By Hussein Abdallah

Dr Abdallah is an energy consultant based in Cairo, Egypt.

What shouldthe new oil minister do after the 25 January revolution? Nothing more than make sound plans to confront the projected future and postpone the time when the oil and gas wells run dry. As he knows personally, the truth is that Egypt has become a net importer of oil and gas, since its share of production no longer suffices to meet its domestic needs, forcing it to cover the deficit by purchases from the share of foreign partners. For example, oil and gas production in 2007 was some 76mn tons, of which Egypt’s share was some 47mn tons, while local consumption was some 60mn tons. Thus the shortfall amounted to 13mn tons, which Egypt had to purchase with hard currency from the allocations of foreign companies.

Since energy consumption is forecast to grow at an average annual rate of 5%, Egypt’s annual oil and gas requirements could reach some 100mn tons or 750mn barrels of oil equivalent by 2020. Total local requirements (ie cumulative consumption) could thus reach 1.1bn tons/year for the period 2006-20. Since oil and gas reserves are put officially at around 2.2bn tons of oil equivalent, Egypt’s share of these reserves, after the foreign partners take their share, could run out during the first half of the '20s of the present century, despite the difference in depletion dates between oil and gas, the latter’s reserves being put at four times those of oil.

Since the price of oil is expected to be no less than $120/B by the beginning of the '20s, if Egypt becomes an importer of all its oil and gas requirements it will face an annual bill of $90bn or more, beside being forced to compete with the other countries whose thirst for oil and gas is increasing as their expected depletion approaches. It makes no difference if the alternative is nuclear energy, since the cost and dangers involved are greater than oil and gas and the component paid to foreign companies is 70% of the cost.

Fortunately, the 25 January revolution has paved the way to take positive steps to extend the depletion period. The foreign oil companies were well aware that the government under the National Democratic Party and Mubarak could collapse at any moment and had become like an apparently sturdy tree whose core had been eaten by woodworm and which could be carried away by one strong gust of wind. In the light of this outlook those companies began to ramp up production and exports, particularly of gas and at extremely low prices, in order to garner maximum profits before the tree collapsed and was replaced by young and strong saplings of a sort whose roots have been germinated in Tahrir Square.

However the companies must know for sure that these young saplings have a long life before them and that they will have a sound awareness of the facts of life based on science and technology. The companies can therefore cooperate with them in the certainty that their investments will remain safe for an extended period of time, and that a slowdown in production and exports is in their interests and ensures energy security for as long as possible for the country that hosts them and provides conditions unmatched in other countries. Among these are:

(1)       The foreign partner is not liable for the tax which is the state’s right in exchange for depletion, regardless of the profits or losses arising from production, since the Egyptian General Petroleum Corporation (EGPC) is responsible for the tax instead.

(2)       The foreign partner is not responsible for income tax, which is paid by EGPC instead, nor is it subject to American taxes, meaning that its profits are exempt form double taxation.

(3)       Egypt provides a trained workforce and advanced infrastructure such as pipelines, communications and roads, as well as an advantageous geographical location and a suitable climate.

(4)       Egypt also provides a relatively stable investment climate. There are no tribes who destroy production equipment, cut oil and gas pipelines or threaten the lives of workers in the fields as is the case in Nigeria, Yemen and elsewhere.

Since it is well known that the average success rate in drilling for oil in Egypt is considered one of the highest in the world, the risks and expenditures faced by the foreign partner are less than elsewhere and this must be reflected in Egypt’s favor in negotiations.

The January revolution has paved the way for the companies to review production and export levels so that production does not exceed Egypt’s domestic requirements, taking into account our readiness to buy the companies’ share at the price laid down in the legal agreements before they were amended in the companies’ favor, ie around $2.65/mn BTU. This is about half the price of (and safer than) electricity produced by nuclear power.

The companies should not be concerned if the term of the agreement is extended to some 35 years, which will cover and ensure the production of all the oil and gas in the biggest fields. One of the factors favoring these positive steps is that the companies have begun to compete among themselves to obtain drilling rights in oil countries and are accepting conditions they never accepted in the past. Similarly the oil sector is seeing the emergence of oil deficit countries such as China, Brazil and India, which are looking to sign drilling agreements in the oil countries and are ready to offer greater concessions and compromises than traditional oil companies. Therefore Egypt, with the advantages it has to offer, some of which are indicated above, has no need to fear that the companies will steer clear of investing in it.