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BIG PICTURE - Egypt's oil industry enjoying renaissance

Published: 19:30 28 Aug 2014 AEST

egypt

It’s now nearly four years since a young man in Tunisia burned himself to death and triggered a wave of pro-democracy protests in North Africa and the Middle East.

Some of the most dramatic political and social upheaval occurred in Egypt - one of the most important sources of oil in North Africa and the Middle East.

Some oil and exploration companies, including Canada’s Chinook, have withdrawn from parts of North Africa in the past few years.

“Canadian companies have been under pressure from shareholders to withdraw from politically complex countries,” says Mark Henderson, an oil and gas analyst at Westhouse Securities. “… [But] the day-to-day running of oil assets has gone on relatively unscathed despite the political uncertainty [in Egypt].”

The boom in shale gas in the US is another reason why some Western oil companies are less interested in North Africa.

But don’t dismiss Egypt’s oil market.

Analysts say it has good potential for foreign investors because of its large oil reserves, good infrastructure, gaps in the market and signs that the country is becoming more stable.

Political Risks

Egypt has been through unprecedented change since 2011 when mass protests forced President Hosni Mubarak to resign.

Elected government gave way to military rule.

But with the recent presidential vote elevating former army chief Abdul Fattah al-Sisi to president, international markets are betting on a return to normality for one of the most influential nations in North Africa and the Middle East.

There are still geo-political risks for companies to consider, of course.

While there haven’t been any major attacks on oil fields outside the Sinai peninsula, there is still a risk of attacks on oil pipelines by small tribal groups, says Alan Fraser, a risk consultant at AKE, which advises business on risks.

But many oil fields are in remote areas, which makes it harder for rebel groups to attack them.

“The Egyptian military has put a lot [of effort] into securing major [economic] assets,” Fraser says. “A major attack on a Western company [in Egypt] could deter investment in Egypt, so they would want to avoid that.”

Perhaps the biggest risk in Egypt is the potential for more social unrest.

About 40% of Egyptians live below the poverty line. President Sisi has begun to cut food and fuel subsidies as part of reforms to the economy.

If street protest escalate and turn into another uprising it could weaken the government and cause economic disruption.

Foreign companies in Egypt can mitigate risks by looking for potential flashpoints, testing procedures to evacuate workers and checking that insurance policies will pay out if the worst happens.

“A lot of companies were caught out in the Arab Spring because their policies didn’t always cover all risks,” Fraser says.

Growth Potential

Talk of geo-political risks can unsettle investors but companies already in Egypt, including AIM-listed Circle Oil (LON:COP), say they rarely had problems during the recent political and social turmoil.

This, according to the company’s chief executive Chris Green, owes much to the professionalism of the state-owned Egyptian General Petroleum Corporation (EGPC).

“Operationally we never stopped. EGPC is a well-honed working piece of the state,” he told Proactive Investors.

Circle’s prelims revealed Egypt made a substantial contribution to the company’s US$53mln of cash generated last year and it will continue to be an integral part of the business.

“We are certainly interested in doing more work in Egypt,” Green said.

Sea Dragon Energy (CVE:SDX) is another small oil company which is growing fast in Egypt.

It has doubled its production in the last three years, its chief executive officer, Paul Welch tells Proactive Investors.

Even during the height of the political unrest oil production was never disrupted, although payments for its oil were delayed.

Welch says Egypt’s political system has become more stable in the past year. And there are signs that economy is picking up, including the return of tourists.

His company has been able to buy oil assets at good prices from companies leaving the market.

“Prospects in Egypt [for oil] have always been good,” he says. “We’re nestled between Libya and Saudi Arabia. From an [oil] perspective those are probably two of the better post codes you can get.”

An Investor's Eye 

The 22% rise in the share price of Circle in the year to date reveals sophisticated investors are very much aware that Egypt is a different proposition than it was 12 months ago.

And the renaissance is not restricted to the oil and gas sector with Centamin, the gold miner, is up 42% since the start of January. Toronto-listed Sea Dragon is yet to enjoy that re-rating, so there may be an opportunity there.

And Alexander Nubia (CVE:AAN), which owns the potentially world-class Hamama gold, silver, zinc and copper project, will undoubtedly prosper as the country moves to exploit natural resources other than oil and gas.

Chief executive Alexander CEO Massoud told Proactive Investors recently: “[Egypt] is taking steps to attract investment.

“Government, in my discussions, recognises that mineral resources can become another economic pillar. That momentum is being built. It means the government is going to be very supportive of companies like us as we are on the ground floor of this new sector.”


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