Egypt swaps debt for more debt to keep oil companies on side

Egypt’s state-owned oil and gas companies owe more than $6bn to international energy companies that operate its oil and gas fields in the Sinai Peninsula, the Gulf of Suez, Mediterranean, and the eastern and western deserts.

The country’s government has decided that in the interests of maintaining foreign investment and production of its hydrocarbon reserves, it will pay off those debts by borrowing from domestic and international banks

The Egyptian General Petroleum Corporation (EGPC) will “tender for loans from domestic and international banks” in order to pay off some of the debt, Oil Ministry official Hamdy Abdelaziz told This is Africa.

The move is aimed to stimulate foreign investment by energy companies operating in Egypt, thereby boosting production with more research, development, and exploration, according to Mr Abdelaziz.

The Oil Ministry has agreed to pay off all of its remaining dues to the international oil companies by 2017, instead of just the half repayment that it previously promised. Around $1.5bn of the total is to be paid off in September 2015.

Mr Abdelaziz told This is Africa the EGPC has received three offers from local banks that are under consideration, and that international lenders had expressed their willingness but they are “still working on the necessary procedures” for the deal. He would not name the banks involved until negotiations are completed.

Debts to energy companies accrue at a rate of around $200m per month, and the government says the debt currently stands at $6.3bn. The United States Energy Information Administration claims the debt is $7.5bn.

Egypt occupies an important strategic role in international energy markets derived from its operation of the Suez Canal and Suez-Mediterranean pipeline. International energy companies work extensively in Egypt but have recently been reluctant to invest because of the mounting debts they are owed.

The country has struggled to pay its bills to international oil companies because it is diverting ever more of the energy it produces to satisfy domestic demand, leaving less to export. Egypt is the largest consumer of oil and gas in Africa. The government is hoping to reduce some of the demand with phased cuts to energy subsidies that began on 4 July.

Prior to the cuts, Egypt’s subsidy bill accounted for more tha 20 percent of government spending in recent years, at the same time as the country’s tumultuous post-Arab Spring transitions seriously dented growth and foreign investment. Since its peak production of around 900,000 bpd in the mid-1990s, Egypt’s production has fallen steadily even as domestic demand has risen.

Projects on hold

British energy company BG Group spokesperson Kim Blomley confirmed that the company has been developing plans for more investment projects in Egypt, and has signed one non-binding letter of intent with a local partner to examine supplying gas to an Egyptian LNG facility.

However, “release of funds for any further development remain contingent upon a material improvement in the investment climate, including a significant reduction in the outstanding receivable [debt]”, BG Group claimed in a statement.

BG Group is holding discussions with the Egyptian government about the debt, according to Ms Bromley. The company is owed $1.5bn with $1.2bn overdue, she said. If Egypt were to seek to pay off its debt more quickly by borrowing from banks “that would certainly be very welcome”, she said.

British oil major British Petroleum (BP), which has significant operations in Egypt, is also owed money by EGPC – and is likewise looking at plans for expansion. BP would not disclose the total amount it is owed by the Egyptian government.

On 26 June, Egypt’s Oil minister Sherif Ismail claimed that a $10bn BP gas project called West Nile Delta, that had been stalled for three years, had restarted.

However, BP official Robert Wine told This is Africa that “progress is being made on West Nile Delta, but a final deal has not been agreed yet”.

The government has been signing new deals with international firms in order to keep them on side. On 19 June  the state-owned Egyptian Natural Gas Holding Company (EGAS) announced that it had negotiated more attractive terms with German multinational RWE DEA.

And it is not only oil and gas companies that are being courted. Prime Minister Ibrahim Mahleb held a meeting with high value investors on 10 July  to discuss “amicably settling” the large pile of corporate disputes that have accrued between the private sector and the government.

In addition, on July 4 Egypt’s government paid off around $700m of the debt it owes to the Paris Club – an informal international lending group representing the world’s major economies based in Paris. The Egyptian government’s total bill with the Paris Club stood at $3.7bn in December 2013.

“Things may have gotten to a point with the oil companies where production has dropped too much and this just has to be done,” says Michele Dunne, senior associate in the Carnegie Endowment for International Peace’s Middle East Program.

“Inability to pay the international energy companies is a problem that the government will want to take seriously. However, there’s no clear strategy in Egypt at the moment of which this is a part,” she says.

“We see these moves, but there is no transparency and they are coming through piecemeal rather than as part of clear set of policies.”

This article was originally published with FT:This is Africa on August 26 2014.

About Tom Stevenson
Tom Stevenson is an Independent North Africa reporter

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