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Eni's Zohr field discovery speeds Egypt's gas revival

The find of the Zohr field offshore Egypt has sharpened keen interest in the gas potential of the east Mediterranean

The find should help pull further investment into Egypt's resurgent upstream sector, boosting chances of finding further reserves urgently sought to meet growing domestic gas demand.

Zohr is Egypt's largest gas discovery, holding an estimated 30 trillion cf of gas in place and its production could be supplying the country's power, business and home requirements before the end of the decade. Eni has said it wants to fast-track the development, taking advantage of existing offshore and onshore infrastructure. The Italian company - which will take 35% of the gas with the government taking the rest - is aiming to deliver a development plan by the end of October.

Zohr's estimated gas would add almost 50% to the country's existing reserves and would be enough to meet Egyptian demand at current levels for 17 years, so it is little surprise that Eni's chief executive, Claudio Descalzi, was quick to describe the discovery as one that would "transform the energy scenario of Egypt."

Just how much of Zohr's gas will be producible will not be known until further drilling is carried out - the government has speculated the figure could be 75%. But whatever the amount, it is likely to be meeting much higher gas demand than current levels, when it comes on stream.

As the Egyptian economy expanded over the first decade of the century, gas demand soared. According to BP data, demand rose by two-thirds between 2004 and 2012 reaching 1.85 trillion cf, before easing back slightly to 1.7 trillion cf in 2014, as the country's economic and political travails took their toll. Now with the economy recovering, gas consumption is expected to start rising again, so Zohr's contribution is set to be a diminishing chunk of the whole as time goes on. 

Nevertheless, the find has the potential to be transformative for the Egyptian economy, eliminating the need for costly gas imports and meeting projected demand increases for several years, once it comes on stream. Meanwhile, demand, while still rising, is expected to be restrained somewhat by phased reductions in subsidies on consumer fossil fuel prices by the government, which should result in their near-total removal by 2019.

"With increased domestic gas prices, allied with the energy efficiency policies undertaken by the government to cap the growth in per capita demand, Zohr would go a long way to meeting Egypt's domestic gas demand," says a fellow of the Oxford Institute of Energy Studies, Justin Dargin.

Investment magnet

The Zohr discovery will also be a fillip to the other international explorers that have recently increased their investments in the country, following reforms in both the upstream sector and the domestic power market. Anglo-Dutch Shell and BP were among several firms to sign exploration deals in January. Eni itself signed a fresh exploration agreement with the Egyptian General Petroleum Corporation (EGPC) in June, worth $2bn.

This is a major turnaround, given the uncertainty hanging over upstream projects until recently, as heavily subsidised consumer gas prices and payment caps limited returns to developers. Several firms, including BG, also downscaled or ceased their activities as payments for production became erratic due to Egypt's foreign exchange reserve problems, hastening the country's rapid conversion from gas exporter to importer.

Egypt was forced to secure LNG imports and recently started importing gas from Israel - a country to which it had previously been exporting gas. It has also been in talks with both Israel and Cyprus over possible future imports from gas reserves in those countries.

While imports will continue to play a vital role in meeting domestic demand in the short term, rising production from Zohr and other Egyptian fields, together with the renewed interest in Egyptian gas, look set to render them unnecessary within a few years.

Growing confidence

Payments to producers are now more reliable, while significant reform of the power sector and rising domestic gas prices, mean the government can now offer radically better terms to producers, who can expect to receive up to $6/m Btu for gas from offshore projects under the new regime, compared to a $2.65 cap under the previous policy.

"The recent pricing reforms have illustrated to international energy companies that Egypt is serious about tackling its inefficient energy sector organization. The flurry of recent upstream deals adds significant weight to the fact that international energy companies are ready to do business with Egypt as they see the its recent policies as being quite supportive of increased upstream investment," says Dargin. "There are some slight modifications that can be implemented in the future, such as perhaps allowing energy companies to book reserves and take ownership of certain wells," he adds.

Egypt

Investors are hopeful that Eni's success and the return of big names to Egyptian upstream will build confidence in among financiers, for whom the country has been deemed a high political and economic risk until recently.

"You would hope Eni's find and this new activity will make access to capital easier for companies investing in Egypt," says the chief financial officer of UK-based Rockhopper Petroleum, Stewart MacDonald. His company recently bought two minority stakes in Egyptian onshore acreage from Australia's Beach Energy for $22m.

MacDonald says teaming up with two operators with long track records of working in Egypt and the Middle East helped mitigate the political risk of operating in onshore Egypt - Kuwait Energy is the operator of the Abu Sennan concession in the Western Desert, while Dana Petroleum is operator of the El Qa'a Plain concession in the Sinai Peninsula.

LNG export uncertainty

The Egyptian government's assertion that all of Zohr's gas will be heading to the domestic market seems to preclude directing some of the reserves to Egypt's under-used LNG plants should a pick up in LNG prices make that look attractive in the future.

Eni's Damietta facility has been dormant since 2013, while Idku's output has been severely constrained by the government's decision to redirect gas to the domestic market as well as by payment disputes. However, the government has indicated that the LNG plants could find extra supply by absorbing excess gas production from the country's neighbours, as part of efforts to turn Egypt into a regional gas hub.  

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