Egypt has secured oil supplies for the rest of the year, despite fears about its ability to make payments, from a small number of Western suppliers who have agreed to deliver unusual grades of crude for hefty premiums, market sources said.
The country has been struggling to import oil since the 2011 revolution due to government deficits and resulting constraints on its ability to get credit, stemming largely from the high cost of providing fuel subsidies.
After several attempts, Egyptian state oil company EGPC has completed most of its fourth-quarter crude purchasing tender and is set to award Petraco, Shell and JP Morgan with November and December delivery dates for around 6 million barrels, traders said.
"Well, I guess for a margin some are willing to risk selling to them," said one trader.
Shell is likely to have negotiated even better terms due to its long history as a producer in the country, said another trader who participated in the tender.
In the past six months, foreign banks have cut the number of direct credit lines to Egypt and hiked their charges for opening letters of credit.
Protests over shortages at petrol stations in major cities erupted several times this year when tankers were unable to discharge oil products for several weeks when letters of credit did not come in time.
"I do not know if we will be doing any more deals with them," one trader said. "There are not a lot of banks willing to confirm credit with the Egyptian National Bank."
Under the tender, Shell and Petraco will each be expected to deliver 2 million barrels of Basra Light in November, traders said.
Egypt usually buys small quantities of the Iraqi crude, but the Mediterranean market has ample supply of long sour grades, which made the medium-sour Basra grade more attractive to both sides.
JP Morgan will supply 2 million barrels of Omani crude in December. Omani is rarely sold in the Mediterranean, and a quantity was probably already in storage at the Egyptian port of Sidi Kerir, one trader said.
The Basra cargoes were bought at dated Brent minus $2.50-$3.50 on a cif basis, one source close to EGPC said.
Other recent offers on the grade were around dated Brent minus $3.00 cif Mediterranean for November cargoes, a cheaper price for a longer journey, explained a trader.
Negotiations with EGPC, however, will run to the 11th hour, close to the delivery dates, several sellers said, and some terms could still change.
"The contract is seen as the starting point for negotiation," said a market source frequently involved in deals with Egypt.
The malleable contracts also allow EGPC to make up for previous payment delays as well.
"Demurrage will not get paid this year or next year," said the same market source. "But you bump into your close Egyptian contact in London, and the next tender is awarded to you at a special price to make up for it."
A requirement in the tender contracts for sellers to provide a performance bond, while by no means new, has also started to be problematic for some in dealing with Egypt, several traders said.
The bond, amounting to 5 per cent of the total value of the cargo, is designed to protect EGPC in case of non-delivery. Several firms decided against participating in the latest tenders because the rising cost of opening such a bond at a bank, on top of charges for letters of credit, were too burdensome.
JP Morgan, along with Morgan Stanley, helped refinance EGPC in 2008-2009 in exchange for involvement and thus payments on a significant portion of crude and product deals. EGPC experienced severe credit difficulties during that period to the point that even oil majors would no longer conduct deals, a source familiar with the matter said.
EGPC reissued the tender several times beginning in August, and each time awarded only a part for near-term delivery.
Trading firm Vitol delivered a crude cargo in September and Petraco a cargo in October. This was Petraco's first participation in an Egyptian crude tender for several years, one trading source said.
An even earlier tender issued in July was scrapped after EGPC received no bids when it tried to revive open credit terms.