Getting the deal done: upstream M&A in Egypt
In recent years, Egypt has been a hotbed for M&A transactions - not least in the upstream oil and gas sector - as the traditional IOCs seek to divest themselves of non-core mature oil and gas assets and decarbonise their balance sheets. Whilst Egypt is becoming more familiar to M&A practitioners, there are plenty of nuances to be aware of. In this article, we highlight some of the key issues for buyers and sellers to consider before embarking on an upstream M&A transaction in Egypt.
First, parties must be clear regarding the scope of the assets being sold. A typical scope would include the seller’s participating interest in a concession, together with all associated interest documents (including agreements relating to infrastructure and gas sales), shares in operating companies linked to the target concessions, field facilities and equipment, inventory and data.
An Egyptian concession agreement has the force of law and a separate concession agreement is granted in respect of each concession. Once a commercial discovery has occurred, an operating company will be established under the relevant individual concession. The Egyptian General Petroleum Company (EGPC) will hold a 50% interest in that operating company (which interest is required by law and, consequently, non-negotiable), with the balance being held by the other contractors (pro rata to their participation in the relevant concession). Whilst a separate concession agreement is required for each concession, concessions are often grouped together in respect of a broader geographical area which is to be developed (akin to a unitised field). As such, it is often the case that one or more entities within a seller’s group will be party to a number of separate concession agreements (and a shareholder in separate operating companies) in respect of a given area, such as the Gulf of Suez or the Western Desert. In this scenario, it is usual for one of the operating companies to operate the entire portfolio with the other operating companies effectively subcontracting their obligations to the relevant entity (as is the case with Gulf of Suez Petroleum Company and Badr El-Din Petroleum Company, for example).
Given that Egyptian concession agreements have the force of law, title to any associated assets or interests will pass along with title to the relevant concession. The basis on which such assets transfer is governed by a short-form deed of assignment which will be signed by the seller, the buyer, EGPC and the Government of the Arab Republic of Egypt (most likely acting via the Minister of Petroleum and Mineral Resources (MOP)). A separate deed of assignment will be required in respect of each concession and, in our experience, EGPC is generally unwilling to accept amendments either to the standard form of such document, or the basis on which such assets are to transfer. For example, EGPC would not typically permit the deeds of assignment in respect of a number of concessions to be made inter-conditional, or to include transaction-specific provisions.
The MOP will be the last person to sign the deed of assignment at which point the transfer will become immediately effective, meaning that – in the absence of a formal signing ceremony attended by all signatories – the parties will have very limited insight as to when, and in what order, the MOP will execute the deeds of assignment. In that sense, timing as to when completion will occur is typically unknown.
In the context of a portfolio sale featuring a number of concessions, operating companies and associated assets, it can be difficult to structure the transaction in a way which – whilst respecting the form and method of assignment prescribed by EGPC – gives the parties comfort that the entire portfolio of assets will transfer, and at the same time. Ultimately, there is no guarantee that the MOP will execute the deeds of assignment at the same time, and there could be a scenario in which part of the portfolio has transferred to the buyer with the balance being retained by the seller.
It would be in the interests of EGPC and the MOP to ensure that a portfolio is not split in this way, particularly where one operating company operates all concessions in the portfolio, as the logistical, practical and economic challenges posed by such a scenario would be significant. However, it is a legal risk that cannot be discounted and the sale agreement would need to provide for such an eventuality.
Alongside this structural risk, it is common for EGPC and co-contractors to benefit from pre-emption rights in respect of the relevant concession, meaning there is a possibility that a portfolio could become fragmented if an interest is pre-empted. A key issue for the seller and the buyer to consider is whether there are any “must have” concessions within a portfolio which, if such concessions are pre-empted or do not transfer, would be a deal breaker for the buyer. It is challenging to conceive of an adequate mechanism which would enable the deal to fall away if such significant interests were not transferred and for any concessions which have already transferred to be re-assigned back to the seller. It would lead to a legal and practical minefield - who would operate the transferred assets during the interim, for example, and who would bear the costs of / be entitled to the benefits arising from the relevant concession?
It is tempting to “go down a rabbit hole” when considering the challenges posed by the process of transferring assets in Egypt and there is an inevitable balance to be drawn between getting the deal through, and managing legal risk. It can only be helpful if the parties have some familiarity with the way in which such deals are undertaken in Egypt at the outset, so that the structure of the deal and the transfer mechanics in the sale agreement can be settled at an early stage of the negotiations.
Interaction with EGPC
Leaving aside the structuring complexities, it is important to consider the role of EGPC in the transaction. In many ways, EGPC is the “gate-keeper” to any upstream M&A transaction being successful, and early, strategic and positive engagement with EGPC is essential. For instance, EGPC will be keen to understand the identity of the prospective buyer and its future plans for the relevant concessions (including commitments regarding work programmes and budgets). EGPC approval will be required in terms of the form of deed of assignment, and the proposed scope and form of replacement security to be provided by the buyer. EGPC also plays a pivotal role in quantifying any assignment bonuses (by reference to the terms of the concession agreement) which may become payable on execution of the deed of assignment, so it is important to consider the acceptability of any prospective buyer to EGPC (as regards their financial standing, strategy and reputation) before the transaction is significantly progressed, as well as to assess the scope of any possible assignment bonuses.
To conclude, upstream M&A transactions in Egypt, particularly those involving multiple concessions, are complex and require careful planning, both from a structuring perspective and in the context of stakeholder engagement. In our experience, early-stage discussions between a buyer and seller regarding transaction structure, transfer mechanics and engagement with EGPC are invaluable and often serve to identify any material issues which may hinder – or prevent – the deal from getting through. Although it can be challenging, with careful thought and an open mind to innovative solutions, it can be done.
Andrew Davies and Hussain Kubba are corporate energy lawyers with Norton Rose Fulbright LLP based in London. Together, they have recently advised bp on the sale of interests in a number of oil concessions in the Gulf of Suez, Egypt to Dragon Oil, and Shell on the disposal of its onshore upstream assets in the Western Desert, Egypt to a consortium comprising subsidiaries of Cheiron Petroleum Corporation and Cairn Energy PLC. Hussain also advised EFG Hermes Private Equity on its disposal of the North Bahariya concession onshore Egypt.