Al-Ahram Weekly 11 - 17 March 1999 Issue No. 420
Published in Cairo by AL-AHRAM established in 1875

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Upbeat about oil

Interview by Aziza Sami

The petroleum industry worldwide has been hard-hit by the decline in crude oil prices over the past year, leading multinational companies to cut their expenditure and, in some regions, to reconsider their investments.

In Egypt, at the beginning of this year, the US oil company, Amoco, trimmed down its personnel, following its global merger with British Petroleum, a procedure which the American company -- currently Egypt's largest foreign investor -- had never undertaken before and one which raises questions about the future of international oil investments in Egypt.

In the Middle East, several natural gas export projects have been publicised, and several regional competitors are vying for what is becoming an increasingly lucrative market worldwide. These projects have acquired an added significance, in the context of regional political tensions. A controversial natural gas export project between Egypt and Israel also raises queries, and has resulted in often conflicting reports. Minister of Petroleum Hamdi El-Banbi has shed some light on Egypt's position regarding these developments.

What is the secret of your enduring optimism that Egypt will continue to attract multinational petroleum companies, despite the recent decline in oil prices?
I am by nature optimistic, but it is also an optimism which is based on facts. A large risk factor is involved in petroleum investments because they entail a great deal of money and they are also long-term. In order to attract them you must have stability, as well as transparency and credibility of your financial systems. You must give confidence to investors to come and invest and give them an accurate profit percentage.

Egypt possesses these factors. The country's stability is well known. Under Nasser (in the socialist sixties), all the agreements concluded in the petroleum sector went into effect. There has never been a dispute necessitating arbitration with a foreign investor and the ones which did arise were resolved between the oil companies and the government.

Eni, (the state-owned Italian oil company) has been with us for 45 years, and Amoco of the US has been here for 40 years. Even in the current year, 1999, after the collapse in oil prices which occurred in 1997 and 1998, the People's Assembly only last week ratified seven new agreements with a total minimum investment of $1.09 billion.

How are you planning to deal with oil companies' investment reductions, which is bound to affect their presence here?
Oil companies have reduced their investments tremendously all over the world by maybe more than 30 per cent. But we were able to convince these companies because of the factors I have mentioned above.

There is also one other thing. The decision-maker is a human being. If he is well-treated in a place, he tends to be biased in favour of this place and direct favourable decisions towards it. Egypt has a lot to offer to expatriates and to their companies, not only in terms of profit and work, but in terms of social life as well. We don't have closed systems that do not attract foreigners. People can move freely, they can visit different places. We have various types of schools, and the banking system here is very free. You can transfer your money any time, as well as communicate with families overseas. Expatriates like to come and live in Egypt. There are now approximately 49 companies from 21 nations operating in Egypt.

If there are marginal differences between offers that they receive from Egypt and other countries, they will definitely prefer Egypt.

Oil prices are predicted to remain low for several years to come. How will this affect Egypt's economy?
Low oil prices will have severe repercussions on the economic system worldwide, because most oil-producing countries are Third World countries. They import finished products from the industrialised countries. For this reason, when the developing nations suffer a shortage of money (as a result of declining oil prices) they will cut into their budgets. There will be a problem in financing development projects and their import capabilities will be limited.

Egypt is a bit different from most of the oil-producing countries. OPEC members largely depend on oil exports, which may constitute 80 to 90 per cent of their Gross Domestic Product (GDP). In Egypt, oil makes up only 10 per cent of GDP. This is a good situation, because you have other sectors contributing to our GDP, mainly agriculture and then industry. So although there will be a detrimental effect on the Egyptian economy resulting from the reduction in crude oil prices, it will not be of the same magnitude as that on the economies of the Gulf states, for instance.

But Egypt's internal consumption is also increasing tremendously, at a time when several development projects are being initiated. All of this is at the expense of oil exports. But the internal production of oil and gas makes for added value, because the gas will go into producing fertiliser for instance, then the fertiliser will go into agricultural production. And again, because our internal consumption is increasing, this will open up projects, and the detrimental effect of the low oil prices will be reduced.

