Britain’s BG in stand-off over Egyptian gas policy

BG Group said it would not deliver on liquefied natural gas agreements in Egypt, as diversions to the domestic market during the fourth quarter were higher than expected.

The British oil and gas company BG Group yesterday issued force majeure notices on its LNG agreements in Egypt because of unexpectedly high diversions of gas to the domestic market.

The notice frees all sides from contract terms because of circumstances beyond their control.

In a statement on its website, BG Group said that diversions currently amounted to about 1 billion standard cubic feet of gas per day.

However, BG said it “remains committed to the Egyptian LNG project and will continue to negotiate with the Egyptian authorities and other stakeholders to seek a long-term solution.”

Egypt accounts for a fifth of the company’s production.

“BG Group usually converts most of its gas production from Egypt into LNG and exports it around the world to Europe, South America and so forth,” said Robin Mills, the head of consulting at Manaar Energy. “But recently the Egyptian government has been pressuring gas companies to meet the increasing local demand. Also it has not been paying money owed to these companies – which affected their investment in new production.”

BG said it expected its LNG shipping and marketing results for last year to be consistent with market guidance. However, its full-year business performance, which excludes disposals, certain re-measurements and impairments, is expected to be flat at US$4.4 billion.

Earnings are forecast to be down by about 33 per cent at $2.2bn, or around 65 cents per share, including about $2.4bn of non-cash, post-tax impairments.

“[The tax impairments] reflect the difficult operating environment in Egypt and lower forward gas prices in the US, coupled with lower production profiles in both countries,” BG said.

The total operating profit for LNG shipping and marketing for 2014 is expected to be $2.1bn toS2.4bn, lower than in 2013 as a result of a decrease in supply from Egypt.

“There is considerable uncertainty over the number of LNG cargoes that Egyptian LNG will produce in 2014,” the company said.

Foreign oil and gas companies have been frustrated by the Egyptian government’s lack of payment, causing some to sell their assets in the North African country.

Last August, Apache sold $3.1bn worth of assets to China’s Sinopec, reducing its exposure to Egypt’s turmoil and political unrest.

Mr Mills expects the situation to “drag on” as no apparent solution is on the horizon.

“The situation will take years to be resolved, as the local demand is increasing and energy-saving or renewable energy initiatives are only being introduced very slowly.”

He also warned that BG’s action could deter other foreign oil companies operating in the country and affect foreign direct investment in general.

Last December, the Egyptian government released payment of $1.5bn to foreign oil and gas companies. The Sharjah-based fuel producer Dana Gas received $53 million, but still awaits $277m of unpaid invoices.

Dana Gas said at the time that it was in discussions with the country’s leadership in connection with its dues.