Egyptian government hopes to attract foreign investment
The government is reforming the business climate to attract foreign investment — and it has gas and oil projects at the top of its wish-list
Egypt is trying to draw a line under the four years of instability which followed the 2011 uprising. Abdel Fattah al-Sisi, the former army commander who was elected president in May last year — the previous year he had deposed Mohamed Morsi, the Islamist leader who won the 2012 election — has a vision of an outward-looking Egypt, leading the fight against Islamist extremism. Foreign investment is to be encouraged with economic reforms and deregulation.
The country’s troubled gas sector — production is declining, exports have collapsed and shortages have developed inland — was an early target. Improved terms led BP to announce the go-ahead for its West Nile Delta development in March — a $12 billion investment which, on its own, will increase the country’s gas production by 25%. Soon after, Eni signed a framework agreement covering $5bn of investment in oil and gas developments over four years.
Key to the new investments is the authorities’ acceptance that the prices they pay producers for gas will have to rise. For many years there has been a ceiling of $2.65 per million British thermal units (Btu) — far too low a price to allow discoveries in the deep-water Nile delta area to be developed, and not even enough for some tie-in developments. Higher prices have been discussed for five years, but are finally being implemented.
Egyptian Natural Gas Holding Company (Egas), the state-owned gas company, signals it will now pay $3.95-5.88/m Btu for new agreements. In 2010, BP is said to have agreed to a ceiling of $4.10/m Btu for its West Nile Delta project, although this figure might now have been increased.
Agreements with other producers have been reported. In March, BG is said to have agreed to $3.95/m Btu for gas from new developments — up from the $2.65/m Btu it had been receiving — while DEA is said to have agreed to $3.50/m Btu for gas from the onshore Desouk licence — up from $2.50/m Btu — in return for increasing production in phases between now and next year.
The government has also been settling its debts with the producers for past gas purchases. In the latest, December 2014, tranche of repayments, the government paid the producers $2.1bn, by its account reducing the amount owned to $3.1bn — although summing the main producers’ figures for the amounts still owed points to a higher figure.
Meanwhile, the authorities have taken steps to check Egypt’s surging demand for gas. Consumption has doubled in little more than a decade, to 51.4bn cubic metres (cm) in 2013 according to the BP Statistical Review of World Energy, with demand swelled by subsidies introduced in the past to promote gas as an alternative to oil. But the subsidies had become a huge drain on government finances. They were cut sharply last summer, resulting in price rises of up to 75%, depending on industry.
The policy of promoting gas use instead of oil has justification. Egypt’s oil production, of about 700,000 barrels a day (b/d), is in gradual decline, while gas production has great potential for expansion.
LNG production amounted to only about 40% of capacity in 2013, and declined to little more than 10% last year
Over the first decade of the century, when the Mediterranean offshore was seeing considerable exploration, the country’s gas reserves more than doubled. With proved reserves of 1.8 trillion cm, Egypt has 40% as much gas as Algeria — but production, after increasing rapidly from the turn of the century, has declined in recent years. Output peaked in 2009 and by 2013 had lost nearly 10% at 56.1bn cm, according to BP’s figures.
BP’s West Nile Delta development, alone, will make a big difference to the gas balance. Production from two licences off the Mediterranean coast, North Alexandria and West Mediterranean Deepwater, is due to start in 2017 and should build up to 12.4bn cm/y — possibly with more to come from additional reserves which BP hopes to prove-up. The fields to be developed hold reserves of 142bn cm, together with 55 million barrels of condensates, while potential additional gas reserves are in the range 142bn-198bn cm.
The central field in the project is Raven, discovered in 2004, which lies 40 km offshore in 650 metres of water. Raven and the nearby Giza and Fayoum fields are to be developed as long-distance tie-backs to shore, with a new processing plant constructed for Raven, while Giza and Fayoum gas will be processed at the existing Rosetta plant, operated by BG. Also to be developed are the Taurus and Libra fields, which will flow through a subsea tie-back to facilities in the neighbouring, BG-operated, West Delta Deep Marine block.
BP’s partner in the development is DEA, formerly a part of Germany’s RWE but since early March owned by LetterOne, a Luxembourg-based investment company controlled by Russian entrepreneur Mikhail Fridman. In the West Mediterranean Deepwater licence BP has 80% and DEA holds 20%, while in North Alexandria interests are 60% and 40% respectively. BP says that overall it will have about 65% of the equity, and DEA 35%.
Confirming the Mediterranean’s potential, BP made another substantial gas discovery just after announcing the development project. The firm’s Atoll-1 well, drilled at a water-depth of 923 metres in the North Damietta Offshore licence, found 50 metres of gas payzone.
The well was drilled to a depth of 6,400 metres and is being drilled-on for another 1,000 metres — making it the country’s deepest — to test the reservoir found in the firm’s Salamat discovery, 15km to the south. BP is already suggesting that North Damietta Offshore could see the firm’s next large development in the country, tapping a possible 142bn cm of gas. The company holds 100% of the licence.
But until production can be stepped up, Egypt will be a gas importer. In early April, the Höegh Gallant, a liquefied natural gas (LNG) regasification vessel, arrived at Ain Sukhna port in the Gulf of Suez to start pumping gas into the country’s pipeline system. The vessel’s owner, Höegh LNG, says the ship has an output capacity of 15.6m cm/d or 5.7bn cm/y, and its tanks can hold 170,000 cm of LNG.
Since the beginning of the year, Egas has contracted 90 cargoes of LNG to supply the vessel in coming years. Trading company Trafigura will supply 33 cargoes, Vitol nine, Noble seven and Sonatrach six, all for delivery this year and next. In March, Gazprom signed a contract to deliver 35 cargoes — seven each year between the second half of this year and 2020. Talks with at least one other supplier are understood to be in progress.
According to plan, Egypt should by now be a substantial LNG exporter, instead of an importer. The country’s two LNG complexes, at Damietta and Idku, loaded their first cargoes in 2005 and were successful technically. There were plans for a second train at Damietta and multiple additional trains at Idku.
But, as gas consumption soared, the government put a brake on expansion plans — and then, when power cuts became necessary, started restricting the supply of gas to the existing facilities. LNG exports amounted to 15.0bn cm in 2006 — approaching the complexes’ capacity of 17.6bn cm/y — but declined sharply after a few years. In 2013, according to BP’s data, Egypt exported only 3.7bn cm of LNG.
The Damietta facility — owned by Segas, made up of Spain’s Gas Natural, 40%, Eni, 40%, Egyptian General Petroleum Corporation (EGPC), 10% and Egas, 10% — has been shut down completely since December 2012. After that length of time, the facility is likely to need considerable renovation when gas is eventually available for it. The single train has a capacity of 7.6bn cm/y.
The Idku complex — two trains of 5 billion cm/y each, operated by BG — continues in operation, although at very low utilisation and with one train shut down since last summer. LNG production amounted to only about 40% of capacity in 2013, and declined to little more than 10% last year — only five shipments of LNG left the facility last year, down from about 50 the previous year. Interests in Train 1 are BG, 35.5%, Petronas, 35.5%, EGPC, 12.0%, Egas, 12.0% and GDF Suez, 5.0%. Train 2 is owned by BG, 38.0%, Petronas, 38.0%, EGPC, 12.0% and Egas, 12.0%.
Meanwhile, the Arab Gas Pipeline, built to deliver Egyptian gas to Jordan, Syria, Lebanon and Israel, is virtually unused — the result of sabotage, as well as shortages. The pipeline had carried 5.5bn cm/y in 2009 and 2010.