The article is a trial to simplify to our respectful readers how the Oil & Gas business are working and managing inside our country.
Egypt as a North African country is considered as one of the significant oil and gas producers and influential role players in the region. Egypt’s Ministry of Petroleum is the governmental authority which is responsible for the regulation of the oil and gas industry in Egypt.
The Egyptian Parliament is the only one whom has the authority to give the License to the Minister Of petroleum in order to allow him concluding different contracts for such purpose.
The Egyptian General Petroleum Corporation (EGPC) created by Law in 1958 we can surely consider that the EGPC is the most oldest, major, important and Essential Player in Egypt in the petroleum and Gas field, the Egyptian Natural Gas Holding Company (EGAS) created by Minister of Petroleum decree in 2001 with a vision of Develop natural gas business in Egypt to be one of the key natural gas players in the region and worldwide, and Ganoub El-Wadi Holding Petroleum Company (Ganope) created by Prime Minister Decree in 2002 with a vision of managing and supervising all petroleum activities under latitude line 28. Those entities are the executive Parties whom Managing this business thru the Concession Agreement concluding for the purpose of Petroleum and Gas Exploitation, Exploration and Developing.
This leaves us with two other entities, petrochemicals industry looked after by ECHEM and the mineral resources industry such as the mining for gold, phosphate and other natural resources which is controlled by EMRA.
Overall, these entities perform under the umbrella of the Ministry of Petroleum and thus concluding the organizational chart of the oil and gas controlling entities.
But in light of these governing bodies, two questions arise, is there a special arrangement that controls all the processes and what is the legal nature for the agreement established under the country rule?
Firstly, we need to know the background of petroleum in Egypt. Oil is still the very important product in the world, even though other countries now utilize other means of “renewable” energy but none have had the ability to give up the use of petrol entirely.
It needs to be noted that working in this field is quite risky in exploration and producing, but at the same time it is a very profitable.
But even with the development of new scientific methods, the risk is still quite high.
When we talk about a country like Egypt although the presence of high qualified engineers as well as the availability of the advancements technological other types of manpower but the risk is still present due to the nature of this business.
We can summarize the risk in two main points. Firstly, when you can imagine to spend millions of dollars and the result is a dry well. and the other point when you already produced the oils with a with a high cost and suddenly the prices following down.
In view of the mentioned risk and as well as with considering that the natural resources of Egypt is belonging the Egyptian People, so the decision of how to use the national wealth that belongs to the people should be taken in a very high care and transparence. For these reasons, the final decision is always issued from the parliament in the shape of Law. This is to ensure that the Egyptian people rights are maintained from their elected parliament.
So what is the legal frame work that Egypt depends on?
In Egypt we use the model of Production Sharing Agreement (PSA) the concept of PSA in its simplest form is to attract the well-known and capable companies to come in investment in this business in Egypt.
Those companies, if wins in the international Bid round announce by the mentioned entities (EGPC, EGAS & Ganope) performing the exploration as a contractors withstanding all related costs and if this contractors decided to relinquish from the area due to failing to explore oil and/or according to its calculation the produced oil or gas is not seem economic to them, they bearing alone all the related cost.
What are the legal procedures for initiating and signing these Production Sharing Agreements?
As we said, all natural resources as national wealth belongs to the people and ensure the prevention of any misuse, all transparency principles and rules of fair competition must be observed.The country is represented through one of the above mentioned entities and what happens is that one of these entities announcement and invite to international bid rounds for exploration and exploitation of specific parts of the Egyptian territory.
Egypt has many unexplored areas like the east and west deserts, delta, the red sea or the Mediterranean. One of the mentioned entity performs studies on these specified areas of the country “geological studies”, these studies helps the contractor formulate an idea and an expectation for what to come. The geological studies normally being attached in the package plus the initial agreement model, if the bidder wins the Bid round, in view of these data and for sure depending in its other deeply study and data, and according to the terms and conditions that are included in the model agreement, the Bidders then submits their financially and technically proposal.
But let’s not forget that the announcement published in the international and national means like scientific journals, magazines and newspapers and through the internet.
It is worth to mention what the difference between tender and a bid is round. for the first one, the company whom offer the lowest price and meeting the scope of work, it will elect as the winner, but in the second one, Bid round, the company whom offer a high volume of expenditure on drilling wells and technical studies and other types of bonuses, it will elected as the winner.
As the same procedures of the law no. 89 for the year 1998 the evaluation of the submitted offer in the Bid Round being adopted. We mean that the offers should pass thru the Technical phase and then for the commercial phase to whom were passed the technical step.
The last stage is the signing of the agreement, all the procedures go through all the channels to legalize the project and one such channel is Cabinet (Council of Ministers) and then the Council of State with its legislative and advising sections to review the agreements and approving it.
All of these procedures are done to realize transparency, fair competition and to ban any misuse.
So how does the country bare any of the costs of exploration?
The country doesn’t bearing any costs. Unless the contractor explore the oil and/or gas and also decided that the explored volume is consider economical to him , then other procedures being taken and ended-up to establish a joint operating company to operate the discovered field, in this stage both parties (contractor and the entity “EGPC. Egas, Ganope”) started to apply the formula of cost recovery which was already agreed on in the concession agreement model.
What if the exploration phase results in a finding?
If the contractor found a commercially accepted quota, a joint venture company (JV CO) is established and for assurance of transparency the nature of this joint venture is already mentioned in the package throughout the bid rounds.
This joint venture company is referred to as the operating company and it is generally formed by representatives from the entity whom issued the Bid Round (EGPC, Egas, Ganope) and representative of the contractor, thus forming a board of directors. The JV CO’s role is then to increase the production the facilitate, transportation and storing the crude oil.
Now we have covered the legal procedures in all stages and stating what will happen in case of a finding.
By Ahmed Khorshed
Contracts Manager at Tanmia Petroleum Company