The Oil and Gas Law Review: Egypt
The oil and gas sector is one of the most vital industries in Egypt, with significant energy resources found and continuously being discovered across several production areas throughout the country. At present, there are more than 60 international companies operating in the petroleum field within 164 areas across the Mediterranean Sea, Nile Delta, Western and Eastern Desert, Sinai Peninsula and Upper Egypt.2 Overall, as reported by the Minister of Petroleum and Mineral Resources, Tarek El Molla, investments in the petroleum sector reached 1.16 trillion Egyptian pounds during the past six years, resulting in a surplus in the trade balance during the fiscal year 2018/2019 and contributed by 27 per cent to the national income of the country.3
On the international scale, Egypt also plays an essential role through the operation of its two main transit routes, namely, the Suez Canal and the Suez Mediterranean (SUMED) pipeline. The Suez Canal is a major transit course for oil and liquefied natural gas (LNG) shipments, travelling from North Africa and the Mediterranean Sea to Asia, and from Gulf Cooperation Council (GCC) countries to Europe and North America. The fees collected from the operation of both transit routes form a significant source of income for the government. The Suez Canal recent expansion is expected to increase the country's annual revenues to US$13.5 billion by 2023.
Despite the foregoing, because of the period of political instability following the 2011 uprising, combined with the crude oil prices disruption crisis in 2014, and most recently the covid-19 pandemic which resulted in a global economic slowdown, crude oil production and reserves have declined significantly in the country over the past six years. The Egyptian General Petroleum Corporation (EGPC) official data shows a 2.6 per cent decline, between February and March 2020, in Egyptian crude oil production. As further evidenced in the BP Statistical Review of World Energy 2020 (69th edition), oil production decreased to 686,000 barrels per day (bbl/day) and oil proved reserves to 3.1 billion barrels, in comparison to 4.4 billion barrels in 2009.
As a substitute for crude oil production drops, the government has been promoting and implementing natural gas policies and reforms leading to an immense increase in reported rates of production, especially with the discovery of Zohr field in Egypt's Mediterranean Sea (as further elaborated below). The sustainable development strategy, 'Egypt's Vision 2030',4 launched by the government in 2015, aims at achieving sustainable development in the energy sector, and maximising the efficient utilisation of the country's natural resources, leading, therefore, to boosting economic growth. To achieve the target set by the said strategy, the government has adopted a number of reform programmes in the energy sector over the past five years. Most crucially, the government has put in place an energy subsidies reform programme during 2014/2015, aiming at reducing subsidies and increasing fuel and electricity prices, as part of a gradual plan to entirely eliminate all energy subsidies and liberalise the energy market in the near future. Further, the government issued the Gas Market Activities Law No. 196 of 2017, which mainly targets attracting and encouraging foreign investments in the gas sector. On the other hand, the country has set a target to increase the electricity generated from renewable energy resources to 20 per cent by 2022 and to reach 42 per cent by 2035.5
In light of these reforms and recent significant discoveries, a surge has been recorded in the Egyptian petroleum sector, specifically in the gas sector. Some of the data related to oil and gas production, consumption and importing/exporting rate in 2019/2020, is provided below based on the BP Statistical Review of World Energy 2020 (69th edition).6
i Egypt oil and gas statistical data overview
While, as stated above, crude oil production has been decreasing over the past years, natural gas production increased by 10.9 per cent in 2019, recording 64.9 billion cubic meters (bcm), compared to 58.6 bcm in 2018, which is considered the country's highest production level over the past 10 years. The total natural gas proved reserves has now been recorded to 2.1 trillion cubic meters (tcm) during the period between 2009 to 2019.
Natural gas consumption recorded 58.9 bcm in 2019, compared to 59.6 bcm in 2018; hence, decreasing by 1.1 per cent. As for total liquid oil consumption, it reached 743,000 bbl/day, in comparison to 757,000 bbl/day in 2018 (i.e., declining by 1.8 per cent).
The country's LNG exports rose to 4.5 bcm in 2019, compared to 2 bcm in 2018. A total of 1.7 bcm were exported to Europe, while the remaining 2.7 bcm were exported to Asia and South Pacific countries, 1 million cubic meters (mcm) to Kuwait and 1 mcm to UAE. The imports, on the other hand, finally recorded 'zero' again compared to 3.2 bcm in 2018.
