Oil companies mull deferred payment proposal

18 January 2002

International oil companies producing gas in Egypt are understood to be considering proposals from the government that some of the payments for the gas bought from the companies should be deferred.

Industry sources say that the leading companies involved have been approached informally with a request to defer a portion of the gas payments for two-three years against interest of some 200 basis points over Libor.

The sale and purchase agreements signed with the companies oblige the government to buy agreed volumes of gas in hard currency or else in exchange for crude oil. The sales are based on a formula related to crude oil prices. The financial burden has increased as total production has grown. Egypt is now producing some 3,000 million cubic feet a day of natural gas. A share of this gas is taken by the Egyptian Natural Gas Holding Companyas part of joint venture operating agreements, but this leaves a significant portion to be sold by the companies.

In early 2001, the Petroleum Ministry negotiated revised terms for a total 11 sale agreements with the three main foreign operators - BPof the UK, the Royal Dutch/Shell Groupand Eni of Italy. This deal capped the crude oil reference price at $20 a barrel, to protect the government from the effects of high oil prices, and set a floor of $10 a barrel to protect the companies. The net result was that the top price Egypt paid for its gas came down to about $2.65 a million BTU from as high as $4.00 a million BTU when oil prices hit $30 a barrel. The government estimates that the new deal saved some $200 million in fiscal 2000/01 (July-June).

Some of the companies are understood to be reluctant to provide fresh concessions to the government by deferring payments, as this could erode profitability and might have an impact on future investment plans. Petroleum Ministry officials were not available to comment.

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