February 6, 2015 / 7:00 AM / 5 years ago

Egypt's energy reforms spark rush of oil and gas deals

* Oil company debt repaid in-kind with exploration deals

* Three major oil and gas deals worth $9.2 bln in works

* LNG to align Egyptian fuel prices with global trends

By Oleg Vukmanovic and Shadi Bushra

MILAN/CAIRO, Feb 6 (Reuters) - Energy-hungry Egypt’s willingness to push fuel market reforms and stick to debt repayment plans has led to an unexpected resurgence in oil and gas exploration and supply deals previously delayed by political upheaval.

The country has emerged as a major new oil and gas market as the government looks to ease the worst energy crunch in decades.

In January alone Egypt clinched 15 new exploration deals, amended two more, and closed major tenders to import liquefied natural gas (LNG) from Algeria to Russia, opening up to global energy pricing norms as the government seeks to scrap crippling subsidies by 2019.

Explorers lured by rising earnings on oil and gas production set by the state are seeing the country in a new light even though some are still owed billions, said Martijn Murphy, North Africa upstream research analyst at Wood Mackenzie.

The country of about 90 million relies heavily on gas to generate power for households and industry.

The energy ministry says $2.9 billion of investment has flowed into Egypt’s upstream energy sector — exploration and production — since November 2013, months after then army chief Abdel Fattah al-Sisi took power.

Three major oil and gas deals worth a total $9.2 billion are also in the works, a spokesman for the energy ministry said. He gave no further details.

“Paying down of debt, offshore pricing reform (and the expectation of more of it to come) as well as Egypt being a huge gas-hungry market” is pulling back investors, Wood Mackenzie’s Murphy said.

After four years of turmoil, rising gas demand turned Egypt from net exporter to imminent importer while mounting oil company arrears put off new drilling and production investment.

The result was the worst energy shortages in a decade.

But Egypt has been settling its debts with foreign energy companies, and as of December it owed $3.1 billion after repaying $2.1 billion. Energy reforms show signs of paying off while the plunging price of Brent crude renders energy subsidy cuts relatively painless.


A new pricing policy has pushed earnings on offshore gas production to $6 per million British thermal units (mmBtu) for new satellite developments, partly enabled by subsidy rollbacks that once swallowed a fifth of Egypt’s gross domestic product and impeded the state’s ability to pay producers.

“It is expected that the amended gas price will encourage energy companies, especially in light of anticipated movements in global oil prices,” said Tarek El Molla, head of state oil company EGPC.

Gas returns were previously capped at $2.65 per mmBtu.

“In the Western Desert, where exploration costs are lower, the government has begun raising the price it will pay to gas producers,” Martijn added, saying Germany’s RWE Dea won a price increase on new production from its Disouq project.

German utility RWE’s oil and gas unit Dea said it sees potential for new investments in Egypt thanks to state efforts to make projects more competitive.

Big energy companies Eni, BP, Shell and Total have all announced new exploration deals in Egypt over the past month.

The general manager of Edison’s Egypt business, Maurizio Coratella, expects a “considerable” increase in gas prices and a move away from existing formulas, he told Reuters.

“New agreements with EGAS do not have a fixed gas price, as it will be negotiated in light of the economics of the project as well as include the possibility for contractors to sell directly on the local market,” he said.

Short of cash, Egypt clearing its debt has involved giving explorers advantageous deals from waiving signature bonuses on new leases to tying payments to production increases.

“In addition to the recent payment we have agreed a plan to collect the receivables as we increase production,” Majid Jafar, managing director of the board of UAE-listed Dana Gas told Reuters.

Last month the company said Egypt’s debt to it had fallen to around $160 million, from $280 million in September.

TransGlobe Energy offset $40.6 million in bonuses against owed receivables from blocks it won in a recent bid round, Martijn said. The company declined to comment.

Edison has pitched building a power plant fed by new supply from its offshore Abu Qir field and offsetting power sales revenues against outstanding arrears, Coratella said.

Rather than pull back, the various schemes show how oil companies are using debt leverage to deepen their exposures to fast-growing Egyptian energy markets as European demand fades.

BG Group is working with BP and GDF Suez to bring in offshore gas supplies through its own under-used pipeline infrastructure. The unfinished deal could help BG resume LNG exports, a company source said.

Still, Egypt’s days as a net gas exporter are numbered, explorers and analysts said.

Last week Egypt awarded a $2.2 billion LNG import deal to European trading houses - at least two more are in the works.

The hope is that subsidy cuts will tame gas demand growth for long enough to allow new supplies to start filling the gaps.

Additional reporting by Vera Eckert in Frankfurt and Rania El Gamal in Dubai; Editing by Michael Georgy

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