Electricity generated from renewable energy remarkably increased in 2019 reaching 6.5 terawatt hours (TWh), including 3.7 TWh from solar generation (in comparison to just 1.5 TWh in 2018, hence an almost 145 per cent hike), and 2.8 TWh from wind generation (in comparison to 2.0 TWh in 2019). Undoubtedly, the notable surge of renewables in Egypt had its positive impact on reducing carbon emissions, which fell by 1.7 per cent in 2019.
Another major recent development in the petroleum sector is the settlement by the Egyptian government of foreign petroleum companies' overdue receivables, which have been piling up since 2011. As recently disclosed by the media centre of the Cabinet,7 by the end of 2019 around US$5.4 billion (85 per cent) out of total dues of US$6.3 billion has been finally settled, marking the lowest debt level in the oil and gas sector since 2011. Despite the financial challenges caused by the covid-19 pandemic, it is also expected that the government settles the remaining dues in the current fiscal year 2019/2020.
Legal and regulatory framework
i Domestic oil and gas legislation
Article 32 of the Egyptian Constitution of 2014 (the Constitution) provides that all natural resources are owned by the state, upon which is solely bestowed the right to control the exploitation and development of these. As such, the state, represented by the Ministry of Petroleum and Mineral Resources (the MOP), may award oil and gas exploration and exploitation rights by virtue of a concession agreement, to an interested investor (the Contractor) upon fulfilling specific criteria, as further elaborated below.
The concession agreement, issued by virtue of a law, is considered the key legislation governing all aspects of the relevant oil and gas exploration project. Aside from concessions, the oil and gas sector is generally regulated according to a number of laws and regulations, including:
- the Mining and Quarries Law No. 66 of 1953, as amended by law No. 86 of 1956 and its Executive Regulations issued by Ministerial Decree No. 758 of 1972 (referred to as the Fuel Materials Law);8
- the Gas Market Activities Law No. 196 of 2017 and its Executive Regulations issued by the Prime Ministerial Decree No. 239 of 2018;9
- the 'Oil Pipelines Law' No. 4 of 1988 and its Executive Regulations issued by the Ministry of Petroleum Decree No. 292 of 1988; and
- the Environmental Law No. 4 of 1994 (Environmental Law) and its Executive Regulations issued by Prime Minster Decree No. 338 of 1995.
Most crucially, the Fuel Materials Law sets out the terms and criteria required for the issuance and renewal of licences necessary to conduct petroleum exploration activities. These terms include the financial and technical criteria required to be fulfilled for granting the initial exploration license, the duration of the license, requirements for renewal, rental fees during the exploration phase and some general guidelines related to the bidding process.10 The Executive Regulations of the Fuel Material Law further grant the MOP the right to revoke an exploration licence or rescind a concession agreement in specific cases, or upon the commission of violations by the Contractor, including, without limitation, (1) refraining from paying any amounts due under the concession agreement within a maximum period of three months as of being notified; (2) subleasing or assigning any or all of its rights under the concession without obtaining the prior approval of the competent authorities; (3) extracting any mineral without the competent authority's permission; or (4) breaching any of the provisions of the concession agreement or the Fuel Materials Law.11
The MOP12 is the highest governmental institution in Egypt responsible for setting out and overseeing the general policies and regulations governing oil and gas activities in Egypt. It was created in 1973 by virtue of Presidential Decree No. 409 of 1973. The authorities of the MOP were established by in decree No. 1451 of 1973. Among said authorities, the MOP is responsible, through its affiliated entities, to regulate the production, distribution and supply of petroleum products. It is further entitled to propose legal reforms for overseeing any impediments or challenges encountered within the sector. Several entities, including the below listed, have been established and affiliated to the MOP to implement the different petroleum policies.
