Infrastructure for investment

Egypt

TOGY talks to Thomas Maher, president and COO of Apex International Energy, about Egypt’s current economic environment, how infrastructure investments have made the market more attractive and local challenges faced by E&P players. Apex signed two PSCs with the government in August 2017 for the West Badr el Din and Southeast Meleiha concessions.

What is your assessment of the current economic environment in Egypt?
The currency devaluation in November 2016 had negative consequences for the purchasing power of most Egyptians. In parallel, the government introduced tough economic reforms two weeks later by accepting a USD 12-billion Extended Fund Facility (EFF) from the International Monetary Fund (IMF). The fiscal reforms required under the EFF has resulted in a much-improved macro-economic environment for Egypt.
Vast improvement in foreign exchange reserves, expat remittances, tourism revenues, tax revenues, and Suez Canal revenues have all been noted. The government is also spreading out its debt financing obligations and trying to put a strategy in place to balance out payments over time.
The debt is something that everyone is keeping an eye on because it continues to grow. Yet the fact that subsidies are starting to be reduced as tax revenues increase is helping to balance the budget. Egypt had a primary budget surplus in their last fiscal year for the first time in decades.
Another past problem that the government has addressed and is close to solving is the past due payments owed to the oil and gas producers in Egypt. The arrears on these payments reached over USD 6 billion in early 2014. These companies could no longer afford to invest in exploration and production (E&P) operations, which led to natural gas production reaching very low levels, forcing the government to import LNG.
Fortunately, these arrears have been brought down steadily since 2014, to about USD 1 billion at the end of 2018, with the stated goal of complete elimination by the end of 2019. E&P companies have been investing again, particularly in offshore Mediterranean gas development projects. The result has been an increase in natural gas production from a low of 3.9 bcf [110.4 mcm] per day in Q3 2016 to a current 6.8 bcf [192.6 mcm] per day, which has allowed Egypt to stop LNG imports and restart LNG exports.

How would you describe the investment arena in the country?
Despite the improved macro-economic environment in the country, an expected increase in foreign direct investment (FDI) has not materialised as yet. This is a concern because what Egypt really needs now is to attract additional FDI that is needed to sustain the economic recovery, create jobs and drive down unemployment.
The government has taken pertinent steps to improve the situation by investing in infrastructure, which helps to reduce unemployment short-term and prepare the country for FDI to come in. Eventually the state should start pulling back the reins on this public spending, and give space for private investment to come in.
Broadly speaking, you won’t attract FDI without good infrastructure. So it has been a smart move on the government’s part to launch a number of projects to build key roads, tunnels, bridges, new cities and specialised economic zones. However, it has also put a strain on their budget and crowded out some private investors wanting to come in.
With respect to infrastructure in the upstream oil and gas sector, the Mediterranean is coming up with fresh discoveries on a regular basis and now hopefully there will be activity in the Gulf of Suez. These areas all have key infrastructure already in place, so there is not a lot of lead time required to hook up discoveries and start generating revenues for the state and contractors.

What are the major challenges E&P companies such as Apex face in Egypt?
Bureaucracy and strict regulations cause major setbacks not just in oil and gas, but in many industries in Egypt. The country is trying to make progress in these ambits to allow businesses to come in and establish themselves as quickly as possible.
In this sense it is vital to have good co-operation with the government. We work with both the Ministry of Petroleum and EGPC in our two concessions in the Western Desert. They know we are a new company coming in and they want to see us succeed.

To what extent is Ganope’s establishment of a new PSA model a step forward?
It is a step in the right direction, but it is not where most of the IOCs would want to see it. They are showing a good effort to modernise the standard production-sharing model to attract more foreign investment. My understanding is ExxonMobil, as well as some of the other large IOCs, provided the government advice in this regard. You can see some changes to the PSA model in the most recent EGAS and Ganope bid rounds.
However, the focus thus far with these changes to attract investment has been in the Red Sea and Mediterranean Sea, which are deepwater plays and expensive to explore. The government has come to realise that they must come up with a more hybrid model of concession agreement when it comes to specific areas and levels of investment. Many of us looking at Egypt’s mature oilfields would like to see future agreements address the special needs there.

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