period of time, and that a slowdown in production and exports is in their interests, and ensures energy security for as long as possible for the country that hosts them and provides conditions unmatched in other countries. Among these is the fact that the foreign partner is not liable for the royalty which is the state's right in exchange for depletion, regardless of the profits or losses arising from production, since the Egyptian General Petroleum Corporation ( EGPC ) is responsible for the royalty instead.

Moreover, the foreign partner is not responsible for the Egyptian income tax, which is paid by EGPC instead, nor is it subject to American taxes, meaning that its profits are exempt from double taxation.

Add to this the fact that Egypt provides a trained workforce and advanced infrastructure such as pipelines, communications and roads, as well as an advantageous geographical location and a suitable climate.

Egypt also provides a relatively stable investment climate. There are no tribes who destroy production equipment, cut oil and gas pipelines or threaten the lives of workers in the fields as is the case in Nigeria, Yemen and elsewhere.

Since it is well known that the average success rate in drilling for oil in Egypt is considered one of the highest in the world, the risks and expenditures faced by the foreign partner are less than elsewhere and this must be reflected in Egypt's favour in negotiations.

The January revolution has paved the way for the companies to review production and export levels so that production does not exceed Egypt's domestic requirements, taking into account our readiness to buy the companies' share at the price laid down in the legal agreements before they were amended in the companies' favour, i.e. around $2.65/million BTU. This is about half the price of [and safer than] electricity produced by nuclear power.

The companies should not be concerned since the term of the agreement is extended to some 35 years, which will cover and ensure the production of all the oil and gas in the biggest fields. One of the factors favouring these positive steps is that the companies have begun to compete among themselves to obtain drilling rights in oil countries and are accepting conditions they never accepted in the past. Similarly, the oil sector is seeing the emergence of oil deficit countries such as China, Brazil and India, which are looking to sign drilling agreements in the oil countries and are ready to offer greater concessions and compromises than traditional oil companies. Therefore Egypt, with the advantages it has to offer, some of which are indicated above, has no need to fear that the companies will steer clear of investing in it.

© Al Ahram Weekly 2011