CAIRO: Think forecasting global fuel prices for the next month is tricky? Try the next 20 years.
This is the task for British Gas (BG) Egypt, a huge fuel company, and others in the natural gas sector, where contracts are often measured in decades.
In light of tumbling fuel prices sparked by the economic downturn, BG will focus on “sustaining their operations and trying to stay competitive in a low-price environment, Tim Blackford, the company’s president, told Daily News Egypt at a conference earlier this week.
This, he said, means reevaluating some of their contracts with suppliers of services such as drilling and construction.
“We’re in an interesting place, really, where the oil price is at $40 per barrel or so [but] some of the contractual expectations remain quite high, so we’re working with a number of contractors on addressing those specific issues, he said.
Faced with sinking prices, the firm could, for instance, extend the length of a contract with a rig owner in exchange for a cheaper rate. Such an arrangement would in theory benefit both sides – the gas firm trims its cost while the supplier enjoys the certainty of long-term revenues and employment.
“We’re seeing this in a number of conversations, be it for construction or drilling or equipment supply or whatever, Blackford said. “And we’re not alone in this, virtually every company is going to be reviewing its contracts and purchasing strategies in the reality of oil and gas prices.
British Gas came to Egypt about two decades ago, and the firm now accounts for about 40 percent of Egypt’s natural gas production. The company’s first project was devoted to supplying the local market, but over the past five years it has expanded its Liquefied Natural Gas (LNG) exports to the point that Egypt is now the parent firm’s sixth-biggest exporter.
As with many hydrocarbon-rich nations, Egypt requires foreign firms to partner with a local company, in this case the Egyptian General Petroleum Company (EGPC) or the Egyptian Natural Gas Holding Company. This means the state has final authority over how much fuel a private firm can export, where they can export it and at what price they can sell to the domestic market. Egypt has an interest in both supplying cheap domestic energy and giving private firms enough incentive to extract and refine the gas. The state’s role in the sector has historically been extensive and, some analysts say, meddling.
This week local press reported that officials here plan to restructure EGPC, eventually liberalizing some refining and distribution activities.
Still, contract terms in Egypt are generally favorable, Blackford said. “One of the things in my experience that really is a hallmark of Egypt is that its contract terms have always been pretty market-responsive, he said. “It’s relatively easy to be a foreign oil and gas investor in Egypt.
One example is the price of gas, he said, which Egyptian officials tend to negotiate rather than mandate.
British Gas exports about half the gas it produces in Egypt and sells the other half domestically. The government coordinates domestic sales through state-owned companies, which means the British firm does not directly sell to local customers. The state is discussing allowing direct sales, Blackford said, but nothing is definite so far.
“That really forms part of the pattern which you’ve seen in a number of countries in which they’ve liberalized their gas markets, Blackford said. “It’s possible that that happens in Egypt, but that is not what happens at the moment.
Wherever gas prices eventually land, BG will be in Egypt for some time, Blackford said. There could be as much gas left in Egypt waters as has already been found, albeit in less accessible spots, he said. “Is it fair to say that lots of the easy-to-access, cheaper to develop, cheaper to produce gas is currently in production? The answer is yes, Blackford said. “Most of the easy-to-win stuff has been won. But we’re not running out of hydrocarbons, and Egypt specifically is not running out of oil or gas.
