REFILE-Egypt debts to oil firms highlight subsidies struggle

Fri Apr 12, 2013 11:24am EDT

* Oil firms reveal Egypt owes them $5 bln, half overdue

* Apache says has $1 bln political risk insurance for Egypt

* Upstream investments still strong, to exceed $8 bln

By Dmitry Zhdannikov

LONDON, April 12 (Reuters) - Egypt owes at least $5 billion to oil companies, half of it overdue, corporate reports have revealed, in a development highlighting the country's struggle to meet soaring energy bills while subsidising prices to avoid public unrest.

Egypt has been delaying payments to firms producing oil and gas on its territory as it has struggled with dwindling currency reserves, rising food bills and sliding tourism revenues since the 2011 revolution that overthrew Hosni Mubarak.

Most oil firms hope to recoup the debts in full, but they acknowledge it could take years. While they are still planning to invest in new projects in Egypt that will help it avoid an energy meltdown, the debt situation remains a challenge.

The government's delay in paying its debts to oil and gas producers could hold back investment in the sector and potentially endanger Egypt's energy security.

"The delays in payments to the operators end up hurting Egypt itself as a potential decline in investment and production may lead to lower government revenues and a supply gap, in a potential vicious circle," said Majid Jafar, managing director of the board of Dana Gas.

Dana is owed $230 million by Egypt in overdue payments for gas supplies and says it is in active dialogue with the government over the debts.

Financial disclosures by firms such as BP, BG, Apache, Edison and TransGlobe Energy show Egypt owed them more than $5.2 billion at the end of 2012.

BP was owed $3 billion as of the end of 2012, of which around $1 billion was overdue. BG was owed $1.3 billion, of which $600 million was overdue. Edison has $400 million overdue, followed by TransGlobe and Dana with over $200 million each.

Egyptian officials have never disclosed debt figures and have challenged estimates ranging between $7-$9 billion. Egyptian officials and oil company sources say some debts are being repaid but the scale and speed are unknown.

At the end of December, Egypt owed TransGlobe, a small Canadian oil explorer, $220 million. Company officials declined to give the current number, saying it will be detailed in first quarter financial results in early May. The company has stakes in five concessions in the country.

Since the revolution, the government has been making its payments for oil after about 8-1/2 months on average, which is about a month longer than was the situation before, Chief Financial Officer Randall Neely said.

"It's always an ongoing dialogue ... with them to make sure we are a priority to get paid so that we can continue to function appropriately in the country and grow production," Neely said.

"I wouldn't say it's shaken our confidence in terms of working in the country. We continue to be positive in terms of our ability to get things done and the opportunity set within the country," he said.

POLITICAL RISK INSURANCE

Foreign companies dominate the energy sector in Egypt, Africa's top oil producer outside OPEC and its No.2 gas producer after Algeria.

Output has been in decline in recent years. January oil production fell 3 percent year-on-year, according to government data, while gas output fell 9 percent.

Oil output was the lowest in three years and gas output the lowest in five years, according to the Middle East Economic Survey. Egypt's oil use has risen by a third in the past decade, and exceeded oil output since 2008.

Driven by population growth and energy subsidies, which account to $15 billion a year or a quarter of the budget, Egypt's gas use has nearly doubled over the last decade to nearly match production, thus limiting exports and hard currency revenues.

The Egyptian economy has been in crisis since the overthrow of Mubarak in 2011, with President Mohamed Mursi grappling with a weak economy and street protests. Rating agency Moody's puts chances of a default at 10 percent within one year.

Some companies say they will have to wait for years before recouping the debts. BG said it expects to fully recover $1.3 billion by the end of 2015, under a recent deal pegged to oil and gas production levels.

As political and economic conditions deteriorate, some have taken precautions. Apache has purchased a multi-year political risk insurance from the Overseas Private Investment Corp and other insurers to cover Egyptian risks.

"These insurance policies provide approximately $1 billion of coverage to Apache for losses arising from confiscation, nationalisation, and expropriation risks, with a $263 million sub-limit for currency inconvertibility," Apache said.

It also has a $300 million coverage with OPIC for losses arising from non-payment on past invoices.

"The coverage was critical to Apache's ongoing investment in Egypt," said OPIC.

NEW PROJECTS

Oil companies say output declines will be reversed as investment rises, despite the debt challenges.

Apache, the largest oil producer in Egypt, plans stable investment in Egypt for 2013 at over $1 billion.

"We have not missed a day of production since the revolution began in January 2011. We believe the Egyptian government understands the value of our contribution, especially at a time when other sectors of the economy are struggling," spokesman Bill Mintz said.

Other major players also say investment will remain stable or even rise despite the government caps on gas prices, which are below U.S. prices and are a fraction of EU prices.

"There's been no impact on production, or investment decisions," said a BP spokesman.

Apache, BP and Edison did not comment on the debts owed to them by Egypt.

BP however identifies Egypt as a major development area as it is planning to start drilling 18 wells as part of the $13 billion West Nile Delta project, which will ultimately produce enough gas to meet around a fifth of Egypt's demand.

BG and partner Petronas have also sanctioned $1.5 billion in new gas investments. The government hopes to eliminate energy subsidies within five years, which could make its gas market attractive.

Egypt's ministry of investment has said the energy sector will see a rise in investment in 2013 from $8.2 billion in 2012, which was down $400 million on 2011.