What impact will the decrease in oil revenues have on Egypt's foreign currency earnings?
It will affect our foreign currency earnings because we are also exporting less oil (because of increasing internal consumption) at fewer dollars per barrel. But since the oil is used domestically, it should add to production and to total GDP, which will perhaps offset the overall effect.

We are aiming as well, through agreements signed recently, to increase the number of projects in the oil and gas sectors, so as to continue producing oil at acceptable levels and also so that Egypt would become a gas exporter. We are reducing oil exploration in certain sensitive areas, such as the Red Sea with its coral reefs, and going to the Mediterranean, which is prone to more gas availability and which is friendlier to the environment.

At this point, gas prices are lower than those of oil. The world is discovering the uses of gas and is increasingly turning to it.

How is Egypt coordinating with OPEC to avert a further decline in prices?
Egypt is not an OPEC member, but we have very close ties with the petroleum ministers of all OPEC countries. We meet and coordinate and give support to the decisions undertaken by OPEC. We participate in the consumer-producer dialogue which is attended by both members and non-members of OPEC.

We still believe that OPEC is the only organisation which can do something about oil production policies. If OPEC falls, everybody else will fall.

But what specific measures has Egypt undertaken in this respect?
We join in to form one bloc in our negotiations with the industrialised countries. When OPEC called for export cuts, we agreed. Egypt's export volumes are not at all effective (on the world market) but we agree symbolically.

An OPEC meeting is scheduled in March. Do you think that OPEC members can overcome their political differences, related to Iraq and Iran, or to Venezuela for instance, and act in a concerted manner in order to end the oil-price crisis?
OPEC, like any organisation, will have problems, and to minimise them is the objective of all its members. In the end, OPEC still has a great effect on the petroleum market.

Amoco's trimming down its personnel is an unexpected turn of events, given the $310 million worth of investments the company announced last November. What is the reason for this development?
The reduction in manpower is an exercise undertaken by most companies once in a while. Some of the other companies in Egypt were reducing their staff even before the 1997 price decline.

What is making it a little different now, is that Amoco had never made any staff cuts. Its policy over the past 25 years or more was not to hire more people and to keep its presence here very small. Amoco relied heavily on its joint-venture with the Egyptian General Petroleum Corporation (EGPC), which is GUPCO.

Recently, when they started searching for gas, which was a new venture for them, they expanded their staff and kept it so, hoping that certain development plans would take place, such as gas exports. This has not materialised until now, because of several problems. Until now, the gas export project has not been concluded.

There is also the merger which occurred at the beginning of this year between Amoco and British Petroleum. They decided to have a staff reduction which, in my opinion, is temporary.

What investments will the newly merged company, BP-Amoco, be making in Egypt?
Last week, the People's Assembly approved a new agreement which will require a minimum of $450 million additional capital investment in Egypt during the next six years. This is capital expenditure which will be directed solely to the Gulf of Suez.

In addition, we have already approved another deep water concession agreement in the Mediterranean which requires an investment of $310 million (which you referred to). The sum of both investments, in addition to their operating costs, is very close to an $800 million investment in the next few years by BP-Amoco.

Has Amoco given up any of its concessions to any other company?
No, on the contrary, they are acquiring new concessions in new areas. Given the commitment made by BP-Amoco which is close to a $1 billion investment, one cannot imagine that they will continue reducing their staff. They will most probably rely increasingly on GUPCO, or expand it, or bring in new blood.

The world is witnessing a large number of multinational mergers. How will this affect the future presence of international oil companies currently operating in Egypt?
In my opinion, mergers are not the right direction. You will have a few giants controlling the whole industry. Those companies themselves will lose small scale opportunities, since they will only be looking at giant fields, and smaller fields will be left unexploited. But if you add up the small fields and the small opportunities, you will find that in absolute figures, their sum exceeds the big ones.

I think that small, independent companies will continue to exist, although they will suffer a lot. The trend will probably last for a while, worldwide, but then they will go back to the market's needs.