The EGPC13 was originally established in 1956 by virtue of law No. 135 of 1956, which was then amended by Law No. 20 of 1976, to become a holding company affiliated to, and operating under the guidance of, the MOP. The EGPC is mainly responsible for implementing and overseeing the Egyptian government's petroleum policies. A number of 12 public sector companies are subordinated to the EGPC, and it currently holds shares, either directly or indirectly, in 41 joint ventures, and 87 private sector companies.14 For the purpose of maximising petroleum production and reserves, and petroleum exports' revenues, the EGPC, either directly or through its affiliated companies, is involved in various (upstream and downstream) petroleum activities, including exploration, drilling, development, production, refining and processing operations; as well as transportation and distribution across the domestic market, engineering, construction, fabrication and maintenance activities. To that end, the EGPC, along with the MOP, is entitled to conclude concession agreements with qualified Contractors.
The Egyptian Natural Gas Holding Company (EGAS)15 was established by virtue of Prime Ministerial Decree No. 1009 of 2001. It is mainly responsible for promoting and developing gas activities in Egypt. As such, EGAS is involved in regulating upstream activities in the gas sector, including offering bid rounds for new concession areas, as well as the exploration, development and production of gas reserves. EGAS further handles downstream activities, including the supply, distribution and transportation of natural gas domestically, to meet local market demands. Since 2004, EGAS is a party to all gas concession agreements, while preceding concessions remain to be maintained by the EGPC.
Another entity involved in the petroleum sector is Ganoub El Wadi Petroleum Holding Co (GANOPE), which was established by virtue of Prime Minster Decree No. 1755 of 2002, and mainly overseas upstream petroleum activities in the southern region of Egypt (Upper Egypt).
Dispute resolution conventions
Egypt is a signatory to a number of dispute resolutions conventions, namely: (1) the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1858 (the New York Convention); (2) the Arab Convention for the Enforcement of Judgments and Arbitral Awards 1952; (3) the Convention on the Recognition of Foreign Judgments in Civil and Commercial Matters 1971 (The Hague Convention); and (4) the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 (the ICSID Convention).
Arbitral awards are not reviewed on the merits before the competent courts in Egypt. Assuming the award is valid and does not violate any of the criteria set out by the Egyptian Arbitration Law No. 27 of 1994 (including contravening the public order in the state); the enforcement takes place through depositing the relevant award with the competent court. Once an exequatur order is issued, the award becomes enforceable in the same way as a court judgment.
Bilateral/multilateral investment treaties
Egypt is a member of the Organisation of Arab Petroleum Exporting countries since 1973; and the agreement on the loan and guarantee to the natural gas investments between Egypt and the International Bank for Reconstruction and Development (the IBRD); in addition to around 115 Bilateral Investment Treaties (BITs)16 and Double Taxation Treaties (DTTs) signed with over (58) countries.
One of the various safeguards set by BITs is the protection of foreign investors against nationalisation or expropriation without proper and immediate compensation. The same concept is further guaranteed under concession agreements, which typically provide that the government should fully indemnify the contractors for the period during which a requisition is upheld. BITs further guarantee the free transfer of returns generated from the investment, in the currency of the original investment or in any other freely convertible currency; subject to compliance with domestic laws and procedures, being equitably and fairly applied.
i Granting of a concession agreement
As stated above, oil and gas exploration and exploitation rights are awarded by the government, represented by the MOP (and the relevant competent authority) by virtue of a concession agreement. To that end, periodic bid rounds are offered and administered by the relevant governmental authority (EGPC, EGAS or GANOPE) for granting interested investors the right to explore new concession areas. Upon satisfying the required technical and financial requirements, a concession agreement is concluded between the successful bidder, the MOP and the relevant authority. The concession is issued in a standard form produced by the MOP, except for the main commercial terms (e.g., production sharing scheme), which are subject to the bid's results. Once these terms are mutually agreed, the concession is issued by virtue of a law, which typically enters into force the day following its publication in the Official Gazette. The concession law forms the main legal framework governing the parties' agreement and supersedes any other conflicting laws.
