There are EGPC supply contracts to Union Fenosa and Jordan. The prices are not published. It is said that the price to Union Fenosa is low. The highest number mentioned by observers of the Egyptian gas scene is $0.90 MBtu. Lower numbers, such as $0.65 MBtu are sometimes quoted. This is the price at the point of entry to the LNG plant. If these numbers are gross underestimates EGPC/EGAS would be wise to publish the true figures in order to set the record straight. It is true that in compensation for the low selling price EGPC/EGAS has provided some advantages such as delayed paying of their equity share in the LNG plant and the right to use up to 50 percent of the facility for their own exports under a tolling agreement. But what is the value of these advantages compared to the assumed loss on every Btu sold?
The sale price to Jordan is said to be set at $1.50 MBtu which is a more reasonable number. Yet one needs to keep in mind that Egypt purchases gas at the margin from foreign investors at $2.50/2.65 MBtu. To say that it gets 60-70 percent profit oil at zero price and that the average cost of acquisition is therefore much lower than $2.65 is the wrong argument. As discussed previously, in the case of oil the equity oil is a rent for the state not necessarily a fund to subsidize domestic consumption or exports. It is interesting to note a peculiarity in the agreement with BG for the development of gas fields dedicated to exports. There is a clause stating that if the netback revenue falls below the price at which the gas would be sold to EGPC for domestic use, EGPC would compensate the investor for the difference. Given that the investor was keen on the export option, the notion that he should be compensated whenever the domestic market becomes more attractive simply means that, as the English saying puts it, ‘he wants to have his cake and eat it too.’
. . .We also have to allow for the factors that may have influenced the negotiations of the initial contracts—a multiplicity of objectives which were to be achieved all at the same time. Hence, perhaps, certain concessions on prices were made which may not have been the case given other circumstances.
Circumstances have changed. The information available suggests that all the contracts relating to the export of gas should be now re-opened and re-negotiated. This is possible whatever the precise re-opening clauses state. The fact that Egypt sells at a much lower price than that at which it purchases gas is sufficiently explosive to justify re-negotiation. The foreign companies involved in the contracts would be unwise to oppose a re-opening. Contracts are a formal framework for a relationship. It is the relationship that matters, and it will only work to the benefit of both parties if it is continually perceived as fair by both of them.
Are Egyptians being swindled of their gas?
The ECES has an interesting paper by Robert Mabro on a question that’s been bugging me for a long time: why is Egypt sticking (and hiding the facts and figures) about its bad LNG export deal with the Spanish firm Union Fenosa, which is causing it to lose money on the gas it exports?
Well, where’s little transparency, there’s likely to be a lot of corruption. Just a month ago, NDP MP Imad al-Jalda who also happens to own an oil company was accused by the General Prosecutor of bribing officials to find out where promising oil fields are in the Red Sea and the Mediterranean.
The Ministry of Petroleum is basically run from the top of the state (some say one of the President’s sons is in charge of approving the deals with foreign exploiters), which is not accountable to anybody.
Could someone please explain that to me in English?
The simple version: Egypt’s deal with Union Fenosa, struck in the late 1990s, makes it sell its gas at a lower cost than its replacement cost domestically (by buying up the foreign companies’ share of the gas for use in domestic market). Therefore, it is losing money on the deal. This as far as we know is only relevant to the deal with Union Fenosa, which was negotiated before Egypt even started exporting gas, before LNG had become the commodity it is today, and before the post-2002 rise in oil prices (gas prices are often indexed to oil prices such as Brent).