Nassef Sawiris on Investing in U.S. Shale Gas and the Outlook for Egypt

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In the heartland of America, a contingent of Egyptian engineers is working to capitalize on the natural gas opportunity that Nassef Sawiris says is now possible because of the development of domestic shale gas production.

Egypt’s richest man and his Dutch-listed company OCI N.V. have committed $3 billion in projects in the U.S., including a fertilizer plant in Weaver, Iowa, and a new methanol plant in Beaumont, Texas. The conglomerate recently listed its integrated ammonia-methanol facility situated in Beaumont on the New York Stock Exchange. In addition to numerous construction projects in Egypt, OCI states it is now the largest merchant methanol producer in the U.S., and among the world’s largest nitrogen fertilizer producers.    

Speaking with Knowledge@Wharton ahead of the Wharton MENA Conference on April 12, which he will attend as a keynote speaker, Sawiris discussed the opportunities that brought OCI to the U.S., and his outlook on the natural gas industry. He also discussed Egypt and its evolving political situation. Though he predicts the country’s turbulence will continue until the summer, there are sectors right now that are still attracting investors, he said.

An edited transcript of the conversation follows.

Knowledge@Wharton: For OCI, what was the value and opportunity in establishing U.S. operations?

Nassef Sawiris: As a company, we have a track record in gas monetization projects, and it became pretty obvious to us that the shale gas revolution in the U.S. is not for one season, but is a phenomenon that is here to stay for an extended period of time. This natural gas advantage is a good opportunity for us to do what we have done previously in other markets, such as Holland, which has entered into industries that require natural gas. So, the first attraction was that transformation of the U.S. from an energy-deficient market, at least in natural gas, to abundance. Then we looked at the products that the U.S. is deficit in and is currently a large importer. We said that’s an easy take to be in the import substitution business, because then you know exactly the demand that exists to date, and you’re immediately replacing an import shipment from China or Saudi Arabia by producing it domestically — in this case in Iowa, in the heart of the cornbelt.

Knowledge@Wharton: What can your firm contribute to American know-how as it develops its shale gas industry?

Sawiris: We have built five similar plants in the last 10 years. So we have in-house capabilities that give us an edge as a builder of these facilities. We’re not just an investor; our engineering and construction groups are playing a vital role in the execution of these projects.

Knowledge@Wharton: As the U.S. domestic energy market develops, what must it do to avoid some of the pitfalls that you see in traditional markets?

“It became pretty obvious to us that the shale gas revolution in the U.S. is not for one season, but is a phenomenon that is here to stay for an extended period of time.”

Sawiris: The U.S. has two issues. The approval process, particularly with the EPA [Environmental Protection Agency], is a significant barrier for entry. It takes about two years to complete the entire approval process, including some preliminary engineering work. The second thing is that the labor cost in building a facility like that in the U.S. is in the $90-per-manhour range with costs included in the mechanical construction industry. Those costs in the Middle East are a dollar per hour. On the plus side, you have better rule of law, less risk and less currency risk. A dollar is a hundred cents in the next hundred years. So when you are thinking of dollar denominations as a commodity, you are spending in dollars and you are paying wages in dollars; it makes things a lot simpler.

Knowledge@Wharton: What are your predictions for the natural gas market, and the knock-on effect that the U.S. shale gas industry will have on it?

Sawiris: What we monitor are the 10-year forward contracts of natural gas, and what they seem to indicate is that gas prices are not going to deviate significantly from where they are now. [As for the U.S.], it’s a great market. We didn’t do just one investment; we are embarking on our third investment with the new plant in Texas.

Knowledge@Wharton: Do you have an opinion on the liberalization of U.S. liquefied natural gas (LNG) exports, and the debate about how this will affect global prices? What is your opinion about the current market and its direction?

Sawiris: I hope the government views this with some prudence. A lot of countries, like Egypt and Indonesia, have big LNG facilities, and just 20 years later, they’ve become net gas importers. So I truly hope the analysis on when to stop those exports takes place.

I can’t jump to any conclusions, but one of the interesting things about shale gas, unlike a single mega-field, is that there are not any accurate numbers on what are the U.S. gas reserves. So if you don’t know, you cannot draw a conclusion on what is a prudent size of export. Israel, for example, has one big field that they can get comfort through geological assessment on what the reserves of that field are. Then they can say, we’re happy to export 40%. The situation is much more complex here, because you’re extracting gas acre by acre.

