Hi Egypt says to repay debts to foreign oil companies within six months.

Hi Egypt says to repay debts to foreign oil companies within six months.

By Ehab Farouk and Lin Noueihed:

CAIRO (Reuters) - Egypt plans to repay all of its $4.9 billion debt to foreign oil and gas companies within six months, the oil ministry said on Thursday, a move it hopes will prompt them to boost exploration and ease the worst energy crunch in decades.

Egypt has delayed payments to oil and gas firms as its economy has been hammered by almost three years of instability since a popular uprising ousted autocrat Hosni Mubarak.

Arrears began to accumulate before the revolt, but worsening state finances saw the debts mount to billions of dollars while the government diverted gas earmarked for export to meet domestic demand.

Gas production has steadily declined in Egypt while consumption keeps rising, but firms have been reluctant to increase investment in exploration and production, particularly in costly offshore areas, until the government repays them.

The ministry said in a statement that Egypt planned to borrow $2 billion to help it finance the repayments, seeking to repay 60 percent of the arrears by year-end.

"This offering comes as one of the short-term measures taken by the government to pay the (international oil companies') arrears," Oil Minister Sherif Ismail said in the statement.

He said state oil and gas boards EGPC and EGAS were holding further talks with the companies, in parallel with repayments, to "manage their expectations".

Egypt said in October it had repaid $1.5 billion of the money owed, leaving $4.9 billion outstanding.

But Dana Gas <DANA.AD> said on Wednesday it understood that about half that amount had been repaid, with $700 million more due by year-end.

It expects to get some of that cash and also plans to invest more than $350 million in Egypt over the next few years to drill new wells and redevelop existing wells.

BG Group's <BG.L> earnings have been hit hard by the turmoil as its production and exports of liquefied natural gas from Egypt have been disrupted.

"The Egyptians have paid a big tranche in September and have promised to repay more within a few months, but they have made similar promises in the past and we will have to wait till we see the money," a senior source at BG said.

The gas shortage has left the Arab world's most populous country struggling with blackouts that became almost daily over the summer. The government has also diverted gas away from heavy industries, hitting companies' performance.

Egypt began cutting subsidies on fuel and electricity in July as part of economic reforms aimed at curtailing its budget deficit and curbing growth in energy consumption.

(Additional reporting by Ron Bousso and Karolin Schaps in London and Matt Smith in Dubai; Editing by David Goodman and Susan Fenton).