January 25, 2013
Interviewed by: David Snow
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Deal Story: Egyptian Refining Company

Karim Sadek of Cairo-based Citadel Capital tells the gripping story of how his firm clinched a $3.7 billion refinery deal for Egyptian Refining Company amid political revolution.

Karim Sadek of Cairo-based Citadel Capital tells the gripping story of how his firm clinched a $3.7 billion refinery deal for Egyptian Refining Company amid political revolution.

Karim Sadek, Citadel Capital: This is basically a second stage refinery ie, it’s a hydro cracker. We take from an existing refinery in Cairo– it’s main production, which is heavy fuel oil, and crack it into higher value products, whereby the Egyptian government has a right of first refusal to buy that higher value– higher value meaning gasoline and diesel– at international prices.

This project was conceived back in 2006. We started working on 2006. The main driving idea behind it is that the refining capacity in Egypt, besides being too short– Egypt imports consumes 14 million tons of diesel, and just to take an example, 14 million tons a year, produces 7. So there is obviously an import substitution case here.

So beyond the capacity, we’re also talking about ’70s technology, Russian, outdated. So a lot of waste happening, which was I can’t say acceptable, but permissible when a barrel of crude was at $4 or $5. But not when it’s at $100. The value you’re leaving the table is too much.

So the idea was to basically bring in 2000, latest technology, and took hydro cracking. And this had, besides capturing the most attractive value, the part of the value chain in refining which is the higher-value products, as opposed to taking it all the way from crude– that’s from our side. From the government of Egypt’s side, we will end up supplying five 4 and 1/2 to 5 million tons of higher-value product for day-to-day import.

Just the savings, the material, I mean, the calculated savings on import substitution for the budget is around $350 million a year. This is transport costs, LCs, handling, losses, you name it. Not to mention, strategic value, that this is in the heart of Cairo. Another impact, which clearly shows, given what I’m going to tell you about the timeline of this project, why we managed to pull it off now, is that, from an impact perspective, today, the existing Cairo refinery, its production of HFO, heavy fuel oil, which goes into various– mostly power generation, results in 93,000 tons of sulfur being emitted in the Cairo environment annually.

These 93,000 tons, once we start operation, are not going to be emitted. They’re going to end up being a solid byproduct of the cracking process, which goes into whatever industry that needs sulfuric acid in a solid form– so no gas emissions. So clearly, win, win, win. Win, government, win private sector, win community and society.

This deal, as I said, was conceived in 2006. This is a $3.6 billion deal. 2008, fell through when the financial crisis happened because all the backers were commercial banks– European, mostly. We restarted the process again, taking it to DFIs and ECAs. So finally, in August 2010, the debt package, $2 and 1/2 billion were signed. The lead participants in that is [? JPEC ?], Korea Exim, and European Investment Bank, which, obviously, especially EIB has one of the highest requirements from an environment and social impact assessment, as you can imagine.

And then we were about to close the equity, two weeks, three weeks after the revolution happened. So the target was like mid-Feb, 2011. The revolution happens, obviously, no equity, and an environment where you can imagine someone putting $2 and 1/2 billion, even though it’s a private deal, will require some form of government comfort that we like this deal.

All through the first year post-Mubarak you had two or three governments in place. So you could never pin down prime minister to sign that letter, which we finally managed to do June last year and hence closed– this is the largest [? non-recourse ?] project [? finance ?] finance funding in Africa, done in Egypt in in July 2012 in the midst pf a lot of uncertainty. It just tells you that it had unanimous backing of everyone involved, whether it’s host country, the military, the DFIs, us– I mean, it’s just made a lot of sense.

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