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Egypt's Decline Could be Trouble for Energy Investors

By Daniel J. Graeber | Sun, 25 August 2013 00:00 | 0

U.S.-based energy explorer Apache Corp. is one of the last holdouts in Egypt, which accounts for about 20 percent of its global oil and natural gas production. It says its production hasn't dropped because of what appears to be a protracted political crisis in a country once lauded for its democratic achievements. Most energy companies with assets in Egypt have suspended operations since the military removed Mohamed Morsi from power in early July. The government said a decision to appoint a veteran executive as chairman of state-run Egyptian General Petroleum Corp. would likely boost foreign investor confidence. Members of the international community are suspending ties with the interim Egyptian government, however, and their retreat may pull investors like Apache with them.

The U.S. Energy Information Administration said in a July briefing on Egypt new oil discoveries were made there every year since 2008. Most of them were the result of exploration activity carried out by Apache in the Western Desert, the report said. The company reported seven oil and natural gas discoveries Aug. 1 in the Western Desert, where it holds 9.7 million gross acres. The largest discovery, Riviera SW-1X, tested at 5,800 barrels of oil and 2.8 million cubic feet of natural gas per day. Less than a month after the military took control, the company said its exploration and development program in Egypt was moving steadily along.

Apache bought up BP's assets in Egypt for $650 million in 2010. By the end of last year, its holdings there were worth about $854 million. It's swimming upstream, however, as most of its peers have suspended operations because of political violence. German chemical giant BASF, Swedish multinational Electrolux and General Motors all cited the security situation in their recent decision to shutter their offices in Egypt temporarily. Barely three weeks into the crisis, BG Chief Executive Chris Finlayson said the current situation was "a primary concern and will continue to be so as the political, social and business environment evolves."

Related article: Egypt, Take III: No End to the Carnage

The Egyptian government said last week it tasked energy veteran Tarek El Molla to head the state-run EGPC.  The last man to hold the job, Tarek El Barkatawy, was appointed in May. The government expects El Molla to help address spiraling debt and overall production declines. A general decline in the country's energy sector contributed to the sense of frustration with Morsi' administration before the military intervened. Now it's the international community calling some of the financial shots in Egypt. The European Union last week said it was concerned about the economic situation in Egypt but felt it was time "to review the issue of assistance to Egypt" given the severity of the crisis.

Approximately 4 percent of the world's oil travels through the Suez Canal, which remains open despite the unrest. Nevertheless, the crisis in Egypt was blamed for recent spikes in oil prices. That said, on the supply side it's likely Libya will create long term problems for energy markets, not Egypt. For investors like Apache, however, the risk remains severe. EU foreign policy chief Catherine Ashton said she's willing to play a role in a political resolution despite lingering frustrations. The Muslim Brotherhood, Morsi's political support group, hasn't shown signs it's ready to negotiate, suggesting the crisis will continue even if Ashton is welcomed back to the bargaining table. Energy companies may be able to tolerate a certain level of risk on their books, but looming civil strife, no matter what form, is a poor investment to bank on.

By. Daniel J. Graeber of Oilprice.com

About the author

Contributor
Daniel J. Graeber
Company: Oilprice.com
Position: Senior Analyst

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