Wednesday, 26 October 2016

Wrapping up the US business delegation’s visit to Egypt, day two

US business delegation report, day two: The last day of the US business delegation spanned from talks on oil and gas to electricity and energy, U.S.-Egyptian relations and the Suez Canal Economic Zone. We were reminded of the potential of our gas sector and we will know by November which state-owned oil companies will IPO, thanks to Oil Minister Tarek El-Molla’s announcement. We learned that the famous arbitration clause for the feed-in tariff has finally been worded and appeals on local arbitration will happen outside of Egypt. And Suez Canal Economic Zone Chairman Ahmed Darwish gave a vivid presentation of the prospects of investments in the Suez Canal Zone and confirmed companies will “highly likely” pay utilities in USD.

Here’s the rundown:

Tarek El Molla, Minister of petroleum and metallurgical wealth
Key takeaways

  • The ministry’s strategy focuses on energy security by responding to domestic demand and sustainability by increasing the value of natural resources.
  • 70 new upstream oil and gas agreements have been signed with major international companies with a minimum expenditure commitment of USD 15 bn and minimum 300 wells to be drilled.
  • Zohr is a game changer and a success story to be followed, representing a record time from concession award to discovery, from discovery to signing of development lease [6 months later], from the discovery to planned first gas [expected before end of 2017],” El-Molla said.
  • Zohr itself has created appetite, motivation, and companies now are very active,” he said, mentioning Cyprus as one of the partners looking for opportunities there.
  • Committed investments for major gas development projects are worth USD 30 bn in the next 3-4 years.
  • “Very soon, during 2017, we will have a lot of announcements of discoveries onshore and offshore.”
  • Subsidy reduction will be by about USD 6 bn in the five-year plan for energy subsidy reform.
  • Major petrochemical investments in the past three years include MOPCO and ETHYDCO, worth USD 4 bn.
  • An onshore gas plant is under construction to treat 2.7 bcf/d.
  • El Molla reiterated the first companies to IPO in the new state probram “would be in the oil and gas sector.” Why? They are stronger and have better balance sheets.
  • The proposed start for IPOs is with eight companies. The Investment Ministry is working with state-owned NI Capital, which is screening candidates. “They have almost concluded the exercise,” he said, adding that “During the month of November, we will have a decision for which companies to start with. […] The plan is to have it through roadshows globally.”
  • On the halt of Aramco shipments, El-Molla did not comment: “It is a commitment of the state, a matter of national security; the citizen will not feel the problem,” said El-Molla. “All needs in petroleum products will be provided.” He reiterated earlier statements that it is not a problem if shipments are delayed.
  • In response to concerns that the mining law does not encourage development, El Molla said the current law will not change, given it was amended end of 2014 and executive regulations were issued a few weeks ago. “Investors would say it is better to have royalty and tax rather than having a production sharing system,” he said.

Best quote: “By 2021, the [energy] sector’s full value chain potential should be unlocked as a growth and sustainable development engine for Egypt; becoming a leading regional oil and gas hub and a role model for the future modernized Egypt.”

Sabah Mashaly, Deputy Minister of Energy and Electricity
Key takeaways

  • The deputy Minister of Energy and Electricity confirmed that three companies signed feed-in tariff program phase one contracts.
  • She said two more companies are expected to sign “today” (Tuesday).
  • The new strategy for the energy sector and electricity up to 2035 was adopted by the Supreme Energy Council, the highlight of which is focusing on renewable energies, as 90% of electricity is currently generated from natural gas and liquid oil.
  • She outlined the “schemes” for electricity generation from renewable resources. A scheme by NREA through EPC contracts, where 700 MW are in operation, with a target of additional 11 GW over the next 6 years. Another scheme is “competitive bidding”, about which she said 250 MW of projects will be shortly signed and 3 new tenders have been announced in August 2015 for the development of 550 MW in wind and solar energy. The third scheme is the feed-in tariff program targeting contracting 4300 MW of solar and wind energy by 2017.
  • Challenges within the sector include fuel shortages, energy subsidies, lack of supporting policies and regulations, achieving environmental goals, lack of power plants.
  • She spoke about building three mega projects with c. 14.4 GW capacity in high-efficiency solar power generation worth EUR 6 bn to be connected to the national grid by May 2018.
  • Total investment costs on the transmission line was EGP 18 bn in past two years.
  • To encourage private sector: “By 2019, no subsidy will be offered to the electricity sector in Egypt, but it will take into consideration all the social impacts.”
  • Opportunities for the private sector: Supplying energy to meet demand which requires adding 52 GW to the national grid by 2030; wind and solar energy investments; strengthening the transmission and distribution network to absorb the capacities expected to be added; transition to smart grid and electricity efficiency opportunities.
  • She outlined incentives for investors: allocating land for investors for lower fees in renewable energy projects (2% of total generated energy in year); the Transmission Company’s commitment to buy electricity and resell it to end user; feed-in tariff prices that are “the highest prices in Middle East.”
  • The deputy minister highlighted the electricity law passed in July 2015 as a way to deregulate and liberalize the market, “taking into considerations social aspects.”
  • She said the Transmission Company will be kept as a state company (no IPO) but will be operating within a deregulated markets.
  • “We encourage IPO mechanisms for distribution companies [private companies].”
  • 7 GW coal-fired power plants targeted by year 2023 on EPC+finance mechanisms.
  • The new arbitration clause for FiT contracts going forward has been worded, and appeals on local arbitration will be conducted outside of Egypt — in response to the demands of financial institutions.

