Egypt opts for pragmatism
The Egyptian government says it will pay more for gas produced from deep water. Will that trigger a new era of development in the country's offshore? Derek Brower reports
FOR SOME time, Egypt has been living off its reputation. Promises of further riches to be found in the Mediterranean deep water brought companies flocking to the country at the turn of the century. By 2005, Egypt had brought on stream two liquefied natural gas (LNG) plants and was hopeful that new capacity would follow.
Since then, the plans have stalled. The petroleum ministry's ambition to see gas reserves of up to 120 trillion cubic (cf) proved by 2011 is ambitious, if not unachievable (reserves are around 70 trillion cf). The same is true for its goal of doubling LNG exports. Capacity is already a respectable 12.2m tonnes a year (t/y) from three trains at two plants. Doubling that would make Egypt one of the world's top-five LNG exporters.
With a population of over 80 million and an economy growing at almost 7% a year, according to the World Bank, demand for gas in Egypt alone ought to provide the incentive for the country's deep-water developers. Accurate supply and demand figures from Egypt are notoriously hard to source, although Middle East Economic Survey estimates gas consumption doubled between 2000 and 2007 – it now stands at around 1.56 trillion cf/y. Yet the successes of a few years ago – when the UK's BG alone successfully drilled 19 exploration wells in the West Delta Deep Marine (WDDM) concession – have scarcely been repeated.
A policy problem
For the operators in the sector, the problem has been the country's energy policy. With an eye on domestic needs and the legacy of future generations, energy minister Sameh Fahmy famously said Egypt's gas must be divided three ways: a third for domestic use, a third "for our children" and a third for export. Yet subsidies for domestic gas use continue to mean rapid growth in demand among the country's industrial and domestic users. "Clearly, one third can't meet Egyptian demand, so they've had to borrow from the future generations' reserve," says one analyst. At the same time, drillers in the country's upstream also know that only a third of a given discovery may be devoted to Egypt's LNG export business.
Meanwhile, the cost of inflation that has bedevilled the oil industry across the world is also squeezing international oil companies (IOCs) in Egypt, where the price the government offers for gas found in the costlier offshore regions have often made projects unattractive. BG, it is understood, would like to invest up to $1bn upgrading its 0.8bn cf/d Rosetta development. It came on stream in 2001 and supplies the domestic market. But investing new cash has hardly been attractive given the low price on offer – around $2.65/m Btu. That kind of lukewarm enthusiasm in the sector has been around now for several years and is one reason why the most recent licensing round, in 2006, ended as a damp squib.
But change is afoot. Lobbying by IOCs yielded one success last summer, when the government agreed to increase the price state-owned Egyptian General Petroleum Corporation pays BP and its partner RWE Dea for gas produced from two licences in the Nile Delta: West Mediterranean Deep Water and North Alexandria. For gas produced in the shallow waters to 2009, the companies will continue to receive $2.65/m Btu. But that will increase in stages to up to $4.70/m Btu for gas from deeper waters.
At the time, Fahmy said the arrangement would be extended to other operators in the country's offshore. Last month, the government kept its word, endorsing a maximum price of $3.95/m Btu for gas produced from five other concessions, including RWE's North Idku, Eni's and Hess' North Bardawil and West Mediterranean Block 1 and BG's Rosetta and WDDM projects.
While no one thinks the increase in prices will help Egypt firm up 120 trillion cf of reserves by 2010 – "a number pulled from the air," according to one analyst – it will be welcomed by the companies that have been lobbying the government to move in that direction for years. Craig McMahon, an Egypt analyst at Wood Mackenzie, a consultancy, says the new prices reflect the government's pragmatism. Look around the world at the actions of other governments in the energy sector, he says, and Cairo's willingness to listen to the IOCs is an encouraging sign.
At the same time, says Bill Farren-Price, an analyst at Medley Global Advisors, there was not much else that the government could do: "The sector had been grinding to a halt." Indeed, natural gas in Egypt is becoming something of a premium. Already, plans to export more through an extension of the Arab gas pipeline – which supplies 39bn cf/y to Jordan – are on the back burner. More speculative plans, such as OMV's ambition to import Egyptian gas through its Nabucco pipeline project to central Europe, are out of the question.
Beyond supplying the domestic market, the biggest hope of operators in Egypt's upstream is to find sufficient gas to support another LNG train. Of the two existing plants, at Idku (ELNG) and Damietta (Segas), it is the second that is attracting most attention. That reflects the diverging upstream fortunes of the two companies that are racing to find enough gas to support a new train.
BG has long hoped to develop a third train at ELNG. But since finding enough gas to support the first two trains, it has not met the same upstream success. The company's decision to pull out of Israel could free up to 1 trillion cf for sale to the Idku plant (see box), but that would account for only a third of the gas needed to support a new train.
