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Egypt’s unrest dampens mood of investors in petroleum industry

The revival of unrest in Egypt that pushed former President Mohammed Morsi out of office is raising concerns among oil and gas companies operating in the country, according to latest findings by Business Monitor International (BMI).

“Egypt’s political instability continues to dampen investors’ mood despite signs of progressive stabilisation since mid-July,” said the global business monitor in its October 2013 monthly market intelligence and trend analysis for the oil and gas industry across Africa.

The report, which BMI made available to PANA here, explained the situation, citing an announcement in late July by BG Group, a British multinational oil and gas company, that it would reconsider future investment in the North African country.

“This supports our view that with the country failing to reach an agreement with the IMF and to implement a rationalisation of its downstream market, it has created a significant amount of uncertainty for producers as they face growing risk that output may be redirected to meet domestic demand rather than their contracted export obligations,” said BMI.

Although a new cabinet was formed in July, BMI’s Country Risk team does not expect formal parliamentary elections to be held before February 2014.

Egypt’s new Petroleum Minister Serif Ismail has proposed a programme that would focus on boosting exploration and production activities as well as training the domestic workforce for this sector.

“Despite strong commitment and the clear line adopted by the new Petroleum Minister, we remain cautious about the stability of the current government and the policies it aims to implement.

“In addition, we do not expect the country to secure the badly-needed US$4.8bn loan promised by the International Monetary Fund (IMF) before 2014 as negotiations continue to drag on,” BMI observed.

One key obstacle to securing a deal is that part of the IMF conditionality for the loan is likely to involve a rationalisation of Egypt’s oil and gas sector, and in particular the country’s downstream.

One reform pushed by the IMF is to raise fuel and gas prices in order to both limit the fiscal burden of energy subsidies and the excess consumption subsidies encouraged.

“With no scope for such reforms in the near future (as it was planned by the former government), we do see increasing risk of further resource nationalism that would see growing reservation of domestic output to satisfy domestic consumption.

“This will in turn pose further downside risk to our short term production forecast, as international players with operations in Egypt may decide to reduce activities until the country’s political stability is fully restored,” BMI argued.

Both BG Group and BP have already reduced their staff and exposure to the Egyptian market.

According to the BMI report, BG Group appeared to share similar worries. In late July, the company revealed that the recent unrest and leadership change had led it to reconsider its investment plan in Egypt, particularly in the wake of the country’s growing and uncontrolled domestic demand which was threatening its export commitments.

Underscoring a tight supply market, BG Group had threatened to close part of its liquefied natural gas (LNG) export terminal as feedstock for the plant started running low. Such worries could extend to other producers in the country.

Although exploration has remained active, BMI expected further deterioration in the country’s business environment.

Heightened political uncertainty, exacerbated by the IMF’s push for the government to cut subsidies and risks to the country’s oil and gas export capacity posed by growing Egyptian demand, BMI said, “has led us to reconsider Egypt’s Risk/Reward Rating”.

“The country’s risks have significantly increased, pushing its overall ranking from sixth place in the Middle East and North Africa (MENA) region to ninth,” it added


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