Egyptian Energy Debt Looms Large Over Recovery | Forbes

Energy 5/16/2014 @ 11:04πμ 405 views

Egyptian Energy Debt Looms Large Over Recovery

This week, Egypt’s state-backed oil company announced that the country’s debt to foreign energy firms stood at $5.9 billion, just shy of the $6 billion it owed a year ago. This limited progress report comes after a year of concerted effort on the part of Cairo to draw down the debt in an effort to repair relationships with international suppliers and increase interest in exploration and production investment. Despite paying out $1.5 billion to creditors in December 2013, Egypt’s burden has remained steady as the country continues to struggle with declining domestic production and an unsustainable fuel subsidy program.

Cairo’s lack of progress has not been helped by the country’s deep political instability over the last two years, making it difficult to attract new investment or sustain any sort of economic recovery. This uncertainty has also made it hard to move forward on plans for subsidy reforms, which would mean changes to one of the region’s most generous fuel assistance programs. Coupled with the country’s weakened financial standing and currency, forcing them to pay premiums for crude supplies, the country’s subsidy program has made it difficult to chip away at its industry debt.

Cairo has recently taken steps to reverse the energy industry’s fortunes by promoting new exploration efforts. A few days before the new year, the Egyptian government announced plans to auction 22 oil and gas concessions through this month.  Promoted by Egypt’s General Petroleum Corporation and Natural Gas Holding Company, the concessions are spread across the country, including opportunities in the “Suez Canal, Egypt’s western desert, the Mediterranean sea and the Nile Delta”.

However, just as Cairo promises steps forward for new industry efforts, some foreign firms have suggested that they may be headed for the door. Notably, in January the UK’s BG Group announced that they would be forced to break production contracts with customers and lenders and would enforce force majeure in Egypt due to a reduction in output in the company’s largest area of activity. The reduction, about 15 percent over the last year for the UK’s second largest producer behind BP, was the result of Cairo’s demand that gas output be shifted to meet domestic demand rather than allowing exports.

Debts to BG and BP make up the lion’s share of the country’s overall burden, with $4.9 billion owed to the two companies.

Post-Election Progress?

Long thought to be political poison, energy subsidy reform is expected to see some progress following this month’s national elections, scheduled for the 27th and 28th. Framing reform as a catalyst of needed economic growth, Finance Minister Hany Kadry Dimian has said that the first round of reforms could occur as early as this Autumn, telling Reuters that an “ambitious program to streamline energy subsidies coupled with tax reforms that helps broaden the tax base and promote a fully fledged Value Added Tax system.”

However, any ensuing increase in consumer or industrial fuel prices runs the risk of public protests, adding to the country’s already volatile environment and hampering Cairo’s push for stability.

“Phasing out energy subsidies … there is no choice,” said this week. “That means better capital allocation will come to the market. It’s not an easy decision, has to be very well managed.”

Link to source: http://www.forbes.com/sites/christophercoats/2014/05/16/egyptian-energy-debt-looms-large-over-recovery/