On your recent visit to Turkey, a memorandum of understanding (MOU) was announced for the export of Egyptian natural gas to Turkey. This seems to indicate that there has been no progress in the deal which was announced between the two countries at the Cairo MENA conference in 1996, during which this same MOU was declared. What exactly is the status of this project which has been stalled for three years now?
Negotiations for gas importation with other countries normally take time, because the importing country has to be sure of the absolute potentiality of the exporting company; that it can make available a non-stop supply of natural gas and that the exporting country will have other concessions that fulfil its local needs.

In the Middle East, the situation is more complicated because of the attempts to politicise gas deals in the area, mainly in the context of the Arab-Israeli conflict. Because a natural gas export contract is a long-term one, confusion might occur in the minds of some people as to what the criteria for decision-making in such contracts are. Some people exploit this situation to advocate their interests.

But what is stalling the Egyptian-Turkish natural gas export project?
Again, politics. In Turkey, there are elections and some problems. They are in need of natural gas, and have signed several MOU's with many countries and many companies have offered them concessions. So, the decision-maker is unable to conclude a firm deal with a strong company like Amoco. They think they can get a better offer from another place, but this is taking time because these other places are all in the air.

If you are a politician and some people are telling you they will get a commodity at a lower price, you definitely will not take a decision, and this is what is happening in the whole region. Even Israeli politicians have announced that they will reach a conclusive contract with Egypt -- which was announced by Sharon -- and we are declaring otherwise. But this is not a topic for politicians to deal with, it is not their concern. Most of them do not know the gas business.

Turkey is realising the importance of their need for natural gas and President Demirel has announced he was keen on the project. They feel strongly about ties with Egypt and about Egypt's stability, which will ensure a continuous, non-stop supply of natural gas.

This is what I felt during the visit which you described as not very fruitful. But at least this was put on paper, in a document for the Turkish side. I am very optimistic about the project which has been given a high-level push by the presidents of both countries.

There have been lengthy deliberations -- again for three years now -- on whether the natural gas will be transported to Turkey via pipeline, or by means of tankers, in liquefied form. Has this issue been resolved?
We are now studying three different venues, one is liquefied natural gas (LNG) from Port Said, the other is a pipeline from Egypt's coast to Turkey and the third is a land line from Egypt to Jordan, Syria and Turkey. They also are studying these alternatives in Turkey.

International press reports have alluded to an internal dispute between the Turkish state-owned oil company, Tupras, and BP-Amoco which could result in excluding Amoco from the Egyptian-Turkish proposed LNG export project. Are these reports accurate?
Turkey and Amoco have very good relations and the LNG project is being given the utmost priority in Turkey. There is some competition [between oil companies] for the transport of LNG to Turkey and the Turkish government is in the process of evaluating these offers. There are some technical concerns which must be addressed, but my feeling is that the LNG project from Egypt has top priority in the minds of the Turkish government.

But feasibility studies have not been undertaken yet for a suggested offshore or land pipeline connecting Egypt, Lebanon, Syria and Turkey. So we have decided to form a technical committee between Botas, the Turkish national oil company, and The Egyptian Gas Company, GASCO, to conduct a feasibility study for the two lines and to choose one.

This will not affect the LNG project, but will be an addition to it. This committee will start its work within 60 days

About a year ago, the then Israeli Minister of Infrastructure Ariel Sharon announced that negotiations were under way to export Egyptian natural gas to Israel. Since then, Egypt has announced that there are no negotiations. What is the exact status of Israel in relation to the natural gas export project?
This project does not have anything to do with Israel. Israel does not have the facilities to receive liquefied gas; whereas in Turkey, in Izmir, they have the needed facilities. So this project will be solely between Egypt and Turkey.

These are technical reasons. But is it the policy of the Egyptian petroleum sector not to undertake any projects which include Israel until further progress on the peace front is achieved?
There are absolutely no negotiations between the EGPC and Israel in this respect, either at the ministerial or at the technical level. There were negotiations at the technical level at one point, but these have stopped.

