Egypt is finalizing details of a new type of oil and gas contract to attract even more foreign investment than the $10 billion already coming into its energy industry this year.
The contract will provide investors with incentives to explore for fossil fuels in undeveloped areas, Egypt’s oil minister Tarek El-Molla said in an interview. He didn’t provide details of the changes to the contract.
“We’re improving the cost-recovery process to be faster, less bureaucratic and more efficient,” El-Molla said. The government will launch a new bid round in the Red Sea this quarter, he said.
The most populous Arab nation wants to become a gas re-exporting hub on the doorstep of Europe, and the contract overhaul is part of a broader plan to liberalize its energy industry. Italian firm Eni SpA’s discovery of the giant offshore Zohr gas field in 2015 reignited waning investor interest in Egypt’s oil and gas industry, the country’s biggest single magnet for foreign direct investment.
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Officials told Bloomberg in October that the new oil and gas contract would allow investors to control their share of production rather than sell to the government at preset prices. The officials, who asked not to be identified because the discussions were private, said terms could be tweaked depending on the investment.
Egypt’s existing production-sharing agreements give investors about a third of a project’s output to help cover exploration and production costs. The rest is split with the government, which has the right to buy the producer’s entire share at the preset price.
International oil companies have long complained about the contracts. Egypt struggled before Zohr’s discovery to attract major new energy investments. Its current investment model drew greater scrutiny after 2011, when the country began to experience fuel shortages and power blackouts.
The government halted gas exports at the time, diverting the fuel for local use and stopping payments to investors for their share of output. Arrears to international oil and gas companies mounted, peaking at $6.2 billion in 2012, and stood at $1.2 billion in July.
Production from the Zohr field along with BP’s West Nile Delta project reversed the shortage. Output soared, allowing the government to end liquefied natural gas imports and resume exports. The country has conducted a test run on its gas pipeline to Jordan, and said it will supply Lebanon via a link that has been idle for years.
Egypt’s gas riches have transformed the LNG demand outlook in the Middle East. The region was a bright spot for LNG in 2015, driven by Egyptian imports. Now shipments have plummeted so much that it could take a decade for demand to recover.
Three of the top four Mideast LNG buyers reduced imports last year
Royal Dutch Shell Plc, which operates the country’s Idku LNG plant, can now restart regular output after being restricted to occasional cargoes over the past few years. The company will export 17 cargoes in 2019, El-Molla said.
While gas exports are rising, Egypt still has to import much of the oil products it needs for heating, transportation and power generation. The country is investing $9 billion to expand refining capacity and plans to stop fuel imports in about four year, El-Molla said. The Egyptian Refining Co.’s new $3.7 billion processing plant is part of that effort, and will begin operations by the middle of 2019, he said.