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* Gas output falling as poor returns, instability hold backinvestment
* Trying to repay arrears, offer incentives to energy firms
* Gas price negotiable, not pre-set, in new contracts, sayfirms
By Lin Noueihed
LONDON, March 6 (Reuters) - Egypt is enhancing explorationterms and striving to repay nearly $5 billion it owes to foreignoil and gas producers as it struggles to prevent them fleeing tomore promising prospects elsewhere in Africa.
Cairo needs them to expand exploration and bring new findsto production if it is to keep the lights on and avoid morecivil unrest. But investors are hesitant - Egypt pays thembarely enough to cover investment costs.
The costing issue has been compounded since the 2011overthrow of Hosni Mubarak by Egypt's inability to pay foreignfirms for existing output and its decision to divert fordomestic use the share of gas they normally get to export.
The crisis has left BG Group, a major investor whichrelies on Egypt for almost a fifth of its output, unable to meetexport commitments. The British firm has said it would notinvest further until more debts are paid and assurances made.
Low investment has seen Egypt's gas production drop to justover 5 billion cubic feet a day from 6 billion in 2012, saidMartijn Murphy, analyst at energy consultancy Wood Mackenzie.
But smaller players say Egypt has raised its game. Its newlicensing rounds have attracted bids despite the turmoil.
Ireland's PetroCeltic, which relies on Egypt for 70percent of its output, was among three firms to sign up for newacreage last month.
"They have been very creative in keeping investment flowingand keeping investors engaged," chief financial officer TomHickey told Reuters. "For instance, the new rounds give you theopportunity to discuss the gas price, if you find it, ratherthan setting it in the contract."
Hickey said onshore gas producers currently receive amaximum of about $2.75 per 1,000 cubic feet, far below theprices paid in the North Sea and elsewhere.
The new leeway is attractive to investors, allowing them topush for higher prices depending on distance from shore,reservoir depth and what the discovery will cost to develop.
Egypt is offering other perks too. It is allowing firms tooffset the signature bonus - a one-off fee paid to seal anexploration deal - against receivables rather than pay upfront.
In an important change, new concessions would be able selldirectly to commercial users, such as steel or power plants,bypassing government entities, executives and analysts said.
WoodMac's Murphy said these users would pay more, partlyrelieving the state of huge subsidies while satisfying producers' demand for prices that better reflect their costs.
Such measures are vital, say analysts, if Egypt is to stopproducers from fleeing to geologically better-endowed neighbourssuch as Algeria.
REPAYING ARREARS
Producers welcome the promise of higher future returns, butsay new investment will not materialise while Egypt struggles topay for output, even at today's lower prices.
Oil Minister Sherif Ismail said last month that Egypt hadalready repaid foreign producers arrears worth $1.5 billion, andwould repay a further $3.5 billion by 2016.
About $1.2 billion is owed to BG alone, but it says theoutstanding balance has fallen on last year. Smaller firms saythey have seen a larger overall share of their debts paid.
Calgary-based Sea Dragon Energy, a small oil producer thatrelies entirely on Egypt, said it was no longer owed any money.
"It has improved dramatically recently. A year ago we were180-210 days out on receivables," CEO Paul Welch told Reuters.
"And they have accelerated the approval process in theministry... Things are getting signed on a much swifter basis."
PetroCeltic said its arrears fell to $80 million at the endof 2013 from $125 million when it entered Egypt in August 2012.
But others have seen the debts mount as Egypt struggles topay back larger sums. Dana Gas, which relies on Egyptfor over half its output, said it received $53 million at theend of 2013, bringing its total arrears down to $274 million.
That represents a $38 million increase from the previousyear, but chief executive Patrick Allman-Ward said the UAE-basedcompany was confident a solution would be found.
Dana Gas signed a new contract with Egypt last month and SeaDragon acquired two new concessions in April 2013.
Welch said the political turmoil also had a silver lining:energy firms' costs had fallen as the Egyptian pound weakened.
"We are aggressive on Egypt as we think things are improvingand the time to invest is now," he said.
OFFSHORE POTENTIAL
BP said last year it had found offshore gas inSalamat, the deepest well ever drilled in the Nile Delta.
It is evaluating how to proceed but a spokesman said BPremained committed to Egypt and to its major investment in theexisting West North Delta project despite delays.
If it is to reverse the decline in gas production andexports, Egypt must ensure it taps these large deepwater findsthat are costly to develop and require the expertise andfinancial clout of multinationals like BP and BG.
"The Nile Delta fields are maturing and that means you haveto keep drilling new wells just to stand still," Murphy said.
"And there have not been significant investments in newfields because the investment climate is just not conducive tomaking decisions on multi-billion dollar projects."
Executives said Egypt had agreed in principle to pay ahigher price for gas from offshore wells which, unlike oil, onlyget developed with an assured market and agreed price.
Murphy said prices upwards of $5 per 1,000 cubic feet hadbeen offered in the past couple of years on the later phases of existing production-sharing contracts for major projects.
Executives say talks are ongoing over large projects withthe industry pushing for $7 per 1,000 cubic feet - higher thanEgypt pays now but less than it would spend on liquefied naturalgas (LNG) imports if its own resources lie unexploited.
Egypt already expects to import an extra $1 billion ofrefined petroleum products and secure significant gas suppliesas it scrambles to avert a summer crunch.
"Developing its own resources is a lot cheaper thanimporting LNG," Murphy said. "The problem is Egypt needs gas nowand some of these projects will take years to develop."
