Egypt's petroleum ministry is struggling to keep its spending under tabs. Now overspending threatens one of the most important projects in the nation: the contract for natural gas.
Having made significant gas discoveries over the past decade, Egypt has the 16th-largest proved natural-gas reserves in the world at 78 trillion cubic feet, or 1.6 per cent of the world's total known gas reserves.
Yet despite the country's immense known and possible gas reserves, debts owed to international oil and gas companies by the Egyptian government are said to be at least US$4 billion (Dh14.69bn), potentially hindering further production, analysts and industry experts say. After years of buying gas at international prices and selling at significantly subsidised prices in the local market, the overstretched oil ministry is being forced to reschedule payments to its international suppliers.
Dana Gas, the Gulf's only listed natural gas firm, has reported payment delays for gas delivered to Egyptbecause of political unrest. In a statement to the Abu Dhabi bourse last week, the company said the Egyptian gas sector was facing "financial challenges". "We are working together with the host governments to maintain their supply of gas whilst agreeing payment plans for overdue monies that are aligned to our shareholders' interests and the respective countries," said Hamid Jafar, the company's chairman.
Dana Gas collected a total of $177 million in cash last year attributable as part of of receivables from Egypt and Iraqi Kurdistan, the company said in January. A source familiar with the repayments said Egypt was still paying Dana Gas but that the payments were sporadic. "There are no monthly and quarterly instalments. This is a country in revolution and the metre is going higher," the source said, asking not to be named. "Egypt is behind on payments, but at least it is paying."
Dana Gas, based in Sharjah, has substantial interests in Egypt and fully owns three concessions onshore. It also has a 26.4 per cent interest in a gas liquids plant on the Gulf of Suez, which is due to become operationalthis year. Meanwhile, the Egyptian government has also agreed to pay British Gas $500m it owes, a British Gas official said on condition of anonymity.
British Gas, like the other main foreign operators in Egypt, including BP, Eni and Repsol, work in the framework of joint ventures with the state-owned Egyptian General Petroleum. As the country's economic environment becomes more treacherous for investors, analysts say oil and gas companies may seek to renegotiate contracts.
"These international oil companies are having difficulty getting their money back, but the government is putting pressure on them to be reasonable," said Magdi Nasrallah, the founding head of the petroleum and energy engineering department at the American University in Cairo. "We could see a round of negotiating of different prices of contracts, but this won't be now," Mr Nasrallah said. "You're also talking about a government that is in a state of limbo.
"They are not able to implement bold decisions immediately before a presidential election." Heavy subsidies have limited Egypt's ability to offer international oil companies competitive deals for deepwater natural gas exploration, and as a result some exploration work has stagnated.
In November, the local unit of Royal Dutch Shell handed back an offshore exploration block - the Northeast Mediterranean Deepwater concession - to the government because of the high cost of developing gas discoveries in the area. Jeroen Regtien, the Head of Shell's Egyptian unit, said the $200m deep wells needed to develop the concession were too expensive considering the limited return and high risk. "The economic conditions have to be such that this is an economic proposition. We couldn't make it work," he said.
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