Breakfast Wrap: Egypt’s Oil Curse – Part Two

This morning’s Breakfast Wrap will be dedicated to Egypt’s energy crisis and part two to yesterday’s “Oil Curse”.

That’s because two significant calendar events are in store for us this week:

1) From Thursday, shops will close by 10pm and restaurants without tourist licences will close by midnight, hours earlier than usual
2) A delegation from the International Monetary Fund will arrive this week to re-start negotiations over Egypt’s request for a $4.8 billion loan.

Both of these events are inherently related to energy subsidies.  Simply Egypt’s energy shortages because of its wastage and misdirected spending has meant the government is cutting consumption where it can and as quickly as possible.  In addition, the delayed reforms of energy subsidies may cost Egypt almost $5 billion unless the government can show it has a long-term plan in place.

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More immediately, this is the issue:

Egypt’s state-run oil company, the Egyptian General Petroleum Corporation, the most indebted state entity throughout the Egyptian government is having to repay banks and oil companies billions of dollars to support exploration and its subsidy programme.

EGPC repaid $3.2 billion loans to banks during the first quarter of the 2012 fiscal year and last quarter of the 2011 fiscal year, MENA state news agency reported

That brings EGPC’s total debt to banks (just to the banks) to $7.6 billion, from $10.8 billion, MENA reports.  

Meanwhile, EGPC is struggling to meet over due payments to oil and gas companies.   In July alone, the EGPC settled almost $1.2 billion on payments to exploration companies, according to Daily News Egypt.

Industry sources tell me total outstanding debt to oil and gas companies is between $6 billion or $7 billion. That’s disregarding $9 billion that was paid in the last fiscal year.

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To explain the above we need to understand what EGPC is in charge of in Egypt: tendering oil and gas concessions in Egypt.  

That means EGPC will partner with a foreign company, invest a certain amount for exploration and share the profit.  The problem comes when either Egypt uses the whole amount that is discovered and redirects it to local demand rather than exports.  That means Egypt is losing revenue from subsidising those resources instead of exporting them and making a profit on the international market.

It has exacerbated EGPC’s struggles to pay foreign companies, which extract the country’s oil and gas resources.  And that’s just a basic explanation.

These repayments are often restructured with interest added on.  So that means EGPC is paying over due payments plus between 1.5% and 2.5% interest.  (P.s. a note to the Islamists who initially argued against the IMF loan and now say it is “Sharia-compliant”- this blows the IMF loan completely out of the water considering the interest rate on that is just 1.1% with a long grace period.  How do you feel about the biggest state company in masses of debt paying masses more interest?).

Another task EGPC is charged with is maintaining the subsidy system by providing petroleum products.  But as we know, these have been running short, so the oil company has had to borrow from the ministry of finance to import more products.  That costs money and banks are less willing to lend.

As one industry source told me, “EGPC has maxed out its credit cards and few banks are willing to give it any more money”.

That is, except for National Bank of Egypt, the state-owned bank that may bail-out EGPC with credit facilities amounting to at least $3 billion, according to a number of local reports.

EGPC met with NBE to discuss details of a bail-out plan last month, according to a report from Al Masry Al Youm.

NBE offered to restructure $4.5 billion of EGPC’s debt to foreign companies allowing EGPC to more slowly repay the debt, the report said.

We have gone full circle and now the IMF delegation is due to Cairo where it expects some kind of subsidy plan.  Especially considering spending on subsidies is one of the major expenditures, along with interest payments and government salaries that account for roughly three-quarters of total government spending.




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