Israel is not part of the LNG project and was never considered as such. But a peace pipeline was advocated at the time of the MENA conference by the Italian company Eni, which would pass through Israel. This is a pipeline between Egypt and Israel passing through Palestine. On the other hand, Amoco suggested another alternative, which is the LNG project which envisaged transporting liquefied gas directly from Egypt to Turkey via tankers. If there was a surplus, this would be sold to Italy or to Spain, because these three countries have the facilities to use natural gas.

The peace pipeline which was suggested by the Italians tied Egypt to Palestine and to Israel. At a later date, it was to pass through Syria, Lebanon and then Turkey. What we are talking about with Turkey now is a choice between two lines, one extending offshore from Egypt to Turkey straight through the Mediterranean Sea, and the other is a land pipeline extending from Egypt to Jordan then to Syria, and on to Turkey. This will not include Israel. Turkey knows that there are problems in the peace process and they do not want to stall the project.

There are negotiations between Amoco and Jordan to supply Jordan with Egyptian natural gas, because Amoco will join with Jordanian companies in establishing a gas grid inside Jordan; and so it is in its interest to move a part of its quota [from the gas produced in its concessions] from here to Jordan.

The Turks have proposed the idea because they have very good relations with the Americans, and specifically -- contrary to what is said -- with Amoco. Given that Amoco will supply Turkey with Egypt's LNG and that it is already in talks with Jordan, and given that President Mubarak has mediated between Syria and Turkey, the idea was, why not join all, Amoco, Egypt, Jordan, Syria and Turkey [in a natural gas export project].

This was a Turkish proposal, not an Egyptian one.

What is Egypt's position regarding Amoco and Eni's consideration of marketing a portion of their natural gas quota produced from Egyptian fields to Israel?
There are negotiations between Amoco and Eni for exporting natural gas from their quotas to Israel. Exporting here is all from the quota of the foreign partner in the venture and any decision in this respect rests with the foreign partner.

This is a kind of preparatory work they are undertaking, but whether they will actually export is another story. The multinational companies are communicating with the Israeli electric company and telling them that at a certain time we will he having a surplus of gas and will be willing to sell them at a certain price.

But they will have to go across Palestine for instance. How can they construct a pipeline across Palestine while there are still problems?

[Whether they will export gas to Israel] will depend on whether they feels assured regarding their investments. Such assurances can only come about if there is peace in the region. If there is stability in the region, they will execute their projects.

As for Egypt, it is backing foreign companies in their export projects, due to financial reasons. We are supporting peace and will undertake anything which serves peace; I said this in the People's Assembly last week. We will not undertake anything which is detrimental to Egypt or to the Arab countries.

In the meantime, foreign companies have their quotas. If they want to export them wherever they want, we will support them. But capital is cowardly. It likes to go into places where there are no sensitivities and in order to alleviate such sensitivities, there must be peace in the region.

You were recently in Qatar, which is one of the Middle East's major natural gas exporters. What did you negotiate during the visit?
First, I would like to stress that we are not competing and cannot compete with Qatar in the regional natural gas market. Qatar's main regional competitor in this domain is Algeria, actually.

But we are not competing with Qatar in view of the large amounts of oil that they possess and because of the huge distance which separates us.

We also have different markets and finally, there is an understanding between us. We are coordinating our efforts and have established cooperation in many fields, such as exporting some Egyptian industrial goods and butane gas bottles from military factories.

We also discussed cooperation between the Suez Canal Authority and Qatar. The authority owns tugboats, which will facilitate the execution of contracts with Qatari companies.

Have you succeeded in persuading the Suez Canal Authority to reduce tariffs for Qatari petroleum tankers passing through the canal?
This is the responsibility of the Suez Canal Authority which will send its report to the Prime Minister, after which the issue will be settled.

If there is a breakthrough in these negotiations, how will this affect Egypt's relationship with the Gulf states?
This is what the Suez Canal Authority is aiming at (to give equitable treatment to all states whose traffic is passing through the Canal). It cannot give a privilege to only one country.

If the Suez Canal Authority grants any cuts in tariffs, this will be to all countries and for the same commodities, be it crude oil or LNG.

This goes two ways as well. If Algeria wants to export its natural gas through the Suez Canal to Southeast Asia, then Algeria will be given the same cuts, in accordance with international law.

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