Egypt’s petroleum sector emerged as one of the few remaining oases of solid ground, faring far better than other sectors in dealing with last year’s tumultuous events. In order for the sector to take advantage of its relative stability and alleviate some of the pressure straining Egypt’s ailing economy, further development of its various aspects is necessary.

The key to catalyzing growth in the sector is increasing foreign direct investment through formulating effective strategies and improving Egypt’s competitive advantage. To this end, a review of the entire framework within which agreements with foreign investors are inked is essential in rendering the sector a more attractive prospect for investors.

While the existing system is not a complete calamity, there is definitely room for improvement; certain adjustments and optimizations, if applied swiftly, could go a long way towards successfully steering Egypt’s petroleum sector through these difficult times, as well as increasing its efficiency in the long term.

The Egyptian petroleum sector has always been subject to substantial government regulation and involvement, even in the wake of reformist endeavors undertaken by former Petroleum Minister Sameh Fahmy to boost foreign investment.

The Egyptian government’s hands-on approach to the sector is currently embodied in three main entities: the Egyptian General Petroleum Company (EGPC), the Egyptian Natural Gas Holding Company (EGAS) and Ganoub Al-Wady Petroleum Holding Company (GANOPE), which supervises all the petroleum activities under 28 degrees north latitude in Egypt. These entities represent the authorities that foreign investors must deal with in order to begin operating in the country.

The blueprint typically followed in Egypt involves the drafting of Production Sharing Contracts through one or more of these entities in order to instate the regulatory framework within which foreign companies can operate. Through this process, national interest is preserved and a just distribution of resources between investors and the government is ensured.

While this framework is effective in protecting Egypt’s natural resources from exploitation, it presents difficulties that may dissuade investors from approaching the sector in the first place. The roles and responsibilities of the EGPC, EGAS and GANOPE often overlap, complicating the process of foreign investor participation and creating bureaucratic headaches. To streamline the process, tighter coordination between these entities is necessary to shift the burden of dealing with these overlapping roles from the investor to the authorities.

Alternatively, the government could go a step further and by bringing all upstream activities under the control of the EGPC, a strategy that is currently being contemplated by Petroleum Minister Abdullah Ghorab. This model was in place before Sameh Fahmy’s near decade-long tenure through 2011 and would serve to streamline the bureaucratic process simplifying the investors’ job.

According to standard bureaucratic procedures in Egypt, the foreign investor’s entry point into the market is participating in one of the government-run bid rounds. The bidding mechanism of these bid rounds offers competition, allowing investors to freely compete for concessions by attempting to meet the government’s criteria.

The effectiveness of such mechanism in Egypt, however, is curtailed because the government’s criteria are often ambiguous.

The selection criteria attached to any given bid round is not made clear to investors, which limits their ability to accurately assess potential for their investment. Therefore, the government must clearly specify its requirements so as to remove unnecessary obstacles from investors’ paths.

Simplifying the entry process is central to increasing the Egyptian petroleum sector’s competitiveness, but a closer review of some of the policies guiding fiscal agreements is equally important.

The relinquishment of exploration acreage by the investor, which effectively means the government’s reclamation of all acreage deemed unusable by the investor, is typically required at the end of the exploration period. Contractors operating in Egypt are on average allowed 8-10 years of exploration before being required to relinquish unusable acreage. This policy may seem beneficial, as the lengthy period is an attraction point for investors. Yet this is a relatively long time frame for operations and is accompanied by the possibility of generous extensions. The lengthy exploration period currently granted could impede the sector’s pace of development as it limits the number of concessions that could be covered by the investor within the same time frame.

The government should look to offer more balanced agreements, combining attractive time frames with optimal exploratory efficiency, in order to maximize exploratory activity. Heightened exploratory activity raises the potential for heightened output for the petroleum sector as a whole, which in turn makes the sector more attractive for investors.  

The way in which government’s share of production is defined within the agreements could similarly be geared towards maximizing competitive advantage. Egypt’s continued instability coupled with the uncertainty that engulfs the country’s political future are understandable sources of anxiety for investors. In such an environment, investors will consider long-term returns on their investments to be impossible for any authority to guarantee. Consequently, investments that bring quicker returns — and thus are more immune to political turbulence — will seem more favorable.

The concept of the government’s production share in Egypt could be modified to lean towards increasing investor stake in the earlier stages of the contract, which would decrease the government’s share in the early stages. However, it would also provide investors with a sense of security by ensuring quicker returns on their investments and thus counterbalance the fear of political instability.

It should be noted that the government’s share in the investments is no more secure from political volatility than that of the investor. Should this model be implemented, the government could end up suffering the same fate it is trying to protect investors from if the political situation takes a turn for the worse. Nevertheless, this is a risk that should be considered, if only to counter the negative effect of the political situation on the sector’s competitiveness.

A widely recognized impediment to the sector’s growth is the issue of subsidization, a policy that dissuades potential investors from seeking contracts in Egypt. However, calls for a complete cessation of petroleum product subsidization in Egypt are naïve at best and dangerous at worst. Total abolition of subsidies in a country with Egypt’s sociopolitical makeup would trigger rampant popular dissent and thus could potentially have disastrous ramifications, particularly during the economic turmoil the country is currently undergoing. A more prudent solution would be to reassess the system by which subsidies are implemented.

At the same time, existing agreements force the investor to sell gas at subsidized domestic market prices. This policy should be discontinued so as to relieve the investor of having to share the burden of domestic economic problems. Instead, the agreements should allow the investor the freedom to pursue pricing strategies consistent with those of mature global markets. Such an amendment to the current policy would in turn boost the sector’s competitiveness while sidestepping potential political complications that would arise from the removal of subsidies.

The legal and regulatory framework that governs relations between the Egyptian government and foreign investors in the petroleum sector is not terminally flawed, but there is still potential for improvement and optimization. Modifications to existing practices would facilitate the process of investment, maximize output and create a more investor-friendly climate — all of which would provide Egypt with the competitive edge it needs to realize the sector’s full potential. bt