EGYPT - The Private Franchises.

As Law No. 8 took effect in March 1997 which, among other things allowed private companies to market natural gas, the whole area of Egypt was divided into zones for marketing by such companies. Local and international companies specialised in the field of gas marketing were invited by EGPC to submit offers to acquire franchises for these zones. These franchise firms were required to develop markets with each venture to take one of the zones on offer. They were to utilise the most up-to-date technologies to build, operate and maintain gas transmission pipelines and marketing systems - a form of BOT - for a period of 20-25 years. Their total investments were to be repaid by EGPC, with no interest, over the first five years of their operations, through 20 equal quarterly installments. In this way, at the end of the payments by EGPC, ownership of the gas transmission pipelines and any other assets paid for was to be transferred to EGPC.

Each of the gas marketing franchises was to receive a marketing commission from the collection of its gas sales revenues from industrial, commercial and domestic consumers. The overall formula allows a reasonable and stable rate of return for the companies' investments. Their main incentive is to expand their gas markets to the maximum possible, and thus benefit from the economics of scale. In other words, the larger the market the more profitable for each franchise venture. This entices each of the franchise ventures to introduce as many applications for the use of gas as possible, such as gas-based industries, free industrial zones, industries producing gas appliances, industries producing direct gas-air conditioning systems for use in Egypt and for exports, etc.

Gasco's grid supplies over 1m clients with gas in Egypt. A state plan for Gasco and the private franchises adopted in 1998 called for the Egyptian client base to reach 1.5 million by 2003, including the power plants, industries, commercial establishments, the transport sector (CNG for NGVs) and households.

The Egyptian Natural Gas Holding Co. (ENGHC), created in August 2001, from EGPC assets, now is in charge of the entire gas sector, including strategy, gas licencing at the upstream end, Gasco, the downstream end and the private, franchises, and all gas export projects.

Egypt Gas Co. was the first private franchise to operate in Egypt long before Law 8. On March 16, 1997, it acquired 15% in Gasco. It transferred a part of its gas transmission assets to Gasco as payment to cover its equity. At about the same time, Egypt Gas signed a 25-year franchise agreement with EGPC to take up the zone of central Nile Delta. This zone includes the major gas markets of the densely populated governorates of Manufiya, Gharbiya, Qaliubiya and Daqahlia, as well as parts of Greater Cairo and Alexandria.

Egypt Gas was formed in 1983 as a JV of EGPC (80%) and William Press (later Amec) of the UK (20%). Its aim was to market gas anywhere in Egypt, beginning with the areas nearer to the onshore Abu Mabi and offshore Abu Qir fields in the Nile Delta. As EGPC divided the country into different marketing zones, Amec sold its 20% stake to the public in February 1997. Thus Egypt Gas became listed on the Cairo Stock Exchange. Now Egypt Gas is owned 80% by ENGHC and 20% by private interests. After it signed a 25-year franchise agreement with EGPC for the central Delta region, including a northern part of Greater Cairo, Egypt Gas began to install gas distribution facilities in this market. Its aim was to gain 500,000 new customers in the densely populated market, including households, by 2002.

Egypt Gas was the first to introduce compressed natural gas (CNG) for vehicles in 1991, when it installed a CNG refuelling station (Egypt's first) in Cairo, with the help of the Petroleum Ministry which established a state company to convert vehicles into NGVs. With the ministry aiming to convert all public transport vehicles in the Greater Cairo and Giza area into CNG, Egypt Gas now has many NGV refuelling stations in its market.

City Gas Distribution Co., with 20% held by ENI group of Italy (including Snam) as the leader, was the first totally-private franchise venture to be created under Law No. 8 in March 1997. It signed a 25-year franchise agreement with EGPC (now ENGHC) for a zone covering the Sinai and western sides of the Suez Canal, the Gulf of Suez and the Red Sea areas. This zone is to become the biggest market for natural gas in Egypt in 2002, when its consumption may reach or even exceed 30 MCM/day. The zone, where industries are growing fast, in 1999 consumed 8 MCM/day and accounted for 14% of Egypt's total gas use. In view of big industries under construction there, its share of Egypt's total gas consumption has been projected to rise to 34% in 2002/03. Canal cities include those on the Sinai side of the waterway, where a 1,200 MW power plant has been built at Ayoun Mousa.

