As British Gas (BG), one of the world's largest gas and oil producing groups, revealed a three per cent fall in its second quarter net profits, it highlighted concerns about the yields on its investments in Egypt, which contribute 20 per cent to its overall revenues. The group's net profit dropped to $986 million, compared to $1.2 billion in the first quarter. Production at the group's offshore gas fields has been declining recently, and the effects of this retreat in supply have been exacerbated by the intention of the Egyptian government to use more locally produced gas to cover domestic demand. This means that BG will not have enough supply to operate its two liquefied natural gas (LNG) plants in Egypt, which turn gas into a liquefied form for export. Recent civil unrest and leadership change in Egypt after the ousting of former president Mohamed Morsi in July, and the fact the country owes BG some $1.3 billion for domestic gas sales, up from $1.2 billion in the first quarter, have augmented concerns over investing in Egypt. “Events in Egypt remain a primary concern and will continue to be so as the political, social and business environment evolves. While our offshore operations continue unaffected, higher than agreed gas volumes were diverted into the Egyptian domestic market during the quarter, impacting volumes available for LNG export,” said BG Chief Executive Chris Finlayson in a statement last week. During the second quarter of 2013, the domestic off-take from the West Delta Deep Marine Well rose to an average of some 900 million cubic feet a day (mmscfd), close to the sustainable maximum domestic off-take capacity, up from the some 700 mmscfd in the first quarter and resulting in reduced supplies for BG's LNG export operation. This means that BG's Egyptian LNG plant is running at lower than planned levels, reducing efficiency and eating into profits. As at 30 June 2013, the Egypt General Petroleum Corporation (EGPC) owed BG $1.3 billion in gas sales, an increase of $0.1 billion from the end of the first quarter and reflecting higher domestic diversion volumes. “The environment for investment in Egypt is clearly challenging. The recovery of receivables and the full realisation of the carrying value of the group's Egyptian operations remain dependent on the business environment in Egypt, which BG Group continues to monitor closely,” the company said in a statement. BG had an agreement with the ousted former government under which the amount of gas used for domestic consumption should not increase before September 2013. The government planned to reduce domestic diversion through an agreement on gas import deals that would keep the share of Egyptian LNG producers, including BG, intact. Five imported cargoes of LNG, of which two have been allocated to BG, are being provided by Qatar, with deliveries scheduled from the end of July through to mid-September. While operations at BG production facilities in Egypt have not been affected by the civil unrest and change in government, future investments in the country remain less certain. “Given the current situation in Egypt, the group's investment programme is under continuous review,” the company said. Moreover, the wider civil unrest has caused BG to cut its expatriate personnel, including contractors and family members, in Egypt from around 150 to 55, the company's CEO told analysts. “BG's concerns over investment in Egypt over the coming period are quite normal,” said one expert from the petroleum industry who preferred to remain anonymous. He said that investors would normally express their concerns over the investment climate as long as the political instability dragged on. “This has been the case since 2011 following the 25 January Revolution. The local oil sector has received many investment pledges since then, but nothing has yet materialised,” the source told Al-Ahram Weekly. “All companies are reviewing or putting their investments on hold,” he added. The source said that one reason why BG had been so affected by the instability in Egypt was that a big chunk of its operational earnings came from the country. “Egypt is very important to them, and instability will continue to affect their profits,” he said. As for BG's debts from the government, which amounted to $1.3 billion in the second quarter, the source said that the new government would be able to pay its dues. Egypt's economic stance had become stronger domestically and internationally, and the government now had sufficient cash to repay its debts, he said. The new cabinet was better able to handle such problems because it was familiar with the nature of multinational companies' businesses, unlike the former government “which had some problems in handling international relations,” the source commented. The source suggested that the cabinet appoint highly-skilled personnel to start negotiations with BG and solve the problems involved. In September 2012, following a meeting between former prime minister Hisham Kandil and a delegation from BG, the government said that the company would inject some $3 to $5 billion into development projects in Egypt, a sum that might now be reviewed. BG Group has been operating in Egypt for 23 years, pumping more than a third of Egypt's gas and having investments worth some $10 billion.
