BP deal suggests end to Egyptian gas-export freeze
A ground-breaking deal with BP makes way for development of the Raven gasfield – and might mark the end of Egypt's two-year freeze on new gas-export agreements
EGYPT'S gas policy has taken a new turn. After a year of high-level negotiations with BP – including a meeting between outgoing chief executive Tony Hayward and prime minister Ahmed Nazif in January – the government has torn up the firm's production-sharing agreement covering the North Alexandria licence. A new 20-year agreement and higher selling prices should put BP in the driving seat for the development of vast new gas reserves off the Mediterranean coast.
The new agreement's main attraction is that it allows BP and its partner in North Alexandria, Germany's RWE Dea, to hold 100% of the production operation – a departure from the previous requirement that the state's Egyptian General Petroleum Corporation (EGPC) and Egyptian Natural Gas Holding (Egas) should have equity interests upstream. BP (60%) and RWE Dea (40%) will meet all exploration and development costs, and will sell all the gas produced to EGPC.
Prices under the new agreement will be related to Brent crude, but with a floor of $3.00/m British thermal units (Btu) and a ceiling of $4.10/m Btu. The range is a substantial increase on the previous agreement's $2.65/m Btu – Egypt's ceiling for onshore and shallow-water production, although prices extending up to $4.70/m Btu have been agreed for deep-water gas.
As well as allowing the development of the stalled Raven gas and condensate field – a 2004 discovery – and other finds in North Alexandria, the new arrangements seem certain to spark development by other companies. Exploration of the Mediterranean's Nile delta area – mainly by the UK's BG Group, Italy's Eni, BP and Shell – has yielded large gas discoveries, but, apart from in a few blocks, exploitation has been slow.
One problem has been the authorities' long-standing three-thirds principle for gas, under which reserves have been earmarked in equal proportions for the inland market, for export and for "future generations". This restriction, together with the low price being offered by EGPC, cut potential project revenues.
Meanwhile, because of the low inland prices, consumption has ballooned. According to BP's Statistical Review of World Energy, Egypt used 42.5bn cubic metres (cm) of gas in 2009 – up from 16.4bn cm 10 years previously, indicating an average annual growth-rate of 10%. With the country's oil output trending downwards, the government has encouraged gas use – applications include compressed natural gas for vehicles, although electricity generation accounts for over half of inland demand.
Because of that consumption growth, in June 2008 the authorities imposed a two-year freeze on new gas-export agreements. There has been no announcement that the freeze has been lifted – gas from the Raven field will be sold by EGPC in the inland market – but the volumes likely to be available from fields coming up for development will exceed local demand. Also, the government needs the revenue from new exports. It is running a budget deficit this year, in an attempt to maintain growth despite lower revenues from the country's three main external sources – oil and gas, the Suez canal and tourism.
Raven has been appraised and its development is understood to be ready to go – BP had originally wanted the field to be on stream this year, supplying a new liquefied natural gas (LNG) train at Idku. A subsea-to-beach scheme is envisaged – Raven is 40 km offshore, in water 650 metres deep – although the field's extreme pressure and temperature might create complications.
BP has indicated that Raven holds reserves of 113bn cm, but smaller fields in the area – discoveries include Polaris, Ruby, Libra, Fayoum and Taurus – could also be brought on stream once a pipeline is in place, raising the development's reserves to 142bn cm. Production will plateau at up to 10.3bn cm/y, after investments totalling $9bn, and first gas is due in late-2014. BP and RWE Dea signed agreements covering the development with the petroleum ministry and EGPC last month.
East of BP's fields is the West Delta Deep Marine (WDDM) licence, where BG has discovered 14 gasfields and produces from five – Scarab, Saffron, Simian, Sienna and Sapphire. It is now implementing Phase VII of its development in the area, designed to maintain output at the present rate. Gross contract volumes for the WDDM fields, together with that for the Rosetta field, in the adjacent Rosetta licence, total 24.55bn cm/y – equivalent to 39% of Egypt's total output last year of 62.7bn cm.
