Mid East Conflict Overshadows Inauguration Of Midor Refinery

VOL. XLIV

No. 23

4 June 2001

EGYPT

Mid East Conflict Overshadows Inauguration Of Midor Refinery

The new Midor refinery has been thrown once more into controversy. The 100,000 b/d refinery, located outside Alexandria with joint Israeli-Egyptian capital, has seen its original purpose and ownership change several times already, even before it has started commercial operations.

Egyptian officials announced last week that the government was soliciting buyers to purchase Israel’s Merhav share in the project. Dow Jones reported from Cairo on 29 May that National Bank of Egypt, a shareholder in the plant, had bought the Israeli share. Merhav denied the news on 30 May, but confirmed it the next day. MEES understands that a handshake for the sale was made on 27 May but not documented until later in the week.

The original plan for the $1.5bn Midor refinery, Israel’s largest investment in Egypt, was for private Israeli and Egyptian businessmen, with an Egyptian Government minority share, to build an offshore refinery in Egypt to process a cocktail of Gulf crudes delivered by the Sumed pipeline and export the petroleum products to Israel and other Mediterranean markets. At the time the project was launched in the early 1990s the political atmosphere between Cairo and Tel Aviv was relatively cordial, but as relations between Egypt and Israel soured and domestic opposition to the project started growing, the Egyptian Government decided to take full control of the operation. Instead of serving international markets as originally planned, the Egyptian General Petroleum Corporation (EGPC) decided to integrate Midor into its domestic refinery system to meet local needs (MEES, 7 May).

Midor’s structure was changed in late 1996 when the company’s capital was doubled from $180mn to $360mn, with the Egyptian public sector equity quadrupled and the shares of the Egyptian and Israeli private sectors frozen (MEES, 13 January 1997). Originally the company was owned 40% by an Egyptian private sector consortium comprising businessman Husain Salem (through his Swiss firm Masaka) and local banks, 40% by Israel’s Merhav group (through its Irish company Medor) and 20% by the state-owned EGPC. After the increase in capital, EGPC acquired 40% of the equity and two EGPC affiliates, Petrojet and Enppi, acquired 10% each, giving the Egyptian public sector a 60% controlling interest. The Egyptian private sector consortium and the Merhav group did not contribute to the company’s increased capital. As a result Midor was owned by EGPC (40%), Enppi (10%), Petrojet (10%), Medor (20%), National Bank of Egypt Cayman Islands (16%), Masaka (2%) and the Suez Canal Bank (2%). Now, with the sale of Medor’s share, the National Bank of Egypt owns 36% of the shares in the company.

Midor’s first major tender for crude oil was issued on 14 May this year. The bidding invitation asked first for crude in June and then for supplies for the period July-October. It required crude with 30-33ºAPI and sulfur content of up to 3%. The volume required for the July-October period was 12mn barrels, or 100,000 b/d, with delivery to be made CIF at Sidi Kerir and the crude shipped from Ain Sukhna through the Sumed pipeline to Sidi Kerir. Midor has no facility to receive crude from the Mediterranean. The type of crude requested was: Basrah Light, Iranian Light, Iranian Heavy, Dubai, Oman, Kuwait, Foroozan, Kirkuk, Arabian Light, Arabian Heavy or a 50% blend for each. The tender specifically stated "two types of crude at least will be determined for the period of supply." The price for the crudes is based on the arithmetic average of the mean Platt’s dated Brent quotation for the month of delivery.

MEES learns that the July-October tender was awarded for the following:

Elf Trading: 4mn barrels of Oman – 1mn barrels/month.

Vitol: 4mn barrels of Dubai – 1mn barrels/month.

BP: 1mn barrels of Kirkuk (or equivalent grade), and 1mn barrels of Dubai.

Oil Energy (Italy): 2mn barrels of Dubai (with delivery of 1mn barrels in July and 1mn barrels in August), and 1mn barrels of Oman in October.

The Midor tender has raised much interest in regional markets. Politically, it was not possible for Gulf crudes, that specify destinations, to be considered. Hence the attraction of the Oman/Dubai mix that can be delivered to any destination. Egyptian Petroleum Minister Sameh Fahmy, during his whirlwind visit to Kuwait, Saudi Arabia and the UAE to seek supplies, was told clearly that while Gulf countries will study carefully petroleum investments in Egypt, there will not be any deals (oil sales or equity holding) in Midor as long as there is an Israeli equity interest in the project.

One interesting aspect of the tender is the fact that BP is offering Kirkuk crude. The company has retained the option for providing another similar quality crude, as specified in the tender invitation, awaiting approval of the UN sanctions committee on how to price Kirkuk to Egypt – whether it should be considered a sale to Europe or to the Far East. Accordingly a decision will be made whether Kirkuk will be supplied to Midor or a substitute will be used to replace it.

Commercially, the tender has raised eyebrows about the stability of the Dubai market in the third-quarter and future months. There are usually 11 cargoes (500,000 barrels each) of Dubai crude sold monthly. India’s IOC usually takes three or four cargoes monthly. Now with the Midor deliveries, around half of Dubai will be committed to these two buyers. International traders were already squeezing the Dubai market, even before Midor appeared on the scene. It is now feared that the opportunities for manipulating or cornering the Dubai crude will increase still more, rendering less than ever the usefulness of Dubai as a marker crude for Gulf oil supplies to the Far East. The new element in the picture is the sale of Merhav’s share to Egyptian concerns. This will give an opportunity down the road for the introduction of other Gulf crudes to the Midor processing slate, relieving the pressure on Dubai.