Egyptian Potential – Oasis of Opportunity
The Middle East and North Africa, in particular Egypt, has weathered the global financial crisis with limited scars and remained one of the growing economies in the region until the current political confrontation. The country, with its modest petroleum reserves, remains a reliable source of production for both the majors and smaller independent nearby countries. Egypt attracted ever greater Foreign Direct Investment since it commenced reforms in 2004.
For Oil & Gas investors, the country has many pros and cons given the relatively demanding fiscal terms, cap on domestic gas prices and the good past stock market performance since the peak of the cycle mid-2008 relative to other geographic regions. This reflects the defensive nature of the region to commodity price moves. This is balanced by the low cost to operate in Egypt, an attractive geographical location, the quick time from discovery to payback and recent reforms that may bolster investments.
Positives Preferences
Strategic Location – Egypt is strategically located at a major transport hub linking the European Union countries, Middle East and Africa. Approximately 8% of the world’s total shipping transits through the Suez canal. Furthermore, the 2.5 MMBbl/d capacity Sumed pipeline is an important alternative pipeline to transport crude oil from the gulf to the Mediterranean.
Limited Risk of Resource Nationalization – Egypt has an extensive involvement of international oil companies ranging from the majors to the smaller independents. Since the beginning of petroleum sector reforms in 2000, laws have been promulgated to protect foreign invest- ment, e.g. Law 8 of investment which guarantees against deduction, sequestration and nationalization.
International Relations and Geopolitical Stability – Egypt was widely regarded as one of the most politically stable countries in the Middle East and North Africa region until 25th of January. To the major foreign investors will be extremely important how the current political conflict will be resolved and who will
Small but Plentiful – The country’s mature oil and gas industry has created many opportunities and has opened up for the smaller independents as focus has shifted from discovering giant fields to developing smaller fields and increasing productivity in discovered fields.
Rapid Resource Monetization & Infrastructure – Egypt has a short payback period, especially for onshore projects, and the country’s recent investment in oil and gas export facilities provides a mechanism for rapid monetazation of resources.
Economic Growth – Egypt’s economy posted a 4.7% real GDP growth in the 2008/2009 period. The EGX 30 Index has rebounded from lows in Q1 2009, performing better than its Gulf neighbours.
Draw Back
Regulation Uncertainty – Egypt initiated reforms in 2004 to improve the attractiveness of the petroleum sector. However, periods of regulatory uncertainty, for example in 2008, witnessed the government imposition of an unexpected tax on companies operating in the Free Zones and a halt to new gas export projects. Egyptian Free Zones, considered as offshore areas, represent an exemption from all taxes and customs as well as import/ export regulations and investors operating with them export more than 50% of their total production.
Despite the drawback, Egypt’s ingredients for growth are strong:
- Egypt benefits from a large, competitive and low cost workforce.
- Sizeable consumer market for hydrocarbon driving energy consumption.
- Relative macro-economic stability buoyed by low personal and corporate taxes at only 20%. Oil while Gas taxes are higher at 40.55%; however, this is paid by the government on behalf of the contractor.
- Given proximity to Europe, the country is seen as a strategic location, acting as a bridge between Europe, Africa and the Middle East.
- Fiscal transparency and ability to repatriate profits and legislation encourages Foreign Direct Investment (FDI).
- Abundance of discovered and undeveloped hydrocarbon resources.
Egypt offers opportunities for growth depending on the strategy of the investors. Given bullish oil price scenario and the fact domestic gas prices are often capped in Egypt, companies with a bias to oil and gas, with attractive valuations, most probably will continue to benefit from Egypt’s potential.