ii Key terms of concessions
An oil or gas concession is granted for a period of nine to ten years for carrying out exploration activities for the designated concession area. Typically, a financial guarantee (Letter of Guarantee) is submitted by the Contractor to the government prior to signing the concession, guaranteeing the performance of the Contractor's obligations during said period. The concession term is divided into three phases, usually three to four years each phase. The Contractor must relinquish part or a percentage of the concession area, where no commercial discovery is found by the end of each phase (usually 25 per cent for the first two phases and the remaining 75 per cent by the end of the third phase).17
Once a commercial discovery is made, the relevant area (capable of production) is converted into a 'Development Lease', subject to the MOP approval, with an initial term of 20 years commencing from the date of first deliveries of oil or gas. This term could be extended, provided that the total period of each Development Lease cannot exceed 30 years.18
Upon signing a Development Lease, a joint venture (i.e., an Operating Company (OC)) must be established, and equally owned, between the Contractor and EGPC/EGAS. The OC is simply an agent of the Contractor having the sole purpose of carrying out the required exploration and development works under the concession, while all liabilities shall be incurred by the Contractor solely. As such, the OC does not own any right or interest in the concession and does not make any profit. In practice, the same OC could carry out the required work for more than one producing concession, subject to the consent of the MOP.
iii Termination of concessions
The concession agreement expires by the lapse of its term, unless terminated earlier. The government is entitled to early termination, upon the occurrence of certain events, which are typically stated under the concession, including: (1) a misrepresentation by the Contractor; (2) assignment of any of Contractor's rights without obtaining the required approvals; (3) extracting any minerals other than those authorised by the government; (4) if the Contractor is declared bankrupt; (5) non-compliance with a court decision issued in accordance with the court proceedings provided under the concession; or, generally (6) committing any material breach under the concession or the Fuel Materials Law. The government notifies the Contractor of the breach in question, and usually the Contractor is allowed a grace period to remedy and rectify said breach. Termination takes place by virtue of a Presidential Decree.
i Government royalty
The government is entitled to a royalty (in cash or in kind) of 10 per cent of the petroleum produced and saved from the relevant concession area during the exploration or development period. The royalty is borne and paid by EGPC/EGAS, not the Contractor.
ii Cost recovery
The Contractor recovers all the costs and expenditures in connection with the exploration, development and related activities carried out in accordance with the concession. This rate typically ranges around 35 per cent to 40 per cent (equally split between exploration expenditures and development expenditures) of all petroleum produced, as indicated in the relevant concession agreement. The Contractor is entitled to retain the cost recovery petroleum, on a quarterly basis, and may dispose of it freely subject to the preferential purchase rights granted to EGPC/EGAS to meet domestic market requirements. The excess cost recovery petroleum (or the equivalent in cash) reverts to EGPC/EGAS according to the terms of the concession.
iii Production sharing
Upon deducting the government royalty and cost recovery due to the Contractor, the remaining produced quantity of petroleum (usually 60 per cent to 65 per cent) is shared between EGPC/EGAS and the Contractor according to the percentage set out in the concession, and may be freely disposed of, but also subject to EGPC/EGAS preferential purchase rights (usually exercised, upon prior notification to Contractor) to meet domestic market requirements.
iv Laws applicable to price setting
The prices of petroleum products are determined by the government. As typically stipulated under concession agreements, cost recovery that the Contractor is entitled to is evaluated by EGPC/EGAS at 'market price', defined under the concession as: 'the weighted average prices realized from sales by EGPC/EGAS or the Contractor during the quarter, whichever is higher'. The sales relied upon, for the purpose of calculation, are those of comparable quantities on comparable credit terms. A specific equation is usually provided under the concession. The price of production sharing petroleum is evaluated according to the same pricing scheme set for cost recovery, or as may be otherwise agreed between the parties.
Assignments of interests
i Government approval
Any assignment of oil or gas interests to a third party (whether share or asset-based transfer) requires the prior written consent of the government, represented by the MOP, and in practice also the agreement of EGPC/EGAS (usually a signatory on the deed of assignment). This requirement is usually explicitly stated under the relevant assignment clause of the concession agreement, and further confirmed by Article 67 of the Executive Regulations of the Fuel Material Law. These Executive Regulations further set out certain conditions that must be met for the MOP to grant its approval on the respective assignment, namely:
- the assignor's obligations under the concession must be duly performed;
- the assignee must satisfy certain technical and financial criteria;
- the deed of assignment must be submitted for review by the EGPC, and should incorporate a provision confirming that the assignee shall abide by all the terms of the concession being assigned; and
- the assignee must provide a development plan, including the relevant technical and economic considerations and production expectations, for the remaining period of the concession.
