Apache Says Higher Gas Prices Expected in Egypt by year-end

U.S. oil and gas producer Apache Corp, one of the largest foreign investors in Egypt, hopes to reach an agreement with Cairo on higher gas prices by the end of the year and is encouraged by what it considers greater government transparency.

President Abdel Fattah al-Sisi has been more upfront about the myriad challenges facing Egypt’s economy than his predecessors, painting a realistic picture of a country battered by three years of political turmoil.

Cabinet ministers are also more forthcoming than previous administrations, attitudes that are reassuring to foreign investors used to officials who gave Egypt misleading reviews.

Thomas Maher, Apache vice president and general manager in Egypt, says he expects capital investment to remain steady over the next few years at about $1.4 billion annually, with an additional $450 million in operating expenditures.

The outcome of negotiations with the government could determine whether the Texas-based company will expand in the most populous Arab nation.

Apache has been in talks on revising gas prices in some of its concessions, including a joint venture with Shell. Egypt has been negotiating with other gas companies seeking higher prices in order to make new exploration viable.

“I think we’re coming down the home stretch with our negotiations. Hopefully the government will have something to announce on that before the end of the year,” Maher told Reuters in an interview on Tuesday. “At this point we still don’t have an agreement, but we’re encouraged.”

Gas producers currently receive about $2.65 per 1,000 cubic feet, far below the prices paid in the North Sea and elsewhere.

Cairo needs foreign energy companies to expand exploration and bring new finds to production if it is to ease power shortages and avoid more civil unrest. But the current price of gas barely covers investment costs for producers.

Maher declined to discuss the new price Apache was expecting, but executives have previously said they are pushing for $7 per 1,000 cubic feet – higher than Egypt pays now but less than it would spend on liquefied natural gas (LNG) imports if its own resources lie unexploited.

In the meantime, Apache is benefiting from a gas and condensate discovery near the Mediterranean town of Marsa Matrouh announced in May. Maher said the well came on line a week ago and is producing near test rates of 49 million cubic feet of gas and 7,700 barrels of condensate per day.

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Last year, Apache scaled back its operations in Egypt, selling a 33 percent stake to state-owned Chinese oil giant Sinopec Group for $3.1 billion amid political turmoil.

As army chief, Sisi toppled President Mohamed Morsi last year and cracked down on his Muslim Brotherhood, setting off some of the worst internal strife in Egypt’s modern history.

Since being elected president in June, Sisi has delivered a degree of stability while implementing long-awaited reforms.

Egypt’s government has said it was committed to improving conditions for foreign companies with measures such as cutting red tape and easing legal challenges to deals. Maher said he was encouraged by reduced bureaucracy since Sisi took office.

“Our biggest challenge up until recently was the bureaucracy, particularly getting military permits, but that has improved noticeably in the last month or two, pretty consistent to when the new president was sworn in,” he said.

Energy companies liaise with the petroleum ministry for permits requiring the approval of the military, which controls vast amounts of land. Investors often cite Egypt’s notoriously inefficient bureaucracy as a barrier to doing business.

Maher praised increased transparency and officials who are unafraid to speak harsh truths and make unpopular decisions.

To help bring down its swelling budget deficit, the government slashed energy subsidies in July, raising energy costs for companies and consumers by up to 78 percent.

For decades, Egypt’s leaders have avoided tackling the sensitive issue of subsidies, but in just a few months Sisi has taken initial steps on that and other issues such as taxes.

Maher said security remains a concern for Apache, which operates mainly in the Western Desert near the border with Libya, where militant activity has been on the rise this year.

Egypt is combating Islamist militancy, which surged after Morsi’s ouster and has contacts with al Qaeda offshoot Islamic State, now targeted by U.S.-led air strikes in Iraq and Syria.

“Security is obviously a concern with what’s going on around Egypt, particularly with what’s going on in Libya,” said Maher.

Source: Reuters