The below document will provide a legal analysis on the oil and gas sector in Egypt. This assessment will outline the entities that govern the industry, in addition to the various laws, provisions, and regulations utilized to govern the oil and gas industry.
Throughout history, Egypt has had significant energy resources, both traditional fossil fuels and in renewable energy, largely due to the abundance of underutilized land and year round sunshine within the country. Egypt’s strategic geographic location also provides potential for it to become among the most important gas producing nations in the world in the near future, particularly with the discovery of the Zohr Well in 2015. II.
Applicable Legislations & Provisions
This section of the report will look at the following laws:
- Egyptian Constitution
- Mining and Quarries Law No. 66 of 1953
- Gas Market Activities Law No. 196 of 2017 and its Executive Regulations issued by the Prime Ministerial Decree No.239 of 2018
- New Public Procurement Law No. 182 of 2018
- Egyptian Income Tax Law No. 91 of 2005
a. Egyptian Constitution
Article 32 of the Egyptian Constitution stipulates that
‘All oil and gas resources, are within the control of the state.’
Based on the above, the state has traditionally been the only player permitted to control the oil and gas sector, and they could seek out the assistance of private sector companies through concession agreements when desired. This is therefore the most common means of partaking in any oil and gas activities, however, as part of the governments overall plan to encourage further FDI, certain legislations have been passed in an attempt to liberalise the sector. Below, we will provide further detail on these points.
b. Mining and Quarries Law No. 66 of 1953
As mentioned above, the right for exploration and exploitation is conceded in the form of a concession agreement issued by virtue of law between the state (Egypt) through its two relevant governmental entities (EGPC and EGAS) with the contractor company. The law which regulates this is the Mining and Quarries Law No. 66 of 1953, which prescribe the terms and conditions necessary to conduct the proper procedures and obtain the necessary approvals for exploitation and exportation. The concession agreements are then awarded to the most appropriate contractor through a bidding process, offered in accordance with the New Public Procurement Law No. 182 of 2018.
Briefly, the government requires that contractors obtain a certain amount of oil or gas discovered in accordance with a production sharing plan. The contractor can then sell and export their share in agreement in accordance with the price valuation under the concession agreement.
In this scenario therefore, the state retains its permissive power when selecting contractor companies, by looking for specific traits in the company’s technical, financial, and administrative capabilities.
The contractor on the other hand, is responsible for the minimum costs of exploration, as laid out in the concession agreement, and he must provide a letter of guarantee to EGPC to ensure their compliance to their financial obligations, and to ensure that they have no right to reimbursement of expenses except in the case of a commercial discovery.
Generally, concession agreements tend to have the same obligations. The below is a non-exhaustive list of certain obligations which are recurrent in concession agreements.
1) Compensation payable in case of failure to comply with the concession agreement or failure to pay
2) Government entitled to (differing) percentage of aggregate oil production
3) Contractor must report amount of oil discovered to government daily
4) Contractor subject to Egyptian tax laws
5) Contractor cannot assign this agreement to a third party without the approval of government
6) Contractor is responsible for damage incurred as a result of excavation work.
Terms of Concession:
The terms of the aforementioned concession agreements must be approved by parliament, signed by the Egyptian Minister of Petroleum and the contractor. Terms generally range from seven to nine years and are usually divided into one preliminary term, and two following extensions. The three terms of exploration usually range from seven to nine years, however if there is a commercial oil and/or gas discovery then the term may be extended from 25 to 35 years.
a. Exploration Phase – when the contractor seeks out land for the oil and gas concession agreeement. The contractor has no right to extract the material at this phase.
b. Exploitation Phase – oil and gas concession agreements are then awarded to contractors through a bidding process. The tender documents are offered in accordance with the provisions of the New Public Procurement Law No. 182 of 2018 which regulates contracts entered into by public entities.
c. Gas Market Activities Law No. 196 of 2017
Executive Regulations issued by the Prime Ministerial Decree No.239 of 2018
To further encourage private sector investments, the above mentioned law was promulgated ,along with its executive regulation to liberalize the natural gas sector. This law also includes information regarding the issuing, amending, and suspension of licenses for gas activities, as well as including provisions to enable the monitoring of companies to ensure they are consistently compliant with the requirements of the law.
The main purpose of Law no. 196 of 2017 is therefore to:
1) Define all gas market activities
2) Identify roles, rights, obligations of market participants along with their relationship to one another
3) Introduce ‘GasReg’ as a new and public independent body to regulate the gas market – the purpose of GasReg will be outlined in section II in more detail below.
III. Governing Entities
The Egyptian Ministry of Petroleum (“MoP”) is the only authority responsible for regulating, developing, organising, and handling the oil and gas industry.
There are however, two entities which the MoP act through, namely:
a. EGPC (Egyptian General Petroleum Corporation) EGPC is a public entity which is responsible for ensuring that demand for petroleum products are met. This is largely done by enhancing exploration activities, thus maximising production. This includes both upstream and downstream activities.
b. EGAS (Egyptian Natural Gas Holding Company) is a private entity which is owned by EGPC and focuses on natural gas activities, and more specifically implementing effective plans to promote natural gas activities. This includes both upstream (exploration, drilling and production) and downstream (processing, transmission, distribution of natural gas in the domestic market liquefaction and LNG marketing).
As mentioned above, one of the Gas Market Activities Law No. 196 of 2017 was introduced was to introduce ‘Gasreg’ as an additional governing body.
Short for ‘Gas Regulator’, this new body is responsible for things, including but not limited to, encouraging new investment, stimulating competition among potential players by allowing third party access, increasing the quality of services, and protecting consumer rights. In short, GasReg is responsible for monitoring the performances of all gas market players, granting licenses, approving codes of the utilization of gas networks and facilities, and handling complaints that may appear amongst market players. They are also responsible for implementing methodologies to calculate tariffs against excess of gas networks and facilities.
Finally, the Gas Market Activities Law, also prohibits companies from working in with any gas related activity, unless they first obtain a licence from GasReg.
IV Additional Comments
Taxes that are paid by the contractor depends on the profits acquired from its exploration and exploitation activities under the concession agreement which is subject to 40.55% tax rate (Egyptian Income Tax Law No. 91 of 2005) . The contractors must also prepare tax returns for the tax authority by the required due dates. EGPC then utilises EGPC’s share of the petroleum saved under the terms of the concession to pay income tax on behalf of the contractor, and issues the contractor receipts evidencing this. It should be noted that in most of the concession agreements, the EGPC is bearing the corporate income tax on behalf of the contractor – after being grossed up – and the contractor, based on its national law tax law in home country, to has a tax credit.
b. Dispute Resolution
Any disputes that arise between the government and the contractor must be brought to the appropriate Egyptian Court. However, if any contestations arise between the contractor and EGPC or EGAS then it must be settled at the Cairo Regional Centre for International Arbitration.
Overall, the Egyptian oil and gas sector is ripe with opportunities, particularly since the state’s recent plans to facilitate procedures for private sector companies, thus allowing more opportunities for recurrent foreign direct investment.
Andersen Tax & Legal Egypt has an expert team of professionals who can help you comply with legislations.
For more information, contact us.
Copyright © 2018 Andersen Tax & Legal Egypt, All rights reserved