With the world's sixth-largest reserves of natural gas under its soil Egypt is ideally placed to take advantage of insatiable international demand. But tapping the gas requires major investment, a slight problem for a country suffering a cashflow crisis.
Plagued by a shortage of hard currency, the Egyptian government is banking on extensive – and largely untapped – reserves of natural gas as the country’s ticket to future prosperity. But getting the gas online for export is not simple, and in the meantime the state-run petroleum establishment has been borrowing heavily, just to keep up with payment obligations.
Egypt's economy is struggling to recover
from the blows dealt to it by the wars in Iraq
According to sources in the energy sector, the state-run Egyptian General Petroleum Corporation (EGPC) and its subsidiary Gasco have taken more than half a billion dollars in both secured and unsecured loans from international banks and development agencies in the past year and a half. One energy executive, who requested anonymity, suggested that the money was being used for payments to the foreign joint-venture production partners that pump out Egypt’s oil under concession agreements with the government and EGPC.
Egypt’s concession agreements normally involve a 50-50 split of revenues between the government and the foreign producer at each site. The foreign company pays for exploration and drilling, and, following the discovery of commercially viable quantities of oil or gas, entitled to cost recovery before revenue sharing begins.
In practice, companies extract the oil or gas and then sell it to the government at half price – for US dollars. “The problem,” the energy executive said, “is that the government doesn’t have dollars.”
The standard Egyptian concession agreement – in use for more than 20 years – is “not good enough,” she said, because it does not specify the timing of payment. Until recently, this was never a problem, as the companies were always paid promptly.
But about a year ago, Minister of Petroleum Sameh Fahmy began speaking publicly about how, in a friendly partnership like the one between Egypt and the oil companies, the two sides ought to be flexible with each other. For example, he said, long-time partners could renegotiate their payment schedules.
Around the same time, say industry sources, Fahmy was taking company representatives aside and gently requesting a moratorium of six months on concession payments.
Although late payment is common throughout the Egyptian economy, the petroleum sector had always stood out as an exception. The oil companies, liking the status quo, were reluctant to accept the minister’s request.
Nevertheless, foreign oil executives were soon reporting delays of 90 days or more in the government’s payments of US dollars to their firms.
The government’s desperation for dollars has shown itself in other sectors, too. Last May, the central bank froze the account that allowed foreign investors to repatriate their profits from the local stock market in hard currency. That move, along with measures to restrict imports, ran into furious objections and was quickly cancelled.
The local economy has been hit hard by the
lack of foreign currency
With the oil companies refusing to budge on prompt payment, the government probably had no choice but to turn to international lenders. The first-ever loan taken by the state’s oil and gas giants came in December 2001, when the Arab Petroleum Investment Corporation (Apicorp) extended $104 million to Gasco for “general capital investment.”
A second deal, again arranged by Apicorp though syndication to international banks, involved a relatively soft loan of $100 million to EGPC, repayable in three years, with a grace period of over two years. That loan was finalised in May of last year.
Not long after, the oil companies “suddenly went quiet” about payment delays, the executive said.
But with the hard-currency shortage continuing, the government’s quandary remained. More recent loans, with shorter repayment terms, suggest even greater dollar desperation.
A loan closed in the past two months for another $100 million, arranged by French bank Credit Agricole Indo-Suez and secured by future crude-oil sales, must be repaid after just one year, according to the executive. She added that yet another loan, currently being negotiated with a different foreign bank, would work along similar lines.
In a recent, unpublished interview with the local Business Monthly magazine, Apache Egypt general manager Rodney Eichler said that payment difficulties between his company and the government had been resolved. Eichler said he did not know if the government had been borrowing money to pay the foreign oil companies, but he acknowledged that it was “possible.”
Financial lawyers, while declining to give details, confirmed that state-run petroleum companies had recently signed credit agreements with foreign banks.
Egypt has been a significant oil producer for several decades. Though never a major exporter in world terms, the country has met most of its own oil needs from local production, while earning revenue from exports when prices have been high.
Egypt's financial capital: Over 15 million live
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But now, despite new discoveries in the Western Desert, most of Egypt’s oil fields are in “middle age,” with their output in decline. Combined with rising local demand, this has made Egypt a net importer, with imports expected to rise further in the years ahead.
Natural gas is a another story. While fields in the Nile Delta area have been producing small amounts for local consumption since the early 1980s, accelerating discoveries at offshore, deep-water sites have put Egypt on the world map as an up-and-coming producer.
Exporting gas, however, demands heavy investments in exploration, production, transport and downstream infrastructure. At this point, Egypt has yet to export any of its gas. Yet with more and more being found each year, gas – rather than oil – has come to be seen as the best prospect for generating large amounts of badly needed hard currency.
According to official estimates, Egypt’s proven reserves of natural gas now exceed 58 trillion cubic feet, up from 35 trillion at the end of 2000 and 12 trillion in 1991. With two major projects under construction to export Liquefied Natural Gas (LNG) to European markets, Egypt – now ranked number six in the world in terms of reserves – can look forward to becoming a major exporter of natural gas in the next three to five years.
“The gas is there, and everyone knows it’s there. But it requires investment, and it takes time to get it out of the ground in commercial quantities,” the anonymous energy executive said. “It will come together in 2004 or 2005, when the supply of gas and the LNG infrastructure projects will be matched up.”
European markets are hungry for Egypt’s LNG output. “There will never be a saturation point for gas,” the executive said.
Massive oversubscriptions for the recent EGPC loans indicate huge confidence among foreign investors in the future of Egypt’s petroleum sector. Even if the loans were taken out of desperation, the executive said, the move implies increasing maturity on the part of the government.
“There’s no shame in borrowing,” she said. “In the past, the practice has been to put money under the mattress against future projects and payment obligations. But by borrowing on the international market, EGPC has started to act like a real business – as it should.”
Bankers, she added, had been pressing the government to take the step for some time.
The risk to Egypt, meanwhile, is limited. “The worst-case scenario is that the government defaults. The financial risk is all on the lenders,” the executive said.
But will gas exports be enough to make Egypt prosperous? With a population reaching 69 million and still growing at nearly two percent a year, the answer is a qualified yes. “There are fundamental economic and developmental problems,” the executive said. “But LNG will bring dollars, or other hard currency, into the country.”