Assuming all conditions are duly met, a governmental approval on assignment of a concessionary interest takes between four and six months. Both the assignor and assignee shall be jointly liable in performing all obligations under the concession.
ii Pre-emption right
The competent authority (EGPC/EGAS) is granted a pre-emption right to acquire the interest intended to be assigned. Typically, concession agreements contain the mechanism for exercising such a right. In short, the Contractor (assignor) should disclose, by virtue of a written notification to EGPC/EGAS, the details of the agreement reached with the selected assignee, including the value of each assignment deal. EGPC/EGAS shall have the right to exercise its pre-emption right within a specific period, as agreed in the concession, as of the date of being notified. Should it elect to exercise its right, EGPC/EGAS must send a written notification to the assignor following which EGPC/EGAS and assignor must negotiate in good faith to conclude a 'joint operating agreement' (unless already concluded among the contractors), drafted in accordance with the model published by the Association for International Petroleum Negotiators.
If no agreement between the Contractor and EGPC/EGAS is reached within a certain period of time (to be determined in the concession), the Contractor shall have the right to make the assignment to a third-party assignee subject to obtaining the necessary governmental approval.
iii Change of control
The change of control (as opposed to direct assignment) is not regulated under applicable laws, or explicitly covered under model concession agreements19. Typically, the government extends its control over assignments made to direct shareholders, especially in the case where the Contractor is merely a special purpose vehicle, established for carrying out the project in Egypt. However, given the absence of clear guidelines regulating the matter, events of change of control or indirect assignment must be assessed on a case-by-case basis.
iv Assignment fee
Typically, assignment to a third party requires a payment of an assignment bonus, the amount of which differs and is typically determined in the concession agreement. According to the standard terms of a concession, usually the assignment bonus is equivalent to 10 per cent of the value of the assignment deal, which could be calculated based on, either:
- the financial value to be paid by the assignee;
- the financial commitments for technical programmes or development plan;
- the financial value of the reserves;
- the financial value of shares or stocks to be exchanged between the assignor and assignee; or
- any other type of deals to be declared.
Companies carrying out oil and gas exploration, development and production activities in Egypt are subject to an income tax at the rate of 40.55 per cent.20 However, as typically provided under a model concession agreement, the competent authority (EGPC/EGAS) settles, out of its production share, the applicable income tax for or on behalf of the Contractor.
Contractors are also exempted from custom duties, taxes, levies, and other fees imposed on imported machinery or equipment necessary for carrying out their activities, provided the same or similar quality of the imported item or equipment is not manufactured locally at comparable price. Also, concession agreements usually provide that assignments are made free of any capital gain taxes, charges or fess (including income tax, sales tax, VAT, stamp duty or other similar taxes).
Environmental impact and decommissioning
i Environment and safety requirements21
Egypt is a signatory to several environmental conventions and protocols dedicated to the protection of the Mediterranean Sea against pollution and the management of hazardous waste. Most notably, Egypt acceded to the'Mediterranean Action Plan (MAP)-Barcelona Convention of 1975/1976, which was ratified in 1978;22 as well as the International Convention on Civil Liability for Oil Pollution Damage-Brussels Convention of 1969, signed in 1989. Egypt is also a member of the International Maritime Organization (IMO) since 1958.23
On the domestic level, while there is no special law exclusively dedicated to upstream oil and gas activities, the Fuel Materials Law and its Executive Regulations, as well as the Egyptian Environmental Law regulate several environmental related matters with respect to oil and gas operations. In that respect, the Executive Regulations of the Fuel Materials Law outline several measures that must be adopted by the Contactor to prevent, among others, loss of production or leakage, soil pollution, water contamination, accidents, fires, explosions, etc. These Regulations further set out several criteria that must be satisfied in the equipment and machinery used for oil and gas operations, some stringent petroleum waste management requirements, as well as some procedures required for ensuring the health and safety of all staff members present at locations where oil and gas exploration activities are undertaken. The Environmental Law and its Executive Regulations, on the other hand, provide several requirements necessary to ensure the protection of air, soil and territorial sea from oil pollution, as well as treatment of industrial waste particularly with respect to offshore oil fields. As such, the law prohibits companies licensed to carry out exploration or exploitation activities in offshore oil fields from discharging any polluting substances (resulting from carrying out said activities) in the territorial sea or the country's designated economic zones, and to use the best and safest technical measures to treat such discharged waste or polluting substance, in compliance with the standards set by the Barcelona Convention.24
That said, a typical concession agreement generally requires the Contractor to operate in accordance with good market practice and to take all necessary measures to prevent the loss or waste of petroleum during the drilling, production, distribution or storage phase. The government is further entitled to prevent any operation on any concession well or field which, based on its reasonable assessment, might result in any loss or damage to that well or field. The Contractor is entirely and solely liable with regard to third parties for any damage caused by its exploration operations, and must indemnify the government or the relevant authority (EGPC/EGAS) against any and all damages for which they may be held liable on account of these operations.
