As Egyptian political stability takes a turn for the worse, the country has awarded its first oil concessions since the 2011 revolution to Royal Dutch Shell, RWE and TransGlobe Energy.
Curiously, investors are not put off by the raging political instability and the little matter of $3 billion in arrears owed to foreign oil companies.
Up for sale earlier this month were 15 blocks—11 of which were bid on--with Canada’s TransGlobe taking four, Shell won three, and one block each went to Germany’s RWE, the US’ Apache Corp., the UK’s Dana Petroleum, and Greece’s Vegas.
TransGlobe says it plans to begin production of the new blocks in 2014. The Canadian company is currently pumping around 18,000 bdp in Egypt and has previous shares in five licenses. Shareholders are certainly not nervous about Egypt. Transglobe’s shares on the Toronto Stock Exchange rose about 14% to six month high in early November, with the news of its Egypt acquisitions.
Shell’s three concessions are in the western desert, with one of them being a joint venture with an Egyptian company.
Egypt is a significant gas producer—much of which is domestically consumed--and a net importer of oil, though it has 18.3 billion barrels of proven oil reserves.
But we don’t like the level of unrest in Egypt, which seems to be on the edge of another revolution already.
The short story is this: Egypt's new President Mohamed Morsi has taken control over all branches of the government—Hosni Mubarak style—and his many opponents are fighting tooth and nail over this dictatorial move. It’s a major new political crisis that threatens a rerun of the 2011 revolution. The coup-happy military may not stand for it and we could see another military government right around the corner.
On the surface, Morsi’s power grab was intended to stop another constitutional crisis that would have seen the old-regime judges scupper the constitution, which is being revised by a committee dominated by Islamists (Muslim Brotherhood) who support Morsi.
Right now, the Assembly and the Constitutional Court are engaged in a bitter power struggle. The Constitutional Court says it will dissolve the Assembly on Sunday. The Assembly says it will have a new version of the constitution ready before the end of this week.
It’s a race to the finish that is being run against the backdrop of violent protests.
With this in mind, should foreign oil companies be worried about that backlog of oil payments? Yes. While there has been some movement to pay these arrears, it has only scratched the surface, and Egypt is attempting to negotiate barter deals to make good on what they owe.
Here’s another thing we don’t like: In all probability, the November auction includes the country’s best blocks to lure investors in. These blocks may not be representative of the larger picture.
By Charles Kennedy for Oilprice.com