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Shadow Governance Intel

Shadow Governance Intel

Shadow Governance Intel (www.shadowgovintel.com), the analytical arm of West Sands Advisory Limited, conducts in-depth research on power players and power plays that challenge the transparency…

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Is Egypt’s Zohr Field A Game Changer?

NatGas

A politically turbulent six-year period has impacted the Egyptian business environment, adding a new layer of political risks to investments made across the national economy. Despite this, the outlook in certain sectors is largely positive; and the gas sector may be one of the first to see profitability.

With the third largest gas reserves in Africa, behind Algeria and Nigeria, and the 17th largest globally, international interest has always existed in Egypt’s gas sector. However, management of gas pipelines has been a controversial issue, leading to concerns over how viable the industry is set to be once fully developed under President Sisi.

To Zohr and Beyond

The discovery of vast gas reserves in the East Mediterranean basin is generating renewed impetus from the Egyptian government to attract investment into the sector. As a result, steps are being taken and compromises made in the name of boosting investment incentives into the gas sector, with Cairo’s political elite laying the groundwork for gas sector development.

Shake-ups to the Ministry of Petroleum have occurred thick and fast in recent years, as is the general narrative in Egypt. In March 2017, the Chairmen of both Egypt General Petroleum Company (EGPC) and Egypt Natural Gas Holding Company (EGAS) were replaced in elite level changes to the two most important state energy bodies.

With Chairman of these entities averaging one year in position, investors could be forgiven for showing little interest in the new figureheads. The quick turnover in staff is a worrying sign and one that suggests top level strategic decision-making is somewhat removed from the figures who, on paper at least, sit at the top of two very important pyramids.

Related: Oil Rises, But Saudis Face Daunting Dilemma

But for their part, commercial entities have expressed their interest in Zohr, the gas field set to fill state coffers, with business set to pick up at the end of 2017. Tarek El Molla, Oil Minister, and Sherif Ismail, Prime Minister, are by all accounts the chief decision makers with regards oil concessions and contracts. The two have been working together at high-level for the better part of four years, which is the kind of longevity indicative of stable decision making.

For all intents and purposes, Zohr is set to be a game changer for energy politics in the region. That said, the legal and political ‘lay of the land’ is set to change and it will be prudent for investors to stay in tune with how this impacts business dynamics.

Privatisation

As confirmed by El Molla in early July 2017, the gas sector is introducing executive regulations to liberalise the gas sector, expected to come in September. This will allow private actors to import and distribute natural gas, with the aim of turning Egypt into a hub for the industry.

A new draft gas law was sent to Parliament in December 2016 and is believed to have come into effect. This is set to alter the dynamics in Egypt’s gas sector and contains some important points of note for energy companies going forward.

Most notably, it establishes the ‘Authority for Regulating the Activities of the Gas Market’ and thereby adds a new government body into the mix when doing business. According to a review of the law by Shawkawy & Sarhan, a Cairo based law firm that specialises in industry specific laws, the Authority is an ‘independent public entity affiliated to the Ministry of Petroleum’.

In particular, investors should be wary of the risks this Authority may pose to transparency and accountability, which will become more evident as and when it appears in earnest. The President is known for taking moves to override government officials and heads of authorities, suggesting that it could yet be beholden to the political elite. Its independence will be its strongest asset, and should this be compromised from the outset then the body risks being stillborn.

The President is known for taking moves to override government officials and heads of authorities, making this a very real and worrying reality facing investors. The removal of Hesham Geneina from the Central Auditing Organisation (“CAO”) in March 2016 is the most high-profile example of executive empowerment.

Control and Influence

Although a collection of five companies, the Ministry of Petroleum and Natural Resources in Egypt uses two main entities in the energy sector. Namely, these are EGPC and EGAS and are the bodies leveraging the state’s position vis-à-vis international energy companies vying for exploration licenses and production contracts in Egypt.

In particular, the EGPC has long been the main artery of public engagement with the energy sector. Established in 1956, the remit of the EGPC has gradually eroded as the Ministry developed out EGAS and other institutions such as the Egyptian Petrochemicals Holding Company and the South Valley Egyptian Petroleum Holding Company. Even though the actors involved have been diluted in the period since 2002, the layers of corporate companies still show that the EGPC footprint is fairly large across the energy sector.

As such, any new authority will likely have to wrestle for control vis-à-vis the EGPC, given its prized status in Egypt historically. Likewise, private entities coming into the fore must also grapple with state dominance and the opening up of Egypt’s energy sector may happen more gradually than many investors will be hoping for.

Challenges and Opportunities

Egypt is at a cross roads once again in terms of energy sector management. Politically speaking, the fruits of Zohr bring a two-folded benefit to the political elite in Cairo.

Related: The Next Big Catalyst In The U.S. Oil Export Boom

On one hand, the ability to meet domestic energy demand is a huge motivating factor in developing out the necessary infrastructure. Egypt has had problems with electricity shortages since 2011-2012 and currently imports gas from Algeria and Norway in order to meet its electricity needs, with gas generating 75 percent of the country’s electricity. Regaining a relative degree of ‘energy security’ will bode well for President Sisi ahead of an expected Presidential election in mid 2018.

On the other hand, harnessing Zohr’s export potential brings much needed inward revenues to the state. Having turned to the International Monetary Fund (“IMF”) almost a year ago for aid, the country’s financial status needs a boost. Cutting subsidies, raising taxes, and scaling back government spending has incurred huge sacrifice and uncertainty – with political stability ultimately at risk.

Furthermore, GAN Business Anti-Corruption Portal (2017) points out that companies involved in Public Procurement faces a “high risk of corruption” and that transparency in the Natural Resources sector is particularly poor. Given the forecasted privatisation of the energy sector, this sends out some early red flags.

That being said, the Petroleum ministry’s structured response to tackling its debts with energy companies is a welcome sign of relief. Longstanding relationships between public bodies and international oil companies mean that financial opportunities will almost certainly outweigh political risks, but a heightened level of due diligence may be required in order to safeguard entities from reputational damage or unfair competition.
By Shadow Governance Intel for Oilprice.com

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