The Egyptian Environmental Affairs Agency (EEAA) is the main administrative body responsible for issuing any necessary environmental licences in connection with oil and gas activities, and overseeing, in coordination with EGPC/EGAS, the activities or violations committed by licensed contractors.
Any oil and gas company is subject to an Environmental Impact Assessment (EIA) study carried out by the EEAA, to evaluate any environmental risks with respect to the oil and gas activity requested to be undertaken. The EIA is conducted based on certain criteria and specifications set by the EEAA. If the assessment results are favourable, the company is granted the required license to operate. A licence should be obtained for the storage and disposal of dangerous and hazardous material. Additionally, an Environmental Registry issued and closely monitored by EGPC/EGAS must be maintained by the operating company to record any complaints filed or violations committed. The registry is regularly inspected by EGPC/EGAS, and the company must rectify any violations according to the recommendations of the relevant authority.
On another note, vessels holding the nationality of a state party to the Barcelona Convention, and transporting oil on a regular basis from or to Egyptian ports, should obtain the international certificate for the prevention of oil pollution (valid for five years) issued by the Egyptian Authority for Maritime Safety (EAMS). Any other vessels should also be licensed according to the local regulations set by the Egyptian Minister of Transport.25
As stated above, under the model concession agreement, the Contractor is obliged to relinquish either a whole or a part of the concession land or exploration block, where no commercial discovery is found, or which production is not profitable, as approved by EGPC/EGAS26 (hence not converted into a development lease) during the initial exploration period determined in the concession. However, if a non-commercial block in a concession area is partly within the radius of drainage of any producing well, it shall be considered as part of that producing well.27 The relinquishment of each part or exploration block is repeated until the whole concession area is fully abandoned and decommissioned by the end of the concession term, unless otherwise instructed by EGAS/EGPC (e.g., if, in its opinion, the well or block could be used for any other purpose).
There are no specific regulations or guidelines in Egypt governing the decommissioning process. The Executive Regulations of the Fuel Materials Law merely state that the Contractor must prepare a 'decommissioning programme' in accordance with the accepted petroleum industry practice and submit it for approval by EGPC/EGAS.28 In practice, usually the parties enter into a farm-out agreement to agree on the decommissioning process, noting that the Contractor shall be liable to comply with all applicable environmental regulations and the industry practice.
Finally, the EGPC recently issued a new model concession agreement (for the 2018 bid round) introducing a new Article on 'mandatory and voluntary relinquishment' (Article 5) whereby, in the first scenario (mandatory relinquishment), the same conditions for relinquishment stated above apply (i.e., discovery), except that the Contractor may seek the MOP's approval to retain a non-commercially profitable well or exploration block during the following exploration period (if applicable) upon meeting certain criteria and submitting a Letter of Guarantee to cover the additional exploration costs and unrecoverable bonus for the granted extension.29 In the second scenario (voluntary relinquishment) the Contractor may, during any period, relinquish all or any exploration blocks, provided that at the time of such relinquishment, the Contractor's exploration obligations under the concession agreement would have been fulfilled.
Title to assets
As typically provided in a model concession agreement, by the end of the concession term or upon its termination, all assets under the concession charged to cost recovery are transferred to EGPC/EGAS according to the restrictions provided under the concession while the Contractor remains liable for any obligations in relation thereto.