City Gas is the most profitable among the gas marketing companies. It is headed by Abdel Hamid Abu Bakr, a former EGPC executive. Apart from the 20% equity held by the ENI, the 80% is for private Egyptian interests that include the EFG-Hermes finance house and Orascom group of the Coptic Sawiris family. Orascom has a stake in another franchise led by BGI.

ENI has built a part of the Trans-Sinai pipeline, an important system completed in 2001. This has been regarded as the first step towards the export of Egyptian gas to the Palestinian Authority's Gaza Strip and Israel. ENI signed an agreement with the PA on Oct. 12, 1998, under which it will supply the Gaza Strip with Egyptian gas by pipeline. ENI, together with BP, have been trying to get a similar accord signed with Israel. ENI still hopes that, if and when Israel signs peace treaties with Damascus and Beirut, the Italian group would lead a project to extend Egyptian gas exports by pipeline to Lebanon, Syria and Turkey, as well as Jordan and the PA's West Bank (see Gas Market Trends No. 3).

National Gas Co. (Natgas) in late 1997 became the second private firm to be formed. It bid for a 25-year franchise for a zone covering the west of the Nile Delta, including Al Buhaira governorate, Borg Al Arab industrial city, and districts of Cairo/Giza and Alexandria which were not yet served by the Gasco grid. Natgas pledged to build gas transmission and distribution facilities in this zone. It got its franchise on March 16, 1998. Its first phase was to connect 93,000 households to the grid in the West Delta towns of Kafr El-Dawar and Demanhour. It has branched into the CNG refuelling business in its zone. In January 2001, Shell bought the 18% stake in Natgas from majority shareholder Egypt Kuwait Holding Co. (EKHC) as EGPC insisted that the franchise must have an international gas marketer among its partners. Natgas' zone is adjacent to Shell's franchise in Al Fayum. EKHC includes Mohammed Abdulmohsin Kharafi & Sons of Kuwait and Egyptian Kuwaiti Investment Co. (set up in early 1997 by Kharafi, Commercial International Bank of Egypt, Commercial International Investment Co. of Egypt and Wafra Int'l Investment of Kuwait).

Nile Valley Gas Co. (NVGC) got its 25-year franchise on April 18, 1998 and was formed as a JV led by British Gas (BGI), 37.5%. BGI's E&P partner Edison International of Italy holds 37.5%. The other partners are Orascom (Egypt) of the Sawiris clan (20%), and Middle East Gas Association (5%). NGVC will have a long high-pressure pipeline system.

NGVC's huge zone begins at El Wasta south of Cairo and extends through the Upper Egypt governorates of Beni Suef, El Minya, Asyut, Sohag, Qana, Luxor and Aswan, including the New Valley and Toshka projects of massive agricultural and agro-industrial settlements. This is an almost virgin zone, where existing big industries are yet to convert to gas and new gas-based industries are yet to be built.

BGI has big ambitions for NGVC. NVGC's total gas pipeline length in the final phase will be 1,200 km and its ultimate marketing capacity is targeted to be as much as 6000 MCF/day. Its main line will have 34-inch and 70 psi pressure. BGI is to become one of the biggest gas producers in Egypt (see Gas Market Trends). It is to be a major exporter of Egyptian gas, promoting one of the LNG projects proposed.

