In Egypt, the right to explore and produce oil and gas is typically awarded to commercial oil companies on the basis of production sharing arrangements (PSAs), which are awarded as concessions. The contractor, usually a foreign or Egyptian private oil company (or companies), is awarded the concession after a successful bidding phase, and thereafter assumes all risks involved in exploring and developing crude oil or natural gas from the concession area in return for cost recovery and a production share if a commercial discovery is made. The Egyptian Government, as concession grantor, retains the right to own and control the country’s natural resources.
The terms and conditions of oil and gas concessions in Egypt are largely standard. There are typically three parties involved in a Concession:
- the Government of Egypt, represented by the Minister of Petroleum;
- the Egyptian General Petroleum Corporation (EGPC) and/or Egypt Gas Company (EGAS) (both state-owned entities); and
- the contractor.
Egyptian Petroleum Law mandates that every concession must be implemented by a specific statute enacted by the People’s Assembly of the Arab Republic of Egypt authorising the Minister of Petroleum to execute the concession. The provisions of the concession prevail over any contrary legislative provisions. Under the enabling statute, the Government grants the contractor the right to explore and develop a specific area for an initial exploration period, with up to two extension periods at the contractor’s option. The concession automatically terminates at the end of the agreed extensions, unless there has been a commercial discovery of oil or gas as defined in the concession. The contractor is required to make minimum expenditures during the exploration period.
A ‘commercial discovery’ of either oil or gas occurs when one or several producing reservoirs are discovered and are determined to be worthy of commercial development. The contractor must give notice of commercial discovery to EGPC, after which EGPC and the contractor will enter into a development lease, subject to the approval of the Minister of Petroleum.
During the development phase, EGPC and the contractor will establish an operating company, (a private sector company or a type of joint stock company), with its head office to be located in Cairo. This operating company is not subject to the Egyptian Commercial Companies’ Law, but is a transparent, non-taxable, and not-for-profit company. The company’s object is to act as the agent through which the EGPC and the Contractor conduct development operations. The development company may not engage in any business or activity beyond the operations defined in the concession and may not own any rights in any of the petroleum produced or in any of the assets or properties obtained or utilised in connection with those operations. The company must remain in existence for the remaining duration of the concession.
The concession contains a stabilisation clause to protect the contractor in the event of changes occurring after the date of signature which adversely affect the contractor’s economic interest. Parties may renegotiate the concession to modify any resultant economic imbalance, but it remains to be seen whether contractors will rely on this clause to seek the renegotiation of concessions in the light of the current financial climate and the worldwide decline in oil prices.
Set out below is a short summary of several of the key issues a contractor should consider when entering into a concession:
(a) incentives for contractor:
- Concessions are issued by law (legislative protection) and can only be amended by the Egyptian Parliament. Terms of the concession prevail over any conflicting legislation.
- Imported equipment and materials are exempt from customs duties.
- Opportunity for cost recovery and profit share.
- Stabilization (or re-negotiation) clause.
(b) risks for contractor:
- contractor bears economic risks if no commercial discovery;
- priority given to meet needs of the local market and EGCP has pre-emptive rights to purchase the crude oil produced from the concession area.
Neither the contractor nor EGCP may assign any of its rights, privileges, duties or obligations under the concession, whether in whole or in part, to any person, firm or corporation, without written approval of the Government and priority is given to EGCP to obtain the interest to be assigned (except in the case of assignments to affiliated companies).
The terms and conditions of oil and gas concessions in Egypt are largely standard. The Government grants the contractor the right to explore and develop a specific area for an initial exploration period, and, if a commercial discovery is made, EGPC and the contractor will establish an operating company for development and production.