Oil & Gas Regulations in Egypt: Fundamentals legal aspects for the Liquefied Natural Gas (LNG)

Egypt is considered as one of the two countries in North Africa – along with Algeria – that has a hub of liquefied natural gas (LNG) infrastructure. Egypt used to have both LNG importing and exporting facilities; however, the country recently gave up on one of its importing facilities in its way to gain back its position as an LNG exporting hub.

Egypt has two LNG plants that include a total of three LNG trains, with a combined capacity of around 610 billion cubic feet per year (or 12.7 million tons per year).

The main producers or exporters of LNG having liquefaction, storage and export facilities are the Spanish Egyptian Gas Company (SEGAS) Liquefied Natural Gas (LNG) Complex in Damietta, Northern Egypt.

Egyptian Liquefied Natural Gas (ELNG) sponsored with the diversity of the mega up-streamers; Shell, Petronas, and Total. ELNG is considered one of the most renowned companies specialized in liquefied natural gas on both the Egyptian and international levels. EGAS and EGPC are also significant equity shareholders in these LNG projects.

The plant is a two-train facility on the Mediterranean coast with a capacity of 10 billion cubic meters per year (bcm/y) to export the Egyptian LNG to Europe, Asia Pacific, and the US. ELNG acts as a tolling facility with the upstream suppliers paying processing fees for the liquefaction service. The ELNG can accommodate an expansion of other trains with potentially different ownerships and sources of feed gas.

Achieving SELF-SUFFICIENCY in 2019

Egypt became a pioneer towards being a remarkable LNG exporter, for the European market, after overcoming the challenges of 2013-2015. The ownership of the exceptional technology of liquefaction infrastructure, running at full capacity, and resuming natural gas discoveries particularly known as “Nour” and “Zuhr”; also the future is promoted by two promising deals:

• First, signing of the memorandum of understanding on 23 April 2018 for the strategic partnering in the energy field between Egypt and the European Union.
• Second, Egypt signed an agreement with Cyprus, in September 2018, to establish a direct subsea gas pipeline that will transport gas from Cyprus’ Aphrodite gas field to Egyptian liquefaction plants then re-exporting LNG to European countries. The agreement sets the regulatory framework for the exchange of natural gas between the two countries and aims to facilitate the export of natural gas from Cyprus to Egypt through the establishment and operation of a direct sea pipeline from the exclusive economic zone of Cyprus, to natural gas liquefaction plants in Idku and Damietta in Egypt.

The recent regulatory framework applied to LNG

1. Gas Market Activity Law No. 196 of 2017 amended by law no. 13 of 2019, and also the Prime minister executive decree no. 239 of 2018 for regulating the activities of the GAS market, with a particular definition for the LNG industry, the activities related to it in terms of storage and pipelines before the transmission to the ports and sites, and all procedures relating to its restoration.
   The government as a regulator is taking the key role in monitoring industry players to ensure the government objectives and establishing the rules and also incentives to develop the market across the value chain.
2. Suez Canal Authority Circular No. 7/2017 – Concerning LNG Tankers operating between the American Gulf, the Arabian Gulf, India, and its eastern ports.

The decree is encouraging more LNG vessel’s owners and operators to transit the Suez Canal, the Suez Canal Authorities (SCA) have decided to grant LNG tankers in loaded or in ballast operating between the American Gulf, the Arabian Gulf, India and Eastern ports the following Suez Canal toll discounts:

1. The Arabian Gulf and west of India up to the port of Kochi. A reduction of 30% of Suez Canal normal dues.
2. East of the port of Kochi, India west of India and up to the port of Singapore, a reduction of 40% of SC normal dues.
3. Singapore and its eastern ports, a reduction of 50% of SC normal dues.

The tanker has no right to benefit from other rebates (reduction) granted by SCA to LNG tankers, besides that rebate (reduction) subject of this circular.

LNG Sale & Purchase Agreements (SPAs):

In most cases, LNG supply contracts take the form of long-term sales and purchase agreement which can be renewed or extended. However, before concluding such contracts, some aspects must be taken into consideration; such as the integrated commercial structure. The producer of natural gas is mostly the owner of the LNG export facilities as well as the upstream. The revenues are derived from the sale of LNG under the (SPAs) entered into by the participant or the integrated project company, which usually takes the structure of JV company.

The price indexation is one of the significant conditions that determine the payment terms. Such a pricing mechanism is markedly different from one found in traded gas markets as know by market areas or “hubs”. In the UK, the index of pricing called national balancing point (NBP), but other oil index prices could take leverage in the long term contracts if co-exist. In Asia-Pacific, the pricing relies on the Japanese custom cleared crude (JCC) as used in long term agreements as well. Some other players are using the indexation of Coal such as Italy, Netherland, and Norway.

Other terms and conditions as transportation and discharge, level of commitment, the volume of cargo, Cargo diversions, transfer of title and risk, and gas feedstock are on top of discussion while negotiating these type of agreements.