Egypt Grants Tax Breaks for Aphrodite Gas Field Development

NewMed Energy has taken a significant step towards developing the Aphrodite gas field off Cyprus and exporting its gas to Egypt, announcing the initialing of a tax agreement with Egypt. This agreement, which applies to the gas transportation operations to Egypt, aims to reduce economic uncertainty surrounding the project by offering tax exemptions and facilitating fund transfers out of Egypt. The Aphrodite field holds approximately 100 billion cubic meters of natural gas, but full production is still some way off.

The initialed fiscal agreement (FRA) was signed between the field's partners, the dedicated transport company Aphrodite Midstream Company, and the Egyptian government. Under the terms, the field's rights holders and the transport company will be exempt from various Egyptian taxes related to the defined activities, including the sale of gas to Egypt's EGAS. The Egyptian Ministry of Finance will cover income tax on these operations, and transfers of rights, dividends, and capital out of Egypt will be tax-exempt under specific conditions. The agreement also includes exemptions from most VAT on equipment and services for the project, with the Egyptian Ministry of Finance covering import duties and customs for approved items.

However, these concessions are not absolute. They do not apply to certain tangible assets acquired in Egypt, taxes on employees, or administrative and service fees. Egypt also reserves the right to impose general, non-discriminatory currency restrictions for up to 45 days annually during fiscal emergencies. The agreement provides protection against future tax increases, stipulating that the special tax regime will supersede conflicting tax laws. Disputes will be resolved through international arbitration in The Hague under Egyptian law.

While the initialing of the tax agreement is a positive development, it is not yet a final deal. NewMed anticipates full signatures and Egyptian parliamentary approval in the coming weeks, though this is not guaranteed. Parliamentary approval is required within six months of signing the Host Government Agreement (HGA) with Egypt; failure to obtain it could allow the field's rights holders to cancel the HGA.

This tax agreement follows other recent steps to advance the Aphrodite project. In April, a Memorandum of Understanding (MOU) for the sale of all gas from the field to Egypt was initially signed, with final signatures in July. The MOU outlines EGAS purchasing approximately 100 BCM of gas over 15 years, with a potential five-year extension, and includes a 'take or pay' mechanism and Brent crude oil-based pricing. However, this MOU is not yet a binding supply contract, and negotiations for a final sales agreement are ongoing. The development also requires the completion of agreements for an undersea pipeline to connect Aphrodite to Egypt's gas grid, with a joint venture company for this pipeline yet to be finalized.

The Aphrodite field, discovered in 2011, is located in Cyprus's economic waters, about 30 kilometers northwest of Israel's Leviathan field. Despite the discovery date, commercial development has not yet begun. The current plan includes a floating production facility, four wells, and the pipeline to Egypt. Initial investment was estimated at $4 billion, but final costs depend on detailed planning and commercial agreements. NewMed's current projections suggest a final investment decision in 2028 and first gas production in 2031, indicating a long road ahead even with the current agreements.

Ownership structure is also evolving. NewMed holds 30%, Chevron 35% (operator), and BG Cyprus (Shell) holds the remaining 35%. Shell is selling its stake to Hungary's MOL for up to $720 million, valuing the field at approximately $2.06 billion before production begins. This valuation highlights the uncertainty surrounding the field's economic worth. Additionally, the division of rights for Aphrodite-Yishai, a portion of the field extending into Israel's economic waters, remains unresolved, with ongoing negotiations between Israel and Cyprus.