The Project will support development of heavy oil resources in Egypt, as well as development of and exploration for natural gas reserves in Pakistan. These sectors are important to the respective economies; the mining and oil and gas sector constitutes nearly 15% of the Egypt’s GDP and about 37% of its exports. In Pakistan, natural gas, a relatively more affordable and environmentally friendly fuel, currently meets about 46% of the Country’s primary energy needs but where increasing domestic demand is projected to lead to supply deficits. The gas supplied by the Project is a relatively clean source of fuel and will be at significantly less cost than the alternative cost of imports. In addition to contributing production increases to important energy sectors in host economies, the project’s key development impacts will be through applying established technologies for enhanced recovery of heavy oil resources, in generating local jobs and providing training, in the form of incremental revenues to the governments from production sharing, royalties and taxes, from outlay in social programs in Pakistan, and from local sourcing of goods and services where possible.
IFC will track the Project’s development benefits annually based on information provided by the Company in respect of incremental production, local employment, outlay on social development programs, oil recovery rates in Egypt, and incremental revenue benefits accruing to the governments and their agencies from the Project.
Environmental and Social Management:
The Company’s objective to establish international standards for environmental, health and safety aspects of its operations in Egypt is expected to be among the principal positive outcomes of this Project. Given the small footprint and remote Egyptian eastern desert location, environmental impacts are not considered significant. Rally has reviewed their operations in Issaran and has committed to the implementation of improvements as needed, and seeks to establish comprehensive health, safety and environmental and social management systems that will ensure sound management of its projects on a sustained basis. A comprehensive health, safety and environmental audit has already been commissioned based on which Rally will develop action plans for systematic implementation.
The Pakistan operations are in the early stage and will also be designed to comply with host country regulations as well as World Bank Group’s safeguard polices and guidelines. Land acquisition negotiations for the field development facilities are underway with assistance from the regional government. Rally, through the operator, will ensure that land acquisition for the Project is consistent with host country regulations and World Bank/IFC policies. As a part of the development planning, the operator is evaluating the requirements for security at the site. If specific security arrangements are considered necessary, the sponsor will confirm that the operator has implemented appropriate policies concerning the use of security personnel.
Community Benefits:
Both projects lie in remote locations and have very small social footprints. There is no local community in the proximity of the Issaran field, located in the eastern desert on the west shore of the Red Sea, with the nearest inhabitation to the north, Zafarana (p. 5,000 approx.) 40 km away, and Ras Gharib (p. 50,000-100,000) about 60 km to the South.
In Pakistan, Rally’s non-operated Safed Koh block is also remotely located in the Punjab province with some communities in the area adjacent to the project site. Some individuals from the local community will gain employment during field development. The operator has also already provided some development contribution to the community, including a primary school, a medical dispensary and assistance in obtaining water supplies to this community. More generally, within the scope of the Safed Koh concession, Rally and its partners will contribute funds for social welfare programs. IFC expects total outlays on social programs to average about US$80,000 annually, although year to year outlay is subject to minimum provisions of the concession agreement.
Contribution to the Government:
The Project’s benefits to Egypt and Pakistan include revenues that will accrue to these governments in the form of production share, royalties and/or taxes. Based on IFC’s estimates, using the project’s estimated gross proved reserves and World Bank forecast oil prices, the projects can be expected to generate incremental revenues of US$47 million in Egypt and US$119 million in Pakistan over the life of the respective gross reserves, although this depends on actual oil prices and production rates.
Governance Context:
In terms of overall size, the Project’s revenue contributions to GOE and GOP form an insignificant share - in both cases less than 0.1% - of total government revenues in these countries. In Egypt, the GoE’s share of revenues partly accrues to the Ministry of Petroleum (EGPC/GPC) and for income taxes to Ministry of Finance (MOF). EGPC/GPC shares of revenues are mostly reinvested or directly applied to finance domestic subsidies for petroleum products for the Country’s population. MOF funds are applied directly to Egypt’s federal budgets. In Pakistan, revenue payments in the form of royalties and taxes are paid to the federal government. In addition, the project will benefit gas users by generally providing gas at a cost below that of non-gas alternative commercial fuels. Mandatory investments stipulated in the concession agreement in respect of social welfare programs are to be made directly by the operator in coordination with the local civil administration or the relevant provincial government. Unspent amounts are otherwise to be deposited with these agencies. The partners intend to apply these directly in suitable social development programs; these expenditures will be tracked by the Company annually.
In coming to a view of whether to support this Project, the IFC has considered the value of the project’s benefits, and governance and other risks to these net benefits. It has considered in this respect a range of indicators of governance, including the current relationship between the host countries and the World Bank and IMF. IFC believes the risks to project benefits not being realized, due to governance in these countries, as relatively small. In addition, to ensure transparency, payments to governments will be publicly disclosed by Rally in its annual report. The non-revenue benefits which are significant, such as strengthening domestic energy production, relatively clean and lower cost fuel in Pakistan, technology transfer, generating jobs, local social contribution, purchases of local goods and services are unlikely to be impacted by weak governance. Both projects are also consistent with overall World Bank Group objectives in the countries’ oil and gas sectors, including helping strengthen private sector participation in development of these sectors.
IFC Role:
IFC’s support to Rally Energy, a small Canadian oil and gas company, is key for its international operations in Egypt and Pakistan considering the Project’s importance in helping develop domestic energy resources in host countries. The provision of medium-term loan facilities will provide the company the financing needed to meet its capital expenditures and the flexibility it needs to grow its operations in these markets. There is limited availability of such financing for emerging market operations for companies like Rally, which has also sought IFC’s involvement because of its strong familiarity with the Egyptian and Pakistani environments. IFC is also working closely with Rally to help build its health, safety, environmental and social management capacity, a key priority area for the Company.
