Accumulated experienceJune 5, 2019
TOGY talks to Ayman Hussein, chairman of Sky Investments, about how recent economic reforms have affected Egypt’s competitiveness, the private sector’s response to new investment frameworks and how service companies have been impacted by the settlement of arrears owed to IOCs. Sky Investments’ oil and gas-related companies include ADES, Drexel and Sky Logistics.
How have recent economic reforms affected Egypt’s competitiveness?
Generally speaking, not specific to the oil and gas sector and following the macroeconomic indicators, I can say that we are on the right track.
Nevertheless, we are paying the price for this reform. Like any reform, it’s a medicine we have to take and it doesn’t taste nice. We’re extremely focused on the exchange rate, and while this is important, it is not the only thing that should take up our focus.
In my opinion, encouraging the private sector and further investments should come first because that is the way to decrease unemployment. The unemployment rate is the most significant number, more important than the exchange rate and more important than inflation figures. However, we are definitely on the right track long term.
We should do what we did back in 1990 and make the investors confident that they can repatriate their capital. This paid off in the early 2000s – the Egyptian economy had its best eight years from 2000 to 2008.
The big drawback is the high interest rate, which is just inhibiting business. It is the reason why you will not find new manufacturing capacity, unless you go to the oil and gas sector. Oil and gas usually takes international loans in dollars, as the revenue is in dollars, and this means reasonable interest rates. If you are getting your money in Egyptian pounds, you will be paying close to 20% interest including fees and that is not sustainable.
How is the private sector responding to new frameworks that aim to increase investment attraction?
Laws are very good, but even the best of them alone are not the solution. It’s all about how they are applied. We need to restore the lost confidence between the government and the private sector, not by issuing laws, but by applying them. In the real world, the issuing of laws doesn’t secure their objective.
The oil and gas sector in Egypt is internationalised, and what you see here is the best side of Egyptian industry. It’s going so well because it’s taking place between foreign multinationals and the government. Compared to other sectors, there is an accumulated experience among the government officials; they are focused on promoting investments and there’s much more dialogue between the stakeholders. This industry is far ahead.
For instance, there are the new gas regulations which aim to liberalise the gas market. The promotion is slow, but at least it’s there and the government has already encouraged four or five companies that are now committed to exporting and importing gas.
The new Gas Regulatory Authority is also encouraging private and foreign players to trade gas with an open market. This authority is separating some regulatory aspects from EGAS. It is definitely a good step, but actually seeing it on the ground is the next step which will materialise in the next few years, making Egypt the regional gas hub.
Are services companies feeling the impact of the gradual settlement of arrears between the government and IOCs?
Indeed, the payment of arrears to IOCs is helping service providing companies. This is also encouraging new players to come to Egypt, players which will need companies that can provide certain services.
Drexel Oilfield Equipment, one of our subsidiaries, is definitely one of these companies, and has the appetite and can penetrate the market at this time when people are very tired from recent years. We’re doing this in a new way, investing in assets and people to be able to provide best-in-class services. We invested in our downstream and upstream services range and in safety, and we’re investing in logistics, transportation and workshops. This is the best opportunity for us these days.
We are investing in people before assets, requiring the best in the market and training our people on new technology and skills.
What opportunities will the East Mediterranean energy hub come with for local companies?
Exporting gas petrochemicals and electricity is one of the main targets of the country now.
Firstly, Egypt becoming a regional hub will expose us to new technology. Secondly, we have cheap but skilled labour. Compared to other East Mediterranean countries such as Greece, Cyprus and Turkey, we are far ahead within the gas industry, we are ready for this move to export services rather than importing them from these countries.
Egypt has the required infrastructure already available compared to those countries. And more importantly, we have developed expertise within the gas business over the last 30 years. All the experience that Egypt has gained will be useful in this new hub that is being envisioned between Egypt, Cyprus, Greece and the whole region.
What is your view of the strategy of increasing transformative industries in Egypt by taking advantage of the now available gas as feedstock?
All the refined products are definitely an added value; we’re not just trying to export raw gas. It’s about the whole end product chain. We’re building new petrochemical complexes in the Suez Canal area and in the Mediterranean because we have all the facilities there waiting to work. Since 2010, when the revolution started, we’ve hardly used 20-30% of the capacity of the infrastructure that we already had in place, but today we are making use of them and also adding to them. There are new investments coming into the downstream area, into greenfield projects but also into upgrading the facilities to prepare for this energy hub.
