Egypt Reaches First Deal to Revise Gas Prices with RWE DEA

Source: Reuters 6/18/2014, Location: Africa

Egypt has agreed to revise the price it pays to buy natural gas to be extracted by German oil and gas group RWE DEA, a move likely to mean higher prices for the state.

Oil Minister Sherif Ismail said that state-run gas company EGAS had reached an agreement in principle with RWE DEA to modify its current Delta concession contract, the first step by the government to fulfil a pledge to provide more attractive terms to foreign firms needed to boost production.

The revisions aim to "strike a balance between the parties to the agreement regarding the costs of drilling, development, and production in these areas", Ismail said.

Though he did not say how the prices would change, he said that the move was in the context of the government's aim of "matching the cost of development of some newly discovered gas fields", suggesting the government would pay companies more for the gas they extracted.

The step would lead to increased investments that could speed up the development of offshore finds, Ismail said. Fuel-short Egypt badly needs to convince foreign energy firms to boost investments.

Steadily declining gas production and foreign firms' wariness about any increase in investment have combined with price subsidies and rising consumption to create Egypt's worst energy crisis in decades.

The new pricing arrangement will apply only to newly discovered gas, Ismail said in a statement. Egypt's new President Abdel Fattah al-Sisi swore in a new government on Tuesday. Parliamentary elections are expected later in the year.

Political and economic turmoil in Egypt since the 2011 uprising has hurt its ability to offer a good price and dented investor confidence that it can pay.

He said that this "positive step" would be followed by changes to agreements with other foreign companies, particularly those considering developing deep offshore gas finds.

RWE DEA declined to comment.

Egypt relies heavily on gas to generate power for households and industry. Daily power cuts in many cities are expected to continue into the summer months, when consumption peaks.

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