Business Dunes spoke with Sune Stilling, CEO of Egyptian Drilling Company (EDC), about the hurdles facing drilling contractors in Egypt, the impact of inflation and price regulations, and the country’s untapped upstream potential.
Market Realities: Low Oil Prices & Government Price Controls
Q: How has the oil price slump affected Egypt’s drilling sector?
Sune Stilling: At $50 per barrel, upstream operators face tight margins, which trickles down to drilling contractors like EDC. When operators demand lower rig day rates, contractors must push suppliers for discounts—creating a downward pricing spiral.
The only segment that should benefit from low oil prices is transport, since fuel costs drop. But in Egypt, the government is cutting fuel subsidies, eliminating any cost advantage. Forcing suppliers to operate at a loss is unsustainable—finding a balanced negotiation is critical.
Q: What makes Egypt’s market uniquely challenging?
Sune Stilling: Unlike other markets, where high oil prices boost profits across the value chain, Egyptian General Petroleum Corporation (EGPC) regulates prices. We cannot negotiate our own rates, which stifles profitability.
Inflation (peaking at 11.4% post-subsidy cuts) and rising labor costs squeeze margins further. Today, drilling contractors earn far less than they did 7–8 years ago.
Rig Economics: The Struggle for Sustainable Returns
Q: How severe is the pricing pressure?
Sune Stilling: Current rig rates are already 15–20% below fair market value. If forced lower, they’d be 25% too low to deliver acceptable returns. No business can sustain losses indefinitely.
Q: How are companies adapting?
Sune Stilling: Some clients are releasing rigs prematurely, despite new players entering Egypt’s market. The key is long-term contracts (3+ years)—mobilizing a rig for a single well costs ~$5 million, making short-term projects unviable.
Egypt’s Upstream Potential: Gas Boom vs. Unconventional Hurdles
Q: Where are the biggest opportunities?
Sune Stilling:
- Offshore gas: The Mediterranean holds an estimated 223 Tcf of gas, driving major exploration.
- Onshore: Mostly mature, except for unconventional plays in the Western Desert—though these require high-cost, high-tech drilling.
Q: Why aren’t more investors targeting unconventional resources?
Sune Stilling: With ultra-low day rates, even $50 oil struggles to justify the expense. Investors need a 9%+ return on capital—currently unattainable. Until conventional wells become profitable, large-scale unconventional projects won’t take off.
The Path Forward: Policy Reforms & Long-Term Planning
Q: What needs to change for Egypt’s drilling sector to thrive?
Sune Stilling:
- Fair pricing mechanisms – Contractors must negotiate sustainable rates.
- Stable fiscal terms – Investors need predictability.
- Longer contracts – To justify rig mobilization costs.
Despite challenges, Egypt’s gas potential remains vast. But unlocking it requires policy adjustments, energy reforms, and a rebound in oil prices.
Final Thought:
“Egypt’s upstream sector is at a crossroads. With the right fiscal policies and investment climate, it could become a regional energy hub—but only if stakeholders align on sustainable economics.”
