A Russian Role in Egypt’s $12 Billion BP Deal

For the first time, a Russian-owned company has taken a key position in Egypt’s critically important natural gas sector, and it’s a powerful message that the rekindled relationship runs deeper than promises and trade deals.

In the first week of March, Amsterdam-based investment company LetterOne Group, owned by Russian billionaire Mikhail Fridman and headed by former BP chief executive John Browne, bought oil and gas producer DEA for $5.7 billion from German conglomerate RWE AG. The deal gave LetterOne assets in Europe (including ownership of some North Sea fields, which the United Kingdom government is disputing) and, crucially, also in Egypt’s biggest natural gas venture: the $12 billion West Nile Delta project.

The project is run by BP and DEA owns a 35 percent share, and the deal was formally sealed during Egypt’s investment conference over the weekend. It’s a project that will deliver the equivalent of a quarter of Egypt’s total current daily gas production and play a leading role in digging the country out of its energy crisis.

“It’s a very strategic investment for Egypt in general… It’s one of the largest investments (that) the country is looking for in the next few years… definitely it’s a very strategic investment in Egypt,” EFG Hermes research analyst Mohamed Abou Basha told EgyptSource.

While RWE has been trying to sell the oil and gas unit since 2011, some analysts say the Russian-backed entity’s interest in the Egyptian assets at this point in time is politically motivated. Abou Basha says the Egypt section of the deal is evidence of Russia’s interest in investing in the country, adding that the acceptance of the move from  local authorities was “definitely related” to Russian President Vladimir Putin’s February visit to Cairo, because of the growing ties between the two states.

Washington Institute adjunct fellow and expert on Russia’s Middle East policy, Anna Borshchevskaya, says the vacuum left by the United States’ retreat from the Middle East has allowed Russia to fill not only a security breach, but an economic one as well.

“Egypt is a case in point. The US is ignoring Egypt’s interests, including energy interests, and this gives Russia an opportunity to step in,” she told EgyptSource. “Putin and Sisi had signed a preliminary deal last month to jointly build Egypt’s first nuclear power plant. In this context, this agreement certainly fits within the pattern of Russia’s growing influence in Egypt.”

However, Egypt is using this relationship just as much to show the US that it has other options, Borshchevskaya says.

Egypt’s energy sector has traditionally been dominated by Western companies, and Russian companies have never taken much more than a desultory look in the past. LUKOIL and Novatek took on exploration concessions in the 2000s but gave them up before the revolution in 2011, and government talks with Gazprom fizzled by 2010.

According to a source within government regulator Egyptian Natural Gas Holding Company (EGAS), Russian companies have never had a real foothold in the country’s natural gas sector. The source, who wished to remain anonymous as he is not authorized to speak on the record, was surprised to learn of the DEA deal but confirmed it would have needed high-level approval from EGAS to go through.

However, as Egypt tries to fix gaping problems in its energy supply, stemming from lack of investment and corruption, Gazprom was one of the first companies the government turned to in its efforts to buy liquefied natural gas (LNG). That contract to buy 35 LNG shipments over five years was signed on Tuesday.

It’s also again courting that company’s exploration arm: Gazprom International executives were in Cairo for a week in February during an oil and gas conference and met with government energy officials. They told EgyptSource that although Gazprom had never operated in Egypt, they were interested in investigating the country further.

Ahmed Farid Moaaz, Egypt country manager for Canadian gas explorer Sea Dragon Energy, however said Russian oil and gas technology was not very good and that had prevented them from expanding much overseas.

He cautioned though that Fridman’s investment in DEA was not about politics but about money: the last figures available for Egypt’s energy demand growth are 7 to 8 percent in 2010, but oil and natural gas supply 94 percent of the country’s electricity.

Combined with the early stages of liberalization of the energy market, Moaaz believes opportunities abound for investors.

“I’m expecting some of those rich Russian investors to take an interest in the Middle East. I don’t see why not, what’s stopping a major investor to buy shares in this area?” he said.

Angus Blair, founder of Cairo-based think tank, the Signet Institute, says Egypt is in “no mood to stand in the way” of investors who want to sink money into any sector of the economy.

The entree of private Russian interests into the strategic natural gas sector is a signal that Egypt is not just playing Russian interests off against American ones, but fundamentally expanding its sources of investment and economic ties.

Borshchevskaya believes Sisi wants “real” agreements with Russia. “Egypt’s economy is in a recession, they are fighting violent domestic opposition and terrorism. When the US cut off military aid to Egypt, it also signaled that it’s withdrawing support from an ally, so of course they are looking for other options,” she said.

“Egypt is certainly not going to turn away from the US completely, but our (US) policy pushes them closer to anti-Western actors such as Russia – actors who have no interests in promoting human rights, and care more about their influence in the Middle East than regional security. Criticism against Egypt’s democratic backslide is certainly warranted, but right now, the Egyptians care more about security and economy than anything else, and if we don’t support them, Sisi has to look elsewhere.”

Rachel Williamson is a Cairo-based journalist who covers Middle East business, economics and energy.