An Exclusive One-on-one Interview with

Jan. 28, 2008
Q: How has re-structuring of the oil sector streamlined operations and enhanced the industry’s future potential?

H.E. Eng. Sameh Fahmy, Minister of Petroleum

Q: How has re-structuring of the oil sector streamlined operations and enhanced the industry’s future potential?

H.E. Minister Sameh Fahmy
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A: Restructuring the petroleum sector took place by establishing three new powerful and specialized holding companies to develop and manage the petroleum sector in addition to the Egyptian General Petroleum Corporation (EGPC) These three companies are The Egyptian Natural Gas Holding Company (EGAS), The Egyptian Petrochemicals Holding Company (ECHEM), and Ganoub El Wadi Petroleum Holding Company (GANOPE).

The restructuring has speeded up the decision-making process and enabled focus on both gas and petrochemicals sectors. Furthermore, it will boost the oil and gas activities in Upper Egypt.

The holding companies work under the umbrella of the Ministry of Petroleum in complete coordination. They manage operations including collaboration with foreign oil companies and through their subsidiaries; joint ventures and other companies formed under the Investment Law and public sector companies.

Q: Have there been any unforeseen challenges executing the petrochemical’s development plan and is the plan on schedule? A: On the contrary, the Egyptian petrochemical industry has succeeded in keeping pace with the fast and ever changing scenarios within the domestic and international markets. Egypt possesses all the required assets to rank among the most important major global petrochemicals producers, with its availability of gas reserves, political stability, unique geographic location and appropriate fiscal incentives.

We designed The Petrochemical Master Plan consisting of 14 complexes (24 projects, 50 production units). It requires over 10 Billion USD (as of today) to be realized in 20 years. Total production amount up to 15 million tons/year, worth 7 billion USD. It will create over 100 thousand jobs, both directly and indirectly.

In this context, the Ministry of Petroleum established The Egyptian Petrochemicals Holding Company (ECHEM) in 2002 with the main objective to promote and develop the Petrochemical industry in Egypt and assume the responsibility of implementing and continuously updating the Petrochemical Master Plan.

The implementation of the first phase of the project, with a total investment of $6.6 billion is already underway and consists of: linear alkyl benzene, propylene & poly propylene, acrylic fibers (already started in February 2006), styrene & poly-styrene, ammonia, ethylene and polyethylene, poly vinyl chloride and methanol. In this context, five new companies have been recently established to produce and market petrochemical products.

We are doing our utmost to attract international investors here to reap the benefits of these exciting projects.

Q: How is the focus of the foreign direct investment changing in the energy sector, for example, is there an increase for downstream vs. upstream or visa versa?

A: We are encouraging investments from all over the world. It is important to emphasize that investment opportunities exist in various sectors throughout the Egyptian economy, with emphasis on export oriented projects among many others.

Egypt’s record in attracting Foreign Direct Investment (FDI) has been very positive over the past decades. FDI is the major source of capital flow to developing countries and Egypt is well placed to attract additional foreign investment given the success of its stabilization program and the strength of its economic recovery.

In this regard, we stand on solid ground boosted by the continuous support of the government policy and enhanced by the political and economic stability and credibility enjoyed by our country.

As for the investment and financing strategy, the petroleum sector shifted policies from financing projects to rely more on the local and international private sector, as well as local, Arab and international financing institutes. This policy has proved to be very effective in providing more flexibility and developing more projects.

One successful example is Idku LNG train 1 and 2.

It is the largest project to be financed and implemented in Egypt with a value of 1.95 billion US$ (including the financing arrangements cost and loan interest), $1 billion of which are loans without governmental guarantees. Idku LNG first train was awarded the “2003 Gas Deal of the Year” by Project Finance Magazine EUROMONEY. This reflects the confidence that international finance institutions have in Egypt showing it to be a credible country for direct foreign investments. This also paves the way for a successful future cooperation in the oil and gas industry as a whole.

There are presently more than 50 international companies working in the field of exploration for oil and gas in Egypt, with investments estimated at about $2 billion annually. While Egypt for its part, has committed about $3 billion of its own money to upgrade infrastructure within the sector.

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Q: Are any significant changes anticipated in the short-term in concession agreements, or in Egypt’s legal and tax framework as it affects the petroleum sector?

A: To answer this question it should be noticed that most of the existing production sharing agreement models were implemented in the 60’s and 70’s, and although there were no serious problems experienced in applying these agreements, there has been a major evolution in oil and gas technology and consequent industry advancements, along with higher exploration and development costs, especially in deep waters and frontier areas, and with the recent changes in world market prices. We found that it is time to find areas for improvement that could lead to a better utilization of the assets and economical environment that would encourage more investments and lead to further discoveries and increased production.