Just under half of BG's production is supplied to the inland market, with the rest sent to the country's three LNG trains. BG and Malaysia's Petronas are the lead companies in Egyptian LNG, which operates the two-train, 7.2m tonnes a year (t/y) export complex at Idku, supplied entirely by BG's fields. The other facility is the single train, 5.0m t/y Segas plant at Damietta, where Spain's Unión Fenosa and Eni are the lead companies (see Table 1).
Both complexes operate on a tolling basis, under which the contractor group owns the facilities and charges a tariff for processing gas owned by the upstream group, which retains ownership of the LNG. Both ventures have plans for an additional train. Cedigaz, a gas consultancy, says the two LNG facilities exported 12.8bn cm of gas last year – some way below the highest figure achieved, of 15.0bn cm in 2006, and indicating a utilisation rate of only about 75%. EU destinations accounted for 6.7bn cm of last year's output, Spain being the largest buyer, taking 4.1bn cm.
Accordingly to industry sources, the Segas facility has been operating below capacity at times because it has been short of gas. The plant was constructed on the basis of a supply agreement with EGPC, which draws the gas from the country's distribution system and has to accommodate shortages at times of peak demand. In contrast, supplies to the Egyptian LNG trains come from dedicated fields.
Pipeline exports rise
Meanwhile, Egypt's gas exports by pipeline have expanded sharply, to the point at which they are no longer minor compared with LNG. Last year, according to Cedigaz, pipeline volumes totalled 5.5bn cm – nearly double the previous year's flow. Destinations were: Jordan, 2.85bn cm; Syria, 0.91bn cm; Lebanon, 0.04bn cm; and Israel, 1.70bn cm.
Pipeline exports pre-dated the first LNG exports by 18 months, when, in July 2003, the Arab Gas Pipeline started delivering gas to southern Jordan. Since then, the line has been extended north through Jordan and as far as Homs in the mid-part of Syria, giving a total length of 975 km and an overall capacity of about 10bn cm/y. A westerly connection to supply Tripoli, in Lebanon, started up in September last year. Israel is supplied through a separate pipeline, which runs offshore from Arish to Ashkelon.
The next step, targeted for completion next year, will be to take gas to Turkey. Through the Syrian distribution system, Egyptian gas is already available at Aleppo, north of Homs and just south of the border with Turkey, so the Syrian and Turkish distribution systems are to be connected through a relatively short link between Aleppo and Kilis, in Turkey. Beyond that, there are plans for a direct link between Homs and Aleppo. This will allow the Arab Gas Pipeline to connect directly with the planned Nabucco pipeline, which would flow gas from Central Asia across Turkey, through eastern Europe, and to Austria and beyond.
However, it remains to be seen whether Egypt has sufficient gas to export large volumes to Europe, after meeting its likely internal requirements and the growing requirements of Jordan, Syria and Lebanon. Another consideration is that there might not be the political will to do so, given that an important objective behind the creation of the Arab Gas Pipeline was to raise Egypt's standing among the countries of the eastern Mediterranean, so supplies might be reserved for its neighbours.
Meanwhile, there are some questions about the extent of Egypt's gas resources. Official figures rise each year and indicate that reserves have more than doubled, to 2.2 trillion cm, over the past 10 years – but in some years the rises do not appear to correlate with known discoveries. Although exploration of the Nile delta basin has been highly successful, the deeper-water and western areas are still much more speculative.
But a positive view on Egypt's prospects came in May from the US Geological Survey, which published a geology-based assessment saying the Nile delta basin province could hold a mean of 6.3 trillion cm of undiscovered recoverable gas, together with 6bn barrels of natural gas liquids and 1.8bn barrels of oil. That's a lot of potential if BP's ground-breaking agreement leads to the freeze on gas-export agreements being lifted.