In 1999, the national grid was extended by a 230-km pipeline from Cairo to Kuraimat and Beni Suef city, where NVGC targeted households and commercial customers including the Beni Suef power plant and cement plant. In the following phase, NVGC will have a 270-km pipeline from Beni Suef to Asyut. In later phases it will build a 530 km pipeline to Aswan. NGVC began supplying pipeline gas to the 1.5 million t/y Beni Suef Cement Co. in April 1999. It began supplying the city's power plant shortly thereafter. Potentially, NVGC will be marketing up to 240 MCF/day of gas in the Beni Suef-Kuraimat areas. Another 240 MCF/day will be marketed in the Asyut areas when the pipeline now under construction reaches them. The Beni Suef-Asyut line will have an 800 MCF/day capacity. The line will have a compression system, as will be the case for the 530-km line to Aswan.

NVGC's franchise agreement was signed in Cairo and the signing ceremony was attended by visiting British Prime Minister Tony Blair and Egypt's then PM Kamal Ganzuri. Where this franchise is different from the other gas marketing companies in Egypt, is that a large proportion of it is to build the high-pressure transmission line to introduce gas to areas which do not have it. It will be the spinal cord of the gas system. NGVC will build many pressure reduction stations (PRS) along the line to Aswan. The PRS will be the interface between the main high-pressure line and the distribution lines to the consumers. Each consuming area within the NVGC zone will need at least one PRS and a metering station (MS). The pipeline, PRS/MS system and related facilities down to Aswan will cost over $500m.

With BGI being a world leader in the gas business, Edison (the energy unit of Italy's private chemicals group Montedison) is a very aggressive and fast-growing gas marketer and IPP in Italy. Edison has also invested in one of the IPPs in Egypt. In November 1998, NVGC established a local subsidiary called Gas Powered Vehicles Co. (GPVC). To operate within NVGC's zone as well as in other parts of Egypt, GPVC has since built a network of CNG refuelling stations for NGVs. Now GPVC is concentrating on the northern and central parts of Egypt. The partners in GPVC are the same as those in NVGC. NVGC is one of the private franchises now considering an industry to produce direct gas-air conditioning systems in Egypt for the Egyptian market, which is quite big, and for export to the oil-rich Gulf, Africa and other parts of the world. The Petroleum Ministry has done a study since 1997 which concludes that these systems can generate energy cost savings of about 50% compared to electric air conditioning units.

NVGC's vast zone, where the climate is hot and dry, is to be developed by the government on a massive scale as a top strategic priority for President Mubarak's regime.

Shell, a leading gas producer in Egypt which markets other oil products along the Alexandria-Cairo highway, in March 2001 got its 20+5-year franchise to design, finance, build and operate a gas pipeline and marketing venture in the Fayum governorate and nearby areas. Fayum Gas Co. Its partner in this is the Global Infrastructure subsidiary of Egypt's private Arabian International Construction (AIC) group. This zone includes Qom Oshim, a huge industrial free area on the outskirts of Fayum city north-west of Cairo. Fayum Gas will have a 70-km pipeline built from the Greater Cairo's 6th October City to Qom Oshim. The first section will consist of a 16-inch pipe. The second section will involve a 20-inch pipe. This will also be a telescopic system, as in the case of the other Shell-run gas pipelines in Egypt.

Fayum city has a population of more than 1m. Several of the existing industries in Egypt plan to relocate at Qom Oshim, because the free zone there offers better incentives - with the state making a special effort to develop the new free area. This is why Shell has chosen the Fayum zone. The government is rapidly developing the Fayum region and surrounding areas. Two highways are being built as BOOT projects across these areas. One is a 260-km highway between Fayum and Asyut, and the other is a 263-km line between Dayrut and the Farafra oasis in the Western Desert.

The Sharkiya Franchise: The gas marketing zone of the Sharkiya governorate (also known as Sharqiya) was in March 1999 awarded by EGPC to a new private franchise venture led by Magdi Rasekh. He is one of Egypt's big business tycoons with top political connections.

The partners in this franchise are Egyptian companies. Rasekh, who is chairman of Fresh Foods Egypt, has brought an Italian gas marketing firm as a partner in the gas franchise.