Big Oil has to be kept on Cairo's side

29 August 2008
Oil majors will need reassurance from Cairo over its energy tax. By agreeing a higher price for natural gas, Cairo is trying to make amends.

International oil companies (IOCs) are becoming increasingly baffled over Cairo’s energy sector strategy. For a country that has reaped the rewards of long-term economic growth and sound investment terms, abrupt changes in legislation aimed at tilting the balance of power back in Cairo’s favour have not been well received by international oil and gas majors.

In May, the energy sector was hit with an unexpected tax and higher prices for gas in the country’s free zones.

Petrochemicals, steel, oil refining and gas-processing companies are now subject to a 20 per cent tax on profits, and will have to pay almost double what they previously did for their gas supplies.

The immediate response of oil majors was to threaten to cut their investments. One company abandoned plans to develop a multi-billion-dollar refinery and petrochemicals plant, while several others have called a halt to their large-scale spending proposals.

The episode was a rare black mark against an economy that attracted more than $11bn in foreign direct investment in 2007, a figure that is expected to rise to $15bn this year.

Now, after persistent lobbying by IOCs, the Egyptian government is set to make amends by agreeing to pay energy companies a higher price for the natural gas they find in a new licensing round in the Mediterranean Sea.

While that is good news for long-term investors, it is a long overdue concession. Moreover, it only came after leading international players, such as the UK’s BG Group and BP, decided not to participate in a 2006 round, arguing that the gas price formula offered by Egypt did not justify the investment that would be needed.

With its attractive prospects for hydro-carbons, Cairo may yet keep the cream of oil majors onside. But they will still need consistent reassurance from Cairo that its tax grab is an isolated policy, rather than the start of a longer-term programme of windfall taxes.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications