Benefits in the new alignment

Egypt

Sherif El Kilany, Egypt market segment leader for EY, talks to The Energy Year about the impact of the Covid-19 crisis in Egypt and why the country is poised to benefit from the realigning of global industry and investment flows. EY offers assurance, advisory, tax and transaction advisory services worldwide.

How well has the Covid-19 crisis been handled globally?
Covid-19 has been a real shock to the world’s economy. Businesses, financial sectors and energy industries have been disrupted. It left us with a major disruption from a social perspective as well. At the beginning people said it would only be temporary, a matter of weeks, but now experts are talking about a second wave. We saw airlines stop their operations completely, petrol stations almost closed and factories halting production.
In the energy sector, there is also a slowdown due to the lack of demand. Right after Covid-19 broke out we saw a drop in the price of oil and gas, which was a shock to countries that are dependent on income from natural resources. So the energy sector is on top of the list of affected industries. Meanwhile, we still don’t know whether a vaccine will be produced in the coming months.
Some people say that the economic shock will last for another one and a half years. Unfortunately, the situation is strongly linked to how the big economies react to their GDP growth. When I look at all the GDP scenarios for the next 12 months, I don’t see any optimistic ones, and some of them even foresee negative GDP growth.

What has been the impact in Egypt?
The Egyptian government has an agenda that is still full of activity for the next year, and that goes across every single sector. The energy sector will definitely grow with this agenda. There is talk about industrial zones, for example.
While Covid-19 brought bad news, it also brought opportunities. Regarding how it could benefit Egypt, Egypt has long been developing its infrastructure, such as with the Siemens-built power stations that were brought on line a few months ago. This required a USD 12 billion-13 billion investment in a period when Egypt needed a lot of cash, but infrastructure is very important for any industry. If you start to speak about investment, the first issue that comes up is whether you have the electricity to support the industry. Today, Egypt is even talking about exporting electricity to other countries.
In the past, we had global industrial hubs that did a lot of work for the US and Europe, namely China and India. In the future, this equation is going to change and the US and Europe will start looking at other industrial opportunities around the world. They will look to see who has energy, electricity, infrastructure, roads and cheap labour. This will put Egypt’s energy sector into an advanced position for attracting foreign investment, and the government has many plans in place to encourage this.

Where does Egypt’s national energy industry stand in terms of embracing digitalisation?
This is an area that national energy companies have already been thinking about. International standards will be reached starting with the public-sector companies. There is a trend in Egypt of reorganising companies using international accounting standards or ERP [enterprise resource planning] systems. This is very tough to do taking into consideration issues of legacy, legislation, employment rules, etc. But it is moving ahead. The initiative’s stage of completion now is 50-60% and once it is finalised, all of these companies will be at very high standards. This is on the top of the government’s agenda.

Are changes needed to the structure by which Egypt manages its energy resources in light of the high interest from IOCs?
All of Egypt’s governmental and public-sector assets now belong to the Sovereign Wealth Fund, which was established more than a year ago. Gradually you will see the fund accommodate all the public-sector companies. This is the best structure to organise and ensure that the entities are self-sustaining rather than subsidised. You need these companies to be profitable and to maximise their profits. For the assets that are not used, you don’t need to enter into competition with the private sector – you need to privatise these.

What can Egypt offer to investors in a post-Covid-19 environment?
In exploration, Egypt’s laws and regulations are very friendly and offer a lot of guarantees. Entrance and exit are very simple. The transfer of rights of concessions goes very smoothly. And the system gives a lot of benefits when the exploration companies switch to production. The foreign currency issue is no longer a problem. The government has squeezed itself to make sure everything has been kept on track and payments have been made. The devaluation of the Egyptian pound which happened three years ago facilitated the government gaining foreign currency.

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