Ahmed Darwish, Chairman of the Suez Canal Economic Zone Authority.
Key Takeways

  • “We got approval from the CBE for contracts to be signed for the currency we like for different projects,” said Darwish. “It is highly likely that new contracts for utilities might be in USD.” Because for instance in building water desalination plants, there is a large foreign component, which will be paid in USD. What the Zone is advising is working with a model where 70-80% of products are for exports, hence no foreign currency problem. He highlighted that there is no currency transfer limitations.
  • The Suez Canal Economic Zone Authority wants to take a more focused approach in promoting the zone by targeting companies where it is likely to get contracts. For that, the SCZone contracted Mackenzie, “We will start targeting specific companies to tell them why the zone is the right place to come.”
  • The Zone has 17 ideas that could be translated into bunker documents for investing in projects by November.
  • “We awarded 22 mn sqm of land in southern part of Sokhna zone in contracts.” This is where the heavy industry takes place like petrochemical plants, oil refineries.
  • The Zone Authority contracted 2 industry developers for Sokhna. Those are companies that will manage on their behalf. “We don’t want to micromanage,” he said. The SCZone does the macro infrastructure (roads, power, water) and developers work on micro infrastructure (network inside, which they rent out depending on the value added).
  • “We are negotiating with [Chinese industry developers] to have a terminal in Sokhna port,” said Darwish.
  • The SCZone is studying with Mackenzie what they can attract in medium and light industry in Sokhna.
  • Giving licenses for registering companies takes three days. “There is no bureaucracy in the zone.”
  • Eastern Port Said is “the next rising star in the eastern of the Mediterranean.” 5000 meters of terminals are being built by nine different contractors working in parallel to finish in 14 months, to be done by February/March.
  • the Zone Authority has received three requests for bunkering services and tank farms IN Port Said; a tank farm project for oil and gas was awarded in Sokhna.
  • The SCZone will award the first 4 mn sqm to the first industry developer in eastern Port Said before the end of November.
  • A month ago, I got a green light for the port of Arish [for security]. We can start investing in it.”
  • On the role of IT investments, Darwish said there are requests from British Telecom and Telecom Egypt to invest in Eastern Port Said. And in the southern zone, Raya is negotiating with the SCZone.
  • Compared to Jebel Ali: “Everything is in our favor except taxes,” he said. At the SCZone, it is much cheaper to establish a company: 2-3 USD compared to USD 300,000 there. Power and water will be cheaper without subsidizing the investor; zero customs; no VAT; no real estate tax; only corporate tax of 22% – which he criticized as a decision by the former finance minister. “Jebel Ali was established as logistics zone; not as much value added as we have,” Darwish said.
  • West Qantara port is close to Delta, so we tend to think it might be attractive for agroindustry.

Best quote: “We aspire to be in 2035 among the top seven zones in the world.”

Ambassador David Thorne, Senior Advisor to the U.S. Secretary of State (speaking at a press conference)

Key Takeaways

  • Egypt is absolutely critical to achieve macroeconomic stability to the Middle East.
  • Other than Israel, we support Egypt more than any other country, especially security and military support. “We are interested in supporting Egypt in becoming a stable democratic country.”
  • It’s been difficult to channel aid to Egypt, particularly through NGOPs, but “we believe we will straighten that out shortly.”
  • On the Egyptian-American Enterprise Fund, Thorne said it is about being managed by local independent private managers using American money, as a way to support SMEs that stimulate jobs and not only bring investments.
  • On reforms: “This kind of dramatic reform […] is very difficult. They will have clearly an impact of people’s lives […] will be somewhat disruptive.” However: “It has proven to be creating a positive direction for the country.” He added that the government is doing its best to minimize the impact on the poor as much as it possibly can.
  • On Chinese funding to Egypt, in response to AmCham President Anis Aclimandos’ comment that we are waiting on Chinese funding, Thorne said, ”From what I understand, details are being worked out and are progressing in a very constructive way,” but said he will not speak for Egyptian-Chinese economic relations.

Best quote: “The IMF program has mostly been worked out […] It is now a question of when it will take place.”

Omar Mohanna, Chairman, Egypt-U.S. Business Council

Key takeaways

  • No country has withdrawn from the Egyptian market, because they see potential.
  • He mentioned the Egyptian-American Enterprise Fund, with USD 300 mn seed money allocated, saying those are projects that will make a difference for Egypt’s economy and lives of Egyptians. It is a “business approach” to attract partners.

Best quote: “The whole idea is to fight bureaucracy across the board, as a new way of making business. To create environment at large. Not just the investment law. Not just free zones.”
Anis Aclimandos, President, AmCham Egypt
Key takeaways

  • The focus in the streets on talking on foreign exchange is bringing a “negative vibe,” Aclimandos said, adding that the Egyptian economy is deeper.
  • Speaking of the delegation, he said, “you get people looking at us positively”, giving the example of having 9 new companies who joined for the first time among 50+ companies.
  • He said we are waiting for Chinese to sign for funding for the IMF.
  • He praised involving the private sector in the legislation process. “We have been contacted and asked for our opinion.” He said. “Being involved in the drafting the law is very encouraging.

Best quote: “We have to believe in ourselves like they [the business mission] believe in us.”

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594). Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2016 Enterprise Ventures LLC.