Egypt's gas gold rush
February's oil and gas conference in Cairo attracted firms from around the world for one simple reason: Egypt's gas sector is booming
Hot on the heels of the Zohr offshore gas field — the biggest in the Mediterranean — coming on stream in record time in December 2017, there are rumours of still greater reserves at another offshore field, Nour, scouted by Italy's Eni last summer.
International oil companies (IOCs) continue announcing new finds, while Egypt used the conference and exhibition EGYPS to unveil a dozen exploration licences, its largest ever auction. Consultancy Wood Mackenzie calls it "Egypt's astonishing gas renaissance", estimating there is 61tn ft³ of gas reserves in existing fields with another 45tn ft³ waiting to be found.
Egyptians are adjusting to the new reality of their country, once an energy backwater, now the key player in the East Mediterranean gas gold rush. "What we have achieved in only three years has started to attract the attention of everybody. Everyone is looking to Egypt with interest," says Petroleum Minister Tarek el-Molla.
IOCs share his verdict. "Egypt is perfectly located to be a gas hub," says Maria Moraeus Hanssen, CEO of German producer Dea, which won one of the new concessions, an exploration licence in the Nile Delta. "It is the perfect place to develop gas, there is a lot of additional potential and it is a big domestic market."
Business was also brisk among oil services companies. "This exhibition is basically like speed dating, it's like 'here's my card, this is what I do,'" says Ewan Cameron, director of chlorine dioxide firm Scotmas.
Eni and Egypt decline to speculate on whether Nour, as rumours suggest, is greater still than the 30tn ft³ of gas in place at Zohr, but the upstream has never looked so promising. CEO Patrick Allman-Ward, of UAE-based producer Dana Gas, both plays down and plays up the prospects of finding gas in exploration drilling starting in April at North Arish in the Eastern Mediterranean. "It is not a dead cert for exploration drilling, we have a less than 50pc chance of success, but, in the case of success, we are looking at volumes of 4-6tn."
61tn ft³ — gas in place in existing fields
Shell, which accounts for 25pc of Egypt's gas output with 1.1bn ft³/d of production, is sinking new wells. A senior official with state firm Egas, unwilling to give his name for publication, cannot stop smiling, saying he is still getting used to the phrase 'Egypt: energy giant'. "All the people here are excited, we are trying hard to attract foreign investors."
There are two reasons for Egypt's gas boom, the first being galloping advances in technology. US independent Apache is scouring huge tracts of the western desert finding gas deposits undetectable 15 years ago. "We are going to propel the region forward as a regional hub," says the firm's senior regional vice president Grady Ables.
But the key reason for the gas boom is that Egypt's government has become serious about reform. Until 2011, Egypt's oil and gas industry puttered along under inefficient state control, the state-set price of $2.73/mn Btu a major disincentive for IOCs to go exploring. Then came the 2011 Arab Spring revolution, toppling president Hosni Mubarak.
In the post-revolutionary chaos an already creaking gas infrastructure started to crumble. Production fell and, with domestic demand rising, exports wilted and died. Egypt mothballed its two LNG export ports at Damietta and Idku. Militants staged multiple attacks on the Arab Gas Pipeline taking gas to Israel, and, with production needed at home, Egypt ceased deliveries.
Arrears to IOCs reached $6bn as political turbulence continued. In 2012, a Muslim Brotherhood government was elected, but could do nothing to halt the national malaise and it was turfed out of office a year later by the army after 2mn protesters took to the streets of Cairo.
What was termed a popular coup meant a return to military rule, the military being a state-within-a-state in Egypt. But when general Abdel Fattah El-Sisi was elected in 2014 he was mindful of the fate of fellow former general Mubarak. His answer to the national malaise