BP, meanwhile, hopes its recent discoveries will prove sufficiently large to support its plans to develop a second train at Segas. In January, the company announced Satis, a "significant" gas discovery in the North El Burg concession it shares with Eni, in the Nile Delta, some 50 km north of Damietta. The find was BP's second large discovery in the Nile Delta in a year. The Giza North-1 well in Taurus, announced in 2007, and Raven, found in 2003, are both within the nearby North Alexandria A concession the company shares with RWE Dea.
Giza-1 could hold 1 trillion cf. But BP has not said yet what volume of gas it has found in the other two fields. Local reports put Satis at 1.3 trillion cf. Raven, according to rumours, could hold as much as 5 trillion cf. With an estimated 3 trillion cf needed to support a second train at Segas, the recent discoveries could put up to 7.3 trillion cf at the company's disposal. But subtract two-thirds for Egypt's domestic use and that still leaves BP short of the necessary volumes to support a new facility in Damietta.
That could change if companies show more enthusiasm to explore, now that the government has offered them higher returns on any gas they find, says Samuel Ciszuk, an analyst at Global Insight, a consultancy. "The initial signals [from the companies] have been positive." And he points out that the government has also begun to phase out some of the subsidies in the domestic market, which, eventually, could add more incentives for operators.
Yet even if the companies are willing to drill again, the prospects for more success will depend on two other factors: whether there is much more gas to find; and whether rigs can be brought in to find it.
BG drops Israel
BG HAS closed its office in Tel Aviv and ended negotiations with the Israeli government about the sale of 1 trillion cubic feet of natural gas from Palestinian Authority waters to Israel. The company says it is now looking at other ways to monetise its reserve, which is in the offshore Gaza Marine licence.
With negotiations between BG and Israel "definitely over", the company will most likely seek a way to export the gas to Egypt, where it might then help support construction of a third train at the Idku liquefied natural gas plant. The Palestinians had hoped to earn up to $1bn from selling the gas and will be eager to see BG find another way to monetise it.
BG said the main cause of the breakdown in negotiations was the inability of Israel and the Palestinian Authority to negotiate bilaterally. Despite guarantees to the contrary, Israel has been concerned that any money it would pay to the Palestinians for its gas would make its way into the hands of Hamas, the region's governing party. Israel considers Hamas to be a terrorist organisation.
However, it is also understood that Israel was unwilling to meet the price BG wanted for the gas. Negotiations between Israel and BG began again in earnest last year after the UK company said it was looking at options to send its gas to Egypt. With dwindling sources of its own to supply gas-fired generation, that forced Israel's hand. The government of Ehud Olmert lobbied the UK government to put pressure on BG.
"We have made best endeavours to come to an agreement," BG said last month. "But one of our most important prerequisites was for bilateral negotiations between the PA and Israel. It hasn't happened."
Herald of things to come
Wood Mackenzie's McMahon points out that it has not just been the low price of gas that has stymied deep-water exploration. Much of the good acreage has already been taken. Nonetheless, he is optimistic that the geology will support further discoveries. The significance of the Raven discovery was not just its size, but also its location. By finding gas in the Miocene, BP showed potential for discoveries at similar depths in Egypt's deep water. The discovery of Satis could also be a herald of things to come: BP drilled to a record depth for Egypt of 6,500 metres and found gas in the Oligocene for the first time.
More mundanely, however, like other countries, Egypt also faces the shortage of infrastructure necessary to keep exploration ticking along at pace. Shell's hopes of bringing on stream what it believes to be a big gasfield in the ultra-deep-water North East Mediterranean (Nemed) concession has repeatedly been delayed by the unavailability of rigs to drill it (one finally arrived last year). It does not expect production to start before 2011.
But analysts do not hold out much hope for the field. Farren-Price notes that a recent licensing round for Cypriot acreage close to Shell's Nemed concession drew little interest. Meanwhile, the company has dropped plans to develop a greenfield LNG project in Egypt and to develop a gas-to-liquids project in the country.
Whether sufficient new volumes of gas will be found to support more exports might be a question that troubles the companies hoping to acquire additional capacity on the lucrative LNG market. But for domestic users still accustomed to power blackouts, a more serious matter is whether Egypt will have enough gas to meet growing local consumption.
Price liberalisation in the domestic market might help constrain demand. (One analyst says the largest beneficiaries of low domestic prices have been billionaire petrochemicals and fertiliser industrialists.) Some attempts have been made to achieve this, with prices for industrial consumers to double in the next two years to $2.65/m Btu. But bigger rises, especially for non-industrial users, will not be popular and might undermine plans – supported by World Bank loans – to connect another 2 million households to the gas network in the next six years.
That leaves the government to foot the subsidy bill, calculated at about $3.5bn a year. One relatively easy solution might be to stop flaring 60bn cf/y of gas. Another, more expensive solution, however, was proposed last year by Gamal Mubarak and has the support of his father Hosni, Egypt's president: nuclear power. President Mubarak approved plans to build a string of 1 gigawatt plants in the country. Civilian-use nuclear technology has a bad name in the Middle East right now, but it might be a sensible strategy for Egypt.