Foreign investment considerations
While there is no special establishment requirement in Egypt to carry out oil and gas activities, as typically required in concession agreements, Contractors must have an 'office' in Egypt to which notices are served. Accordingly, foreign contractors commonly tend to establish foreign branches at the beginning of their local activity, which also helps in handling the day-to-day business operations in a more efficient manner (e.g., contracting with third parties and employees or dealing with competent authorities). A branch does not have a separate legal existence from its parent company, hence considered an extension thereof (i.e., no separate legal personality). Registration of a foreign branch takes about one week to 10 days, assuming all documents required to be submitted are in order, and the outcome of the security check carried out for the foreign appointed manager is positive.30
ii Capital, labour and content restrictions
Typically, concession agreements allow Contractors to freely remit and retain abroad all funds acquired or generated in Egypt including the proceeds from its share of production, either in US$ or any other convertible currency remittable abroad. Further, BITs guarantee the free transfer of returns generated from the investment subject to compliance with domestic laws and procedures, being equitably and fairly applied (essentially, the transfer must be made through licensed banks in Egypt, and all supporting documents must be duly submitted).
A branch office may not employ more than 10 per cent of its workforce as foreign nationals (9:1 ratio) or pay more than 20 per cent of the total annual payroll to foreign employees, with the exception of foreign nationals appointed as manager. Foreign employees must obtain work and residence permits prior to commencing work in Egypt. In practice, Contractors are usually exempted from the foregoing requirement (depending on the need of their operations) upon the recommendation of EGPC/EGAS, and provided that proper training programmes are put in place for local employees.
To date, there is no special law in place dedicated to anti-corruption in Egypt. Yet, a number of national laws contain various provisions fighting and preventing corruption. These laws essentially include, the Egyptian Penal Code No. 58 of 1937 (penalising bribery involving official servants),31 the Criminal Procedure Code, the Law on Illicit Gain and the Anti-Money-Laundering No. 80 of 2002, the Civil Service Law No. 81 of 2016 and the Procurement Law No. 182 of 2018. The Egyptian Constitution also outlines some principals, albeit generic, for fighting corruption. Further, Egypt acceded to the United Nations Convention against Corruption in 2003 and ratified it by virtue of Presidential Decree No. 307 of 2004.
New discoveries are constantly being made in the oil and gas sector, the most recent of which is the Zohr deep-water offshore natural gas field located in Egypt's Mediterranean Sea. Zohr is considered to be the largest gas discovery in the Mediterranean Sea. It involves 14 producing wells, eight gas processing lines, four offshore pipelines and an offshore management platform commissioned. Briefly, after being discovered in 2015, the field production cycle commenced in December 2017. Zohr field currently produces around 3 bcm (85 mcm) per day and contributes around 12 per cent of the total natural gas production in the country. Upon obtaining the approval of the MOP, foreign partners seek to export portions of their shares in gas concessions concluded with respect to Zohr field to the global market through the Damietta liquefaction plant.
On a related front, the production from Burullus and Rashid gas fields, also located in the deep waters of the Mediterranean Sea, increased to become 440 million cubic feet per day (scf/day), compared to 300 million scf/day in Q1 of 2019/2020. Also, as a result of its exploration works conducted in 2019/2020, Shell has made, through its established JV with EGPC (Bapetco), eight new discoveries in its concessions in Egypt. Earlier this year, the MOP granted seven concessions in the Western Mediterranean area to five international oil companies including Shell, Chevron, BP, Total and ExxonMobil after carrying out seismic works in the area. It is anticipated that several international oil and gas companies will proceed with their seismic surveys in the Western Mediterranean, as of Q4 of 2020, with exploration activities expected to kick off during 2021/2022.
Moreover, the results of the 2019 bid round of the Offshore Red Sea have been announced earlier in 2020. Each of Chevron, Shell and the alliance of Shell and Mubadala Emirates Company has been awarded one block, all of which for a total exploration area of around 10,000 kilometres. While the minimum bid amounted to US$326 million, it is expected to increase to several billion dollars during the development stage in the event discoveries are made. The interest of multinational oil companies in the petroleum bid rounds in Egypt is a strong indicator of the country's attractive investment climate. Upon achieving positive results, it is anticipated that further companies will be interested in participating in the next rounds to come.
