A lot has changed in Egypt since 2011 and, inevitably, the broader political changes in the post-Mubarak era have had an impact on the oil and gas sector. Nonetheless, significant transactions continue in the sector, with overseas buyers continuing to show interest in good assets. In this article we highlight three key issues in Egyptian Oil and Gas transactions.
1. Political and Country Risk
With a new government in place, Egypt has recently entered a period of reform, with growth and significant new investment anticipated in the medium to longer term. Nonetheless, historical volatility and continued tensions mean buyers of assets in the country still take on a level of political and country risk when engaging in transactions, and indeed many buyers will approach transactions with a level of appetite for these risks and some belief in their ability to manage them.
In times such as these, it should generally be common ground between buyer and seller that prevailing conditions at signing should not give rise to a right for the buyer to terminate the transaction. However, even in the present climate of tentative recovery, the following question is still likely to exercise the minds of buyers:
What happens if conditions deteriorate or new risks emerge after we sign?
Concerns around this issue will tend to manifest themselves in the conditions precedent, any material adverse change clause and, to a lesser extent, any warranties given by the seller at completion.
In some cases, the commercial deal may be that the buyer takes these risks (and most likely the benefit of the assets) from signing and will be obliged to close despite any deterioration in conditions or the emergence of further risks. Of course this may also mean a lower price.
In other cases, the issue might be dealt with through a more comprehensive and careful allocation of risks between buyer and seller. For example, the buyer may take on the risk of unfavourable, announced policies becoming law, while the seller may accept the risk of unannounced policies that have a material adverse effect on the assets. Similarly, the buyer may take on the risk of general civil unrest in the country, while the seller may accept the risk of major civil unrest that materially disrupts the operation of the assets or leads to their appropriation. As part of this process, buyer and seller will also need to come to an agreement as to what - in dollar terms - will be sufficiently “material” to justify termination of the transaction.
2. Government Approvals
Changes in government can lead to changes in laws or the interpretation of laws and changes in departmental personnel and procedures. These changes will in turn often impact on timeframes and procedures for obtaining required government and regulatory approvals.
Buyers will naturally be concerned to ensure their transactions have all necessary approvals prior to closing and will look to include appropriate conditions precedent to achieve this. In some cases, buyers may even seek to include a condition to the effect that “all necessary and desirable government consents, approvals and waivers” have been obtained. This may not be prudent for seller or buyer. It is usually beneficial to form a joint of view of exactly what is needed. For instance, the need for competition approvals in Egypt, be it in relation to national rules or COMESA, should be considered.
Sellers on the other hand, with a view to ensuring the transaction closes quickly, will look to ensure conditions precedent are limited to what is strictly necessary, are clearly expressed and achievable. The last thing a seller wants is to give the buyer a vague or unachievable condition precedent that turns a firm transaction into an option for the buyer.
In practice, this is an issue that may be best resolved through early dialogue with local counsel to identify: the required approvals; the process for obtaining the approvals; the form in which the approvals will be given; and the timeframes typically required to obtain them.
Once these matters are settled, the process of drafting conditions precedent – which work for both buyer and seller - should be more straightforward. Obtaining guidance from government officials is also recommended, although getting firm commitments in writing may be challenging.
3. EGPC Receivables
As the purchaser of the majority of oil and gas produced in Egypt, the Egyptian General Petroleum Company (EGPC) is a major creditor of international oil companies operating in the country.
Last year, the Financial Times reported that companies were experiencing delays in receiving payments from EGPC and that the total amount owing by EGPC may be as much as US$5bn. Since then, the Egyptian government has indicated it intends to clear all arrears owed to foreign oil companies by 2017, through a combination of savings from reduced domestic fuel subsidies and the issuance of an international bond to raise up to US$1.5 billion. Even so, EGPC credit risk remains a key issue for acquirers of oil and gas assets in Egypt.
Clearly such acquirers will be taking EGPC credit risk post-transaction, but there remains an open question in many transactions as to how EGPC receivables outstanding as at the economic date of the transaction should be priced or otherwise dealt with.
There are a range of ways this can be managed. For example:
- The seller might retain the rights to the outstanding receivables and collect them as they are paid;
- The seller might transfer the outstanding receivables to the buyer, possibly at a discount to face value; or
- The buyer might pay the seller full value for the outstanding receivables but also seek some additional comfort from the seller, such as an indemnity for any receivables that are not fully recovered within a set period of time.
Similar issues may also arise in relation to cost pool items, where similar solutions might also be considered.
BLP’s Experience in Egypt
BLP has recently advised national and international oil companies on a series of high value oil and gas transactions in Egypt, and has strong relationships with leading local law firms in Cairo. BLP also has extensive experience acting on oil and gas transactions in other North African nations and throughout the Middle East.