What are some of your recent engagements in the downstream industry?
We have invested in our downstream and upstream services portfolio during pre- commissioning of new projects and during shutdowns and turnarounds.
We have purchased new up-to-date nitrogen pumping units, vaporisers, tanks and also safety services related equipment and gas monitoring tools.
We are also investing in logistics, transportation and workshops.
Our eyes are focused on working with new refining and petrochemical upgrading projects; we worked at the Zohr project in the downstream part of the gas plant.
We have currently just successfully completed works with methane shutdown, completing the catalyst change out scope, mechanical works and heat exchange hydro jetting work. We also completed new catalyst loading for GS/ERC refining and the BP West Nile Delta Giza Fayoum and Rawen plants including the full safety service for all the activities.
This is in addition to the nitrogen purging service for Gupco shutdowns and the Sokhna NC/C second ammonia tank.
Could you walk us through your portfolio companies engaged in oil and gas?
ADES is a great success story. Thanks to the recent acquisition of Weatherford’s drilling rigs (in Algeria), 60-65% of the business now is outside of Egypt. This of course helps our economy. We need to have as much success in terms of revenue from different countries as possible.
As for Drexel, it is one of the oldest companies in the oil and gas services business. Egypt started to talk about freeing the economy and opening up for the private sector in 1975. Following the war in 1973, Drexel was established shortly after that, in 1976, using the new laws, and we bought it in 1994.
Sky Logistics was created exclusively for the oil and gas business. The initial idea was to move onshore drilling rigs from one location to another. The rig is disassembled into pieces, loaded onto trucks, transported to a new location and reconstructed. Since then, the business has developed outside the oil and gas sector, and we started working with Siemens and fertiliser companies as well. These are our three main services provided to companies related to oil and gas.
We are now developing a project called SKY PARK, our initial real estate project in terms of office complexes and commercial buildings in the middle of Cairo. We’re launching the sales this September and we will deliver at the end of 2020.
Our aim is to market it to oil and gas companies, to create an oil and gas ecosystem within that park.
From the Sky Investments Holding perspective, what is the added value you bring to your portfolio companies?
The portfolio companies are owned by holding companies as this is facilitating, for example in terms of finance. To banks, we appear as one solid company in order to give corporate guarantees and induce the confidence required to get certain loans.
We concentrate all the cross functional-support functions such as human resources, legal and financial to support all of our companies.
We delegate a lot to the companies we own in terms of operations. We want to be fragmented and we want people to be specialised and focus on their business. In each individual operation, there is a manager who is responsible for his own company.
Would you consider repatriating assets if Egypt’s hydrocarbons industry continues to grow?
Despite the increase in business in Egypt these days, this will not be our strategy. We might increase assets by buying new equipment in order to serve the Egyptian market if needed, but unless we’re seeing losses in other countries, I wouldn’t think of bringing back equipment. I don’t think that the direction of this country invites us to bring back anything. In fact, I would advise the opposite: Increase assets to serve the local market, but keep your international assets abroad because it brings foreign countries and internationals back in Egypt.
Are you looking towards organic or inorganic growth?
We are looking towards both. We want to acquire new companies and workshops, but at the same time we are developing the business within each of our companies.
We’re growing the upstream and the downstream businesses. Within upstream, we are currently pushing through our safety division within Drexel, which provides safety services to around 30% of the market in Egypt.
Within downstream, we are also working very hard, not just for oil and gas, but also by providing services to petrochemicals and fertilisers companies. We’re aiming to be one of the top safety providers in training, PPE [personal protective equipment], H2S, drilling operations and so on. We’re providing these services across the whole industry, not just for oil and gas.
What are your international ambitions?
Our direction is to look for opportunities in Africa, not just in the Middle East region. There is real business to be found in Africa. We’re looking at opportunities in Rwanda and Kenya for instance.
What is your outlook for the coming years?
There are tremendous developments coming in the oil and gas sector, not just for the gas that has been found in the Mediterranean Sea, but in the new areas to work on such as the Red Sea.
Zohr’s success has put Egypt again in the international spotlight, and the stability is bringing people back to work in the country.
Today, the developments we are all witnessing are reassuring investors that Egypt can pay and that you can repatriate your investment. The flotation of the currency has also helped the economy a lot. I think the years to come have a good market share and the capability to serve this growth.
Egypt reinstated political stability and security after the 2011 revolution and even more after 30/06/2013, which has attracted FDI and developments in many oil and gas projects.
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