Knowledge@Wharton: There are complexities in the political realm here as well. In the methanol market, there have been efforts in Congress to legislate the Open Fuel Standard Act. In what direction is the use of methanol in gasoline headed?

Sawiris: This is a matter of time. The technology is right. Politicians can only delay the inevitable for a limited amount of time. What’s happening now is that it’s not just China using methanol in gasoline, but Israel and Australia are also about to launch their own legislation this year authorizing the use of methanol in the gasoline stream. Europe is using about 3% already. So I think it is inevitable. It’s a cleaner fuel, it’s U.S.-sourced and it will improve the octane for the cars, hence making the efficiencies required by the new laws in the U.S. easier to achieve for the automotive manufacturers.

Knowledge@Wharton: There is still resistance in the U.S. market to adopting alternative fuels. What’s the message that you feel needs to get out there?

Sawiris: Let’s be clear — nobody is advocating the elimination of gasoline and shifting to methanol. We’re advocating that methanol be added into the fuel mix alongside ethanol and gasoline. That’s a much easier proposition, adding a second product into the gasoline stream. The marketplace will determine — they will only do it if it is efficient and it results in price savings. From an environmental issue, it is superior. So you are getting to a situation where you could have price advantages and environmental advantages. And, you’re not going to change your car, you’re not going to CNG, you’re not changing your engine. It’s just allowing for gas stations to use that blend.

Knowledge@Wharton: If we could talk about the ammonia market — ammonia prices in April are expected to rise 26%, due to the crisis in Ukraine. Is it a temporary blip or a sign of things to come?

Sawiris: I don’t see it as a temporary blip. There are two possible outcomes I see, from my limited analytical experience. One outcome is that Ukraine is going to be paying higher gas prices; the other outcome is there will be production disruptions. A third outcome, which I think has zero chance of materializing, is that Russia will continue to sell cheap gas to the hostile government in the Ukraine. I can’t highlight which of the first two outcomes will materialize, but both of them result in higher ammonia prices. It doesn’t affect the prices of ammonia as a global commodity. Only the U.S. uses ammonia in direct farm applications. Most of the other uses of ammonia worldwide are industrial.

“There are sectors of the Egyptian economy that have been on fire in the last one or two years, despite all the political turmoil.”

Knowledge@Wharton: Let’s turn to Egypt. What is your outlook on the country, and what does it mean for foreign direct investment?

Sawiris: I’m quite positive on Egypt. I think we’re going to have a few more months of turbulence until there is an election and we have a new president and a new parliament. But a timeline has been set for three to four months. I expect that by July all this will be accomplished. And then people will have an address to talk to and all that. So in the short term, these are the next milestones for Egypt. In general, I think the political situation will converge. Obviously there will be some negative implications for some of the court rulings that made the news. What people don’t understand is that, regrettably, the first round of court rulings in Egypt is almost immaterial. It’s such a junior court; it’s almost like a traffic court.

Knowledge@Wharton: What are you telling investors, then, who don’t possess such knowledge of the internal workings of Egypt? Such headlines, for instance, are also keeping tourists away.

Sawiris: There are sectors of the Egyptian economy that have been on fire in the last one or two years, despite all the political turmoil. Consumer goods are doing amazingly well. Building materials businesses are now getting attention. The government is doing a lot of infrastructure projects, so infrastructure will be an opportunity. There is energy legislation — including price reform — that has to be passed to make that sector attractive. And then the last important sector, after the stabilization of the security situation: the return of tourism. And usually once security stabilizes, the tourists will return. There will be pent-up demand, because everybody wants to come to Egypt. You’ll move to 80% to 90% occupancy from 10% to 20% occupancy.

Knowledge@Wharton: Can you talk about the inflows of investment into Egypt from the Gulf, now that it has shifted from Qatar to Saudi Arabia and the United Arab Emirates? 

