Egyptian M&A 2020 outlook
The M&A activity in Egypt increased by nearly 286% from US$389 million in 2017 to US$1.5 billion in 2018, reaching US$1.6 billion in 2019
There are no signs of a slowdown in the near future with Shell recently announcing its intention to sell its onshore portfolio in the Western Desert worth US$775 million, BP indicating that it is planning to invest US$3 billion in Egypt in the near future and Chevron's, Shell's and Mubadala's success in the Red Sea bid round.
Many experts believe that Egyptian oil and gas M&A activity is set to continue at a good pace due to a combination of reasons, including the continuing economic growth, legal reforms aimed to attract foreign investment, the discovery of vast offshore gas reserves and a growing number of ageing oil and gas assets.
Egypt is one of the largest economies in the Middle East and North Africa (MENA) region and the second-largest economy in Africa. With its population reaching 100 million in 2020, the country is also one of the biggest energy markets in the MENA and Africa regions.
Previously, Egypt experienced a drastic fall in tourism and foreign direct investment, according to the International Monetary Fund (IMF). Government energy subsidies led to the country's high budget deficit and encouraged excessive consumption, which, coupled with the natural decline of gas production, resulted in a large gap between gas supply and demand and a shortage of gas supply for the domestic market. In addition, as a result of the high cost of such subsidies, EGPC, the national oil company, was unable to pay off its debt to foreign operators, resulting in foreign operators delaying investments in existing and new oil and gas projects.
The Egyptian economy has been growing year-on-year for the past few years, with real GDP at 5.6% in 2019, compared to 5.2% in 2018 and 4.2% in 2017, and the IMF is expecting GDP to grow at a rate of 5.9% in 2020.
The economic growth has been attributed to economic consolidation measures implemented since 2016, including the macro-economic reforms tied to a US$12 billion IMF extended fund facility. The conditions outlined by the IMF’s economic reform package included energy subsidy cuts, flotation of the exchange rate, increased taxes and fiscal consolidation.
Following the energy subsidy reform, the fiscal deficit decreased to 8.2% in 2018-2019, compared to 9.7% in 2017-2018 and 10.9% in 2016-2017. Government debt decreased to 90.50% of the country's GDP in the fiscal year 2018-2019, from 108% of GDP in 2017-2018.
The devaluation of the Egyptian pound saw the country's assets and securities lose more than 50% of their value, which, in combination with the increasing sense of political stability, made them more attractive to foreign investors.
Egypt's legislative reform aims to attract foreign investment in various sectors relevant to the country's economy.
The cornerstone of the reform is the Investment Law No. 72 for 2017 and its Executive Regulation, which introduces a number of changes to improve the investment climate.
Also, Law No. 4 for 2018 and Decree No. 16 of 2018, amending Companies Law No. 159 of 1981, have introduced important changes, including recognition of the concepts of a single shareholder company and a shareholders' agreement and allowing a LLC to be managed by a single manager of any nationality.
Additionally, the energy regulation was reformed by the New Gas Law No. 196 of 2017 ("Gas Law"), and its Executive Regulations. The primary significance of the Gas Law is granting the private sector an opportunity to participate in the downstream gas market after decades of state domination of the industry. Private sector players might potentially be able to undertake the activities of distribution, transmission, liquefaction, storage, regasification, supply and shipping of natural gas, all of which have historically been carried out by state entities. Besides, under the Gas Law, private companies are permitted to import natural gas directly, which is expected to provide a useful boost to supply.
Entrance into the market by private companies will be in accordance with the Gas Law's third-party access policies, with the process to be supervised by the new regulatory body: the Gas Market Regulatory Authority (GMRA). GMRA has been granted the powers to issue licences to gas market players, set tariff schedules, ensure the transparency and competitiveness of the sector and settle competitor disputes.
Other legislative developments in Egypt over the past decade include the following new laws: Electricity Law No. 81 of 2015, Bankruptcy Law No.11 of 2018, Importers Registry Law No. 7 of 2017 and Public Contracts Law No.182 of 2018. In addition, new renewable energy regulations are being drafted.
With the global move towards decarbonisation, some experts believe that natural gas is set to play an important role in the energy sector transformation and the recent discoveries of natural gas coupled with the issuance of the Gas Law and other legislative developments have made Egypt an attractive investment market.
Egypt has seen growing foreign investor confidence with the increasing sense of political stability, economic growth and foreign investor-friendly legislative reforms. The country is aiming to become a regional energy hub to monetize its own natural resources and re-export oil and gas from existing and potential sources of supply in neighbouring countries through Suez Canal and SUMED Pipeline, with the new administrative capital of Egypt opening for business in 2019.
With a healthy pool of investors willing to buy and a number of energy players willing to sell, Egypt's M&A activity in the energy sector is expected to continue to grow.