POWER TRIP: RESTRUCTURING THE PETROLEUM

C O N F I D E N T I A L SECTION 01 OF 02 CAIRO 000209

SIPDIS

NEA/ELA FOR SCHALL
DOE FOR ERICKSON AND SPERLE

E.O. 12958: DECL: 02/02/2019
TAGS: ENRG EPET PREL EG
SUBJECT: POWER TRIP: RESTRUCTURING THE PETROLEUM
BUREAUCRACY IN EGYPT
...
REF: 2008 CAIRO 959 Classified By: MINISTER COUNSELOR FOR ECONOMIC AND POLITICAL AFFAIRS WI LLIAM R. STEWART
1.(C) SUMMARY: The Egyptian General Petroleum Corporation (EGPC),a parastatal company under the authority of the Ministry of Petroleum (MoP),controls every facet of the oil business in Egypt, from upstream exploration and production, to midstream refining and downstream marketing and retail sales. Independent newspaper Al Masry Al Yom reported in late January that EGPC's Board of Directors approved a plan to restructure EGPC and set up an independent regulatory authority for petroleum and natural gas. Denying that a major reorganization was in the works, EGPC Chairman Abdel Alim Taha told econoff on February 2 that Minister of Petroleum Sameh Fahmy was considering a "few changes" to EGPC, and that discussions were in a very early phase. Ibrahim Saleh, Senior Advisor at the Ministry of Finance, confirmed to us February 5 that EGPC's board approved a limited reorganization plan but did not mention whether an independent regulator was included.

2.(C) Summary Continued: Oil and gas sector reform has been a priority for Prime Minister Nazif since the autumn 2007 National Democratic Party (NDP) conference. Nazif appointed several key economic reformers to EGPC's board to facilitate transparency, including Finance Minister Yousef Boutros-Ghali and Investment Minister Mohamed Mohieldin, but there has been little tangible change. Energy sector contacts believe that there is a kernel of truth to the news report and that a major shake-up at EGPC is inevitable. U.S. oil and gas producers Apache and El Paso report that EGPC is in arrears in its payments to all producers by almost 150 days. END SUMMARY.


3. (U) The Ministry of Petroleum (MoP) oversees three holding companies that manage all elements of the oil and gas business and form joint ventures with international partners: the Egyptian Holding Company for Natural Gas (EGAS),the Egyptian Holding Company for Petrochemicals (ECHEM) and the Egyptian General Petroleum Company (EGPC). EGPC sets prices and controls the oil business in Egypt, from upstream exploration and production, to midstream refining and downstream marketing and retail sales. Prime Minister Ahmed Nazif and NDP Policies Committee head Gamal Mubarak introduced an ambitious plan to reform the oil and gas sector at the NDP party conference in 2007, proposing the establishment of an independent regulatory agency. -------------- EGPC: BLACK HOLE FOR INFORMATION AND MONEY --------------

4.(C) MoP's financial opacity was a key factor behind the NDP leadership's push for reform: oil and gas revenues go directly to EGPC and aren't incorporated into the Egyptian treasury. Nazif appointed several key economic reformers to EGPC's board of directors, including Finance Minister Yousef Boutros-Ghali and Investment Minister Mohamed Mohieldin, to encourage transparency in accounting and planning and greater coordination between Petroleum Minister Fahmy and the rest of the cabinet. Boutros-Ghali made two moves in 2008 to shed light on EGPC's financial situation and assert a measure of control, by bringing in former EGPC Chairman Ibrahim Saleh as a special advisor on energy sector finance and imposing a small excise tax on gasoline in May 2008, to help pay for a salary hike for public sector workers (reftel). According to Khaled AbuBakr, managing director of TAQA Arabia and chair of the American Chamber of Commerce in Cairo's Energy Committee, Gamal Mubarak and the economic ministers have failed to gain acceptance for their reform agenda within EGPC. AbuBakr lamented that the NDP's key reformers appear to have given up the fight by failing to attend EGPC board meetings.

5.(C) Oil and gas producers Apache (the largest U.S. investor in Egypt) and El Paso told us recently that EGPC is in arrears to international producers by 150 days, and estimate that EGPC owes all international producers in Egypt just over $2 billion. (NOTE: EGPC usually pays oil producers 30 days following the month of production, and natural gas producers 45 days after receipt of gas invoice. END NOTE.) Apache contacts note that falling oil prices since fall 2008 have depressed Egypt's revenues but that this situation is unprecedented and may lead the company to contract its exploration and development activities by the second quarter of 2009 if it remains unresolved. CAIRO 00000209 002 OF 002 -------------- POSSIBLE OUTLINE OF A RESTRUCTURING PLAN --------------

6.(C) Independent Egyptian newspaper Al Masry Al Yom reported January 27 that EGPC's board of directors, minus "prominent ministers or their representatives," approved a proposal to reorganize EGPC, liberalize the distribution side, and set up an independent regulatory agency for oil and natural gas, reporting to the Prime Minister. EGPC Chairman Abdel Alim Taha told econoff on February 2 that Minister Fahmy was considering a "few changes" but noted that discussions were in preliminary stages within the ministry. He denied that a major reorganization was in the works. MoF advisor Ibrahim Saleh confirmed to us February 5 that EGPC's board had approved Minister Fahmy's plan to create separate holding companies for refining and distribution, but did not mention whether an independent regulatory agency was part of the plan. Saleh stated that he and other representatives of economic ministries were not present to vote on the plan, and would not comment on whether Fahmy's proposal was in line with the PM's agenda for energy sector reform.

7.(SBU) Industry contacts assert that restructuring at EGPC is inevitable and believe that Al Masry Al Youm's report was at least partly accurate. Tom Walter, the director of ExxonMobil Egypt, suggests that the likeliest scenario would split EGPC in three between exploration and production activities, refining, and marketing and sales. They believe that this will allow the GOE to have greater visibility into oil and gas revenues and would eventually start to open up the refining and distribution sides to the private sector. Right now, over 80 percent of Egypt's refining capacity is owned by the government. Just over 60 percent of retail sales of gasoline are controlled by two parastatal companies.

8.(C) COMMENT: According to the IMF, oil-related revenue comprised 57 billion Egyptian pounds ($10.2 billion) or 6.4 percent of GDP in FY2007/2008. Cash flow problems have resulted in delayed payments to producers in the past, but the current delay of 150 days is unprecedented. While the GOE is taking steps to restructure its petroleum bureaucracy, it is not clear to us how quickly this will happen or whether this will result in faster payments to producers. Just as troubling is the continuing dissonance between the economic ministries and MoP over the management of hydrocarbons in Egypt. SCOBEY