Sawiris: I don’t think Egypt would be in the position it is today without the $20 billion of infusions that happened to support the ouster of the Muslim Brotherhood. It had to come, it came at the right time, and it created strong support for the Egyptian economy. You saw the reaction on the stock market, the stabilization on a lot of inflationary issues. It’s not like the normal $1 billion or $2 billion investments and loans that we used to get in the past. This is what you call putting in a floor to any possible decline of the Egyptian economy.

Knowledge@Wharton: During the Arab Spring, there was a split in investor mentality toward the MENA region that looked at Arab Gulf economies as stable, versus Egypt or Libya. Is it time for investors to look at the region as a whole again?

Sawiris: It depends on the sector. If you’re in the consumer goods business — if you’re Procter & Gamble, if you’re Unilever — [there is opportunity]. In the midst of all this, we’re building a plant for Mars in Egypt, and we just finished an expansion for Procter & Gamble. So you have to be selective about the sector. Obviously, it’s a huge market with great opportunities. Health care is one, real estate is another, building materials is huge.

“What doesn’t kill you, makes you stronger. We’ve been having crises for the past 12 years…. I would say that it’s a good training ground.”

[In the MENA region] there are economies that rely 90% on a single product. Look at Saudi, Abu Dhabi, Kuwait and Qatar. If oil prices tank to $40, it might be very negative for those economies, but it might be great for Egypt. So the importance of this one-trick pony economy is huge. Iraq moved from averaging two million barrels a day last year to exporting 3.5 million barrels per day in February. That’s 70% growth in oil exports from Iraq. So you have to continue to segregate the economies. What’s good for Egypt and Morocco may not necessarily be good for Saudi Arabia and Kuwait.

Knowledge@Wharton: In that evolving situation, where will OCI position itself, in Egypt and in the larger region as a whole?

Sawiris: To be honest, I have to be politically correct here. In the last three years, we have made our number-one focus to be an active player in gas monetization in the U.S. A company with limited resources has to focus on what its targets are. So a lot of our capex budgets went to our project in Beaumont, our developments in Iowa and our third project in Beaumont, which is over a billion dollars. This is fine. We think the opportunities in Egypt in our sector will probably materialize more in 2015 than 2014. So after the elections, a few months of a stable government, discussions to bring back the International Monetary Fund — which I think is the second half of the 2014 agenda — and political reconciliation, and we will be in investigative mode. By 2015, we could be really in a big investment model. 

We’re really focused right now. There will be a window for who builds what plants in the U.S. first. And I think that the labor market from 2015 is going to be on fire. The U.S. housing market will see a million housing starts by March next year. So sometime next year it’s going to be tough to find a contractor to build your facility. We’re racing against time in the next 24 months.

These commitments, in addition to Beaumont, are $3 billion of additional construction expenditures that we’re putting in the U.S. That’s a sizeable commitment. Are we looking out there at more opportunities? Yes, absolutely, and we could certainly be adding some more capacities in certain products.

Knowledge@Wharton: OCI delisted from Egypt and moved to the Netherlands. Can you talk about that experience?

Sawiris: I think you have to look at the decision in the context of the time. This was done in the context of a government that was extremely hostile to women, minorities, Christians and a lot of businessmen. So I would say that if we hadn’t moved to Holland we would have moved to Siberia or Alaska under the Muslim Brotherhood. It wasn’t a matter of choice to move the company headquarters when we were being harassed on a daily basis. [But] it didn’t change any of our dynamics. We didn’t move any of our plants from Egypt; we’re actually hiring more in Egypt. Delisting didn’t dramatically change our shareholders. Historically, outside the family, we had a big following in London. The bulk of shareholders moved from London to Holland, rather than from Egypt to Holland.

Knowledge@Wharton: The storyline during the Arab Spring was that the Gulf economies were stable, and received a number of Egyptians, Libyans and Syrians escaping the troubles, and bringing their money. Do you see a reversal of that trend?

Sawiris: In the Middle East, you never know what place is safe. It’s the place of the week.

Knowledge@Wharton: In Egypt, your company has dealt with some inhospitable conditions in the past couple of years. How did you keep your employees focused? 

Sawiris: As the saying goes, what doesn’t kill you makes you stronger. We’ve been having crises for the past 12 years. So we laugh when we see some problems that we face in Iowa or Texas, compared to that sort of environment. I would say that it’s a good training ground.

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