Development of the concession agreements is always required to cope with changes and challenges facing the exploration for the oil and gas business. We are keen to introduce the necessary changes in the model and the whole process to reduce the cycle time and to achieve a balance in benefit for the contractors and on the national side. Expert committees with highly qualified staff from different disciplines have been formed in order to accomplish these tasks and several models and scenarios are being evaluated currently to modify and recommend the best models and processes to attract more FDI and to extend the exploration activities in new frontier areas.

Q: How do you see energy consumption patterns changing in Egypt over the longer term?

A: I believe that for the foreseeable future, oil and natural gas will continue to play their vital role as main sources of energy in Egypt. Today the petroleum energy represents 96% of the country’s primary energy supply. The total petroleum products and natural gas consumption increased from 27 million tones in 1990/1991 to 54.7 million tones in 2006/2007. The electricity sector had the largest rate of natural gas consumption and its share represented 58%, followed by industrial sector with share of about 26%.

Q: With the increasing concern about CO2 emissions, is the Ministry considering measures to address this issue?

A: Of course, we are concerned with the global warming phenomenon, we are part of that world and we are doing our best in cooperation with other countries to reduce the effect of green house gases (GHG). Two of our technical staff at the ministry participated in the former UN climate change conference held in Nairobi in November 2006.

The Egyptian ministry of petroleum has exerted several efforts in order to reduce the CO2 emissions such as:

  • Continuing the expansion and use of natural gas in the commercial and residential sector, for example, during the period 1981/1982 – 2006/2007 we supplied natural gas connections to about 2.553 million residential consumers, and our plan is to extend natural gas to another 6 million residential consumers during the next five years.
  • Encouraging the use of natural gas instead of liquid fuels in the transportation sector, currently 81 thousand cars have been converted to work with natural gas; also 114 natural gas supply stations have been established.
  • Utilizing natural gas in new applications, such as using it in air conditioning equipment, and so we have established a specialized company in that field.
  • Applying energy conservation programs inour refineries.

Q: In view of the capital requirements for deepwater development and downstream expansion, what special financial challenges do these plans pose?

A: As you know deep water development requires a large amount of capital as the initial investment, and that this is directly related to the over all economic value of the discovered reserves. We always cooperate with the contractors and investors to reach “a win-win” agreement especially with gas pricing and open areas for export.

Our plan is to continue attracting international companies to explore for oil and gas to maximize reserves and production. Special attention will be given to exploring resources in deeper horizons and new areas such as Upper Egypt, the Red Sea, and the western part of the Mediterranean.

Q: Does the Ministry contemplate new indicatives in training and safety, or to increase the Egyptian content in the sector’s work force?

A: Recognizing the importance of human resources, the Ministry of Petroleum has already begun a remarkable initiative by establishing a new specialized company “Oil & Gas Skills”, to deliver and organize the training and HR development according to the international industry standard for the petroleum sector in Egypt.

Another effort being exerted by the Ministry of Petroleum is to establish a mining college with the cooperation of a number of internationally recognized universities, to upgrade the capabilities of fresh graduates and new generations of the oil industry.

As for the health and safety domain, we strictly monitor the adoption of new codes and ensure the compliance of our operations to international standards. The procedures for industrial safety are applied in all oil, gas, petrochemical and transport of oil goods. This is due to the involvement of international partners and companies working in Egypt through updating safety procedures, training courses and strict implementations of safety regulations in different work locations.

Q: What is the most daunting single challenge facing Egypt’s oil sector – technical, financial, social – in the next decade and what will the Ministry’s role be in meeting that challenge?

A: The major challenges facing the Egyptian petroleum sectors are:

  • The huge and continuous increase in the local consumption of petroleum products and natural gas.
  • Most current petroleum agreements are approaching their end.
  • Emergence of new regions for foreign investments such as Libya, Iraq, Sudan and Western Africa.
  • The lack of oil rigs on the world level.
  • The fast development of the specifications of fuel petroleum products.
  • The rapid increase of prices for raw materials and equipment worldwide, which cause the increase in the investment and operating costs leading to an increase in the final products prices.
  • Scarcity of qualified contractors for oil and gas projects.

To confront these challenges, the Ministry of Petroleum is applying a flexible strategy to assure the rational use of our petroleum wealth and to guarantee the continuation of assuring its role to achieve the goals of the Egyptian economic development plans.

This strategy includes the following:

  • Increasing and developing the crude oil and natural gas reserves;
  • Satisfying the local demand for the petroleum products, natural gas and petrochemicals;
  • Increasing the petroleum exports, and consequently increasing Egypt’s revenues from foreign currency;
  • Attraction from FDI to the petroleum sector projects;
  • Environment preservation;
  • Increasing job opportunities, and improving the performance of the petroleum employees;
  • International cooperation with different technological institutes and adopting the most up to date international technology.