Petroleum giants level criticism at current contractual agreements model

Mohamed El-Bahrawi
5 Min Read

The Egyptian petroleum industry’s top players convened yesterday to deliberate the pros and cons of the current model of contractual agreements inked between government and investors, which regulate exploration and development operations within the country’s oil and gas industry.

Organised by Egypt Oil and Gas newspaper and moderated by former minister of petroleum Abdallah Ghorab the roundtable discussion amassed CEOs and senior executives of giant petroleum operators such as Royal Dutch Shell, British Petroleum, Total E&P, Sea Dragon Inc., Vegas Oil and Gas, Transglobe Energy. Present from the government’s side were the undersecretaries for agreements at the Ministry of Petroleum, the Egyptian General Petroleum Corporation (EGPC), the Egyptian Natural Gas Holding Company (EGAS), and Ganoub El Wadi Petroleum Holding Company (GANOPE).

The agreement model in question, implemented by the government in the majority of deals, the Production Sharing Contract (PSC), has recently come under strong criticism by industry players for its structural inefficiencies and the thick bureaucracy attached to its implementation.

In simple terms, the PSC model entitles the investor to a percentage of the hydrocarbon production to cover the cost exploration (cost recovery), which the investor initially assumes and is only eligible for if a discovery made, then the remainder of the production and profit is shared between the government and the investor.

While its true that the Egyptian petroleum industry has endured the past two years of consistent political turmoil better than most industries in Egypt, and has been somewhat successful in sidestepping many of the economic impediments brought about by the lack of stability and security, it is by no means impervious to the structural disarray and the flimsiness of the current government.

The discussion’s shared sentiment was that despite Egypt’s copious hydrocarbon resources, the era of “easy” exploration and production is at its culmination. Meaning that the extraction and and development of these massive resources, which are situated at great depths, high pressures and high temperatures, necessitates significantly larger investments and the assumption of higher risks by investors, a step they’re currently reluctant to take for several reasons, most prominently is the rigidity of the PSC model.

Production from Egypt’s known basins using the conventional methods can only go so far, a “recovery factor of about 1/3” according to Ghorab. The remainder requires the aid of more sophisticated techniques known as Enhanced Oil Recovery, which increase the mobility of crude in the well to facilitate its extraction. Such techniques present higher risks and require larger investments, which are not economically viable under the PSC model due to slow turnaround of cost recovery, a curbing limitation that tends to repel investors.

Egypt’s untapped resources lay at higher depths, onshore as well as in the Mediterranean, horizons that also require massive investments and the utilisation of cutting-edge technologies. The process of exploration requires the government’s approval for each dollar spent by the investor, since the government is required to settle in case of discovery, which restrains investors when it comes to the use of costly technology. That, coupled with the painfully slow cost recovery process, means the PSC has become an obstacle to the development of Egypt’s potential virgin resources.

“Proposing regulations in challenging fields is problematic,” stated Schlumberger’s vice president and general manager, Amr El Essawi. The PSC has countless limitations and “one size doesn’t fit all” added El Essawi.

Former head of Dana Gas Egypt, Hani El Sharkawi, stressed the importance of “putting together a formal committee made up of investors and government officials to look after agreements.“

Government representatives listened openly to the criticism levelled by investors, yet maintained that the PSC is still viable and that some clauses could be amended to suit the needs of investors.

Investors also spoke of honouring the agreements and meeting payment deadlines in order to restore confidence investor.

“Egypt needs a comprehensive energy master plan, and incentives has to be made to encourage venturing into riskier projects,” said Chairman of Shell Egypt, Jeroen Regtien.

Ghorab stressed the need to increase public awareness and engage in an open dialogue with the forthcoming parliament to introduce the problems clearly, maintaining that clarity is essential for guaranteeing a smoother process.

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