NORTH AFRICAN NATION STILL A DESTINATION FOR GLOBAL INVESTMENT
LISA O'NEILL AND ANDREW WATSON, MCDERMOTT WILL & EMERY LLP, LONDON
JEAN-CLAUDE PETILON, MCDERMOTT WILL & EMERY LLP, PARIS
HERE IS A QUICK SNAPSHOT: Egypt has suffered from significant social and political unrest. This resulted in a drop in oil and gas production levels at the same time as domestic energy consumption was rising. Egypt was facing a serious energy crisis. The election of Abdel Fattah al-Sisi as president in June 2014 proved to be a turning point:
- There has been a substantial reduction in the level of fuel subsidies;
- Significant steps have been taken to repay debts owed to international oil and gas companies;
- There is ongoing diversification of energy sources, with more renewable power projects and increasing imports of LNG.
The future looks positive. A number of agreements have recently been signed by international oil and gas companies and it seems Egypt is still a destination for international investment.
© Mohamed Elsayyed | Dreamstime.com
DEVELOPMENT OF THE ENERGY CRISIS
Egypt has been experiencing one of its most serious energy crises in decades due to a combination of political and economic instability, and the growth in domestic energy consumption.
The beginnings of its energy crisis can be traced back to the political instability of 2011, when production levels of oil and gas fell as companies were hesitant to invest. At the same time that oil and gas production fell, domestic energy consumption rose as a result of increased manufacturing output, energy-intensive upstream projects, and, most significantly, population growth and an increased demand for automobiles.
About half of the Egyptian population relies on subsidies for food and fuel, and these subsidies have accounted for a quarter of the state budget over the last few years. The increase in domestic energy consumption has affected Egyptian state finances in two significant ways. First, the cost of fuel subsidies increased as domestic consumption increased. Secondly, in order to meet demand, the state was forced to utilize stocks of domestic oil and gas that were contractually allocated to the international oil and gas companies involved in their extraction. In using such stocks, Egypt incurred billions of dollars in debt to those companies. Without a guarantee that such companies would be paid on time, Egypt risked losing its position as a destination for continued investment.
GOVERNMENT APPROACH
Recently, the Egyptian government has taken active steps to attempt to meet domestic demand for energy and to reduce its debt to international oil and gas companies. Following the election of Abdel Fattah al-Sisi in June 2014, a new fiscal strategy was implemented, including an amended energy bill that introduced a reduction in energy subsidies and an increase in the domestic price of fuel. It is estimated that the state was able to reduce its fuel subsidy costs by 30% for the 2014-2015 fiscal year. The government intends to use some of the savings it has generated through this reduction to repay some of the foreign debt it has incurred.
The Egyptian government has been fortunate that the impact of the reductions in fuel subsidies has been cushioned by the fall in global oil and gas prices.
In order to meet the additional domestic demand for energy, the Egyptian government aims to increase its LNG imports with investments in LNG storage and an agreement with Sonatrach (the largest oil and gas company in nearby Algeria) to import six large LNG shipments to Egypt during 2015. Additionally, a greater emphasis is being placed on renewable energy with a particular focus on increasing the number of wind farms with the aim of providing 7,200 megawatts of wind-generated energy by 2020. The government aims to source 20% of its energy from renewable resources by 2020 in an attempt to diversify the country's energy sources.
The current government's prioritization of repayment of foreign debt arrears has resulted in the Egyptian General Petroleum Corporation (the Egyptian state-owned oil company) obtaining a series of loans from National Bank of Egypt, National Bank of Abu Dhabi, and HSBC Holdings Plc, amounting to US$1.5 billion, to enable the government to make payments to the international oil and gas companies in satisfaction of arrears. Some of these arrears have been outstanding since 2011, but repayments of around $5 billion made in the fourth quarter of 2014 reduced total arrears to around $3.2 billion. This debt to international oil and gas companies is now expected to be fully repaid by the middle of 2016.
The Egyptian government is taking active steps to continue to combat the issues it is facing in relation to energy matters. Other countries in the region, such as Libya, are by contrast having to first deal with serious political unrest and financial difficulties before considering how to address their own energy crises.
INVESTMENT FROM INTERNATIONAL OIL COMPANIES
International oil and gas companies continue to invest into Egypt. In January 2015, six new agreements were signed with companies for the drilling of more than 40 discovery wells in the Western Desert and the Gulf of Suez. Furthermore, Italian-owned Eni announced it has signed new agreements with the Egyptian state to explore two gas fields in the Egyptian section of the Mediterranean Sea. This is in addition to Eni's recent acquisition of the South-West Melehia block, paid for by utilizing outstanding debt arrears.
To attract additional investment into its domestic exploration market, the Egyptian government has recently invited international oil and gas companies to participate in two bid rounds for additional blocks. The Ganoub El Wadi Holding Petroleum Company is offering 10 blocks in the South Gulf of Suez. The Egyptian Natural Gas Holding Company is offering eight blocks in the Mediterranean. The planned closing date of both offerings was May 31, 2015.
Additionally, in March 2015, BP announced that it had signed agreements to develop the North Alexandria and West Mediterranean Deepwater offshore concession blocks in partnership with DEA. The deal is worth $12 billion, and BP described the investment as a "vote of confidence" in the country. The intention is that over their lifetime, the gas fields will generate 5 trillion cubic feet of gas resources and 55 million barrels of condensates, with production expected to begin in 2017. If the estimates are correct, this deal would see Egypt double its gas energy supply within a short space of time.
OUTLOOK
Despite on-going problems, the outlook for Egypt is positive. The government is facing the energy crisis head on and international oil and gas companies continue to invest.
ABOUT THE AUTHORS
Lisa O'Neill ([email protected]) is a partner in the law firm of McDermott Will & Emery UK, based in London. She is a transactional lawyer with experience of a wide range of corporate and energy transactions, with a particular focus on the oil and gas sector. She advises a diverse range of clients, including major international oil and gas companies, independent oil and gas companies, corporates, financial institutions and private equity funds on M&A, joint ventures, commercial contracts and other oil and gas related work.
Jean-Claude Petilon ([email protected]) is senior counsel at McDermott Will & Emery, based in Paris. His practice focuses on energy and project finance and has specialized in projects related to Africa for more than 30 years. He has expertise principally in the areas of energy (petroleum, power projects), mining, privatizations (both as an advisor to private investors and governments) and project financing. Petilon has extensive experience in acting for major mining and petroleum companies in negotiating international contracts and special tax regimes and in obtaining financing for the implementation of their projects. He also has acted for African governments in the restructuring of institutional sectors such as energy, tourism, public enterprises, transportation, and telecommunications.
Andrew Watson ([email protected]) is a partner in the law firm of McDermott Will & Emery, based in London. He is head of the Projects Group. His practice focuses on energy and infrastructure including project development and finance, oil and gas and telecoms. In the oil & gas sector Watson has advised oil majors, independents and start-ups including re exploration and development, transport and storage and buying, selling and financing oil and gas assets. He has also advised on complex project financings throughout the world including LNG terminals, crude oil pipelines, motorways, high speed rail, power projects and telecoms systems.