A crucial development further took place in 2020 with the inauguration of a new (8 km) marine crude oil pipeline in El-Hamra Petroleum Port, located in New Alamein City, in the Mediterranean Sea, with a total cost of US$100 million. The pipeline is expected to increase the port's shipping capacity up to 1 million barrels/day. In parallel, a new storage was established in the port increasing its capacity to 1.5 million barrels of crude oil per day (as opposed to 250,000 barrels).
With respect to international initiatives, in 2018, Egypt, Greece and Cyprus agreed to establish an Eastern Mediterranean Gas Forum, which was launched a year later (January 2019). It includes among its members countries that produce and export gas through the East Mediterranean Sea. The purpose of the Forum is for its members to coordinate mutually beneficial policies across the region with respect to gas exploration and exportation. During the same year, Egypt and Cyprus further signed an agreement to collaborate on constructing a direct natural gas pipeline connecting both countries. Once completed, the pipeline should allow the seamless flow of gas from the Aphrodite gas field to Egypt's liquefaction facilities located in Idku and Damietta. From there, liquified gas could be directly exported to other countries. The new pipeline is hence considered a crucial milestone supporting Egypt's ambition to become an energy export hub in the East Mediterranean. Very recently this year, both countries further signed a 'maritime demarcation deal', designating a mutual exclusive economic zone in the Mediterranean Sea to maximise the exploration of energy resources in the area.
As regards to settlement of disputes, it has been reported that the Egyptian government approved the settlement of disputes between the EGPC and Petroceltic, allowing the latter to recover over US$30 million as overdue payments from the EGPC.
1 Girgis Abd El-Shahid is the managing partner and Asmaa Badawy is a senior associate at Shahid Law Firm. The authors would like to thank Catherine Abd El Shahid, associate at Shahid Law Firm, for her research assistance with respect to Section VII 'Environmental impact and decommissioning'.
8 Law No. 86 of 1956 repealed almost all the provisions of the Mining and Quarries Law, except for Chapter 2 related to 'fuel raw materials', and the general provisions covered under Chapters 4 and 5. The law is therefore commonly referred to as Fuel Materials Law.
9 The Gas Market Activities Law, as well as the Oil Pipeline Law, focus on downstream activities; hence not covered under this chapter.
10 Articles 25 to 39 of the Fuel Materials Law.
11 Article 73 of the Executive Regulations of the Fuel Materials Law.
17 See Section V.
18 Article 32 of the Egyptian Constitution.
19 More recent concessions (e.g., the concession published in the official gazette by virtue of Law No. 206 of 2014) explicitly provide under Article XXIV ('Status of Parties'), that the change of control of the Contractor (without defining what constitutes 'control') shall be subject to the assignment provision of the concession (i.e., subject to the prior consent of the MOP).
20 Article 49 of the Egyptian Income Tax Law No. 91 of 2005.
21 As of June 2020, EGAS approved the first edition of the sustainability policy for oil and gas companies' activities, prepared by the Egyptian Environmental Affairs Agency. For further information, please check: www.egas.com.eg/news/egas-approved-first-edition-sustainability-policy%C2%A0; and www.egas.com.eg/egas-sustainability-policy.
22 Ratified by virtue of law No. 319 of 1978.
23 Egypt has recently won a 'C-Category' membership in IMO Council, during the elections held in the 31st session of IMO General Assembly (December 2019): www.sis.gov.eg/Story/142719/Egypt-re-elected-
to-IMO-council?lang=en-us. A list of major IMO requirements with respect to oil pollution prevention can be found on the Egyptian Authority for Maritime Safety website: www.eams.gov.eg/Home/IMO_req_En1.
24 Chapter 3 of the Environmental Law is dedicated to maritime protection from oil pollution.
25 Article 77 of the Environmental Law.
26 Article 34 of the Executive Regulations of the Fuel Materials Law.
27 This is typically found under the 'Grants of Rights and Term' section of a concession agreement.
28 Articles 34 and 35.
30 The duration of the security check could extend the process depending on the nationality of the parent company and the manager.
31 Articles 103 to 111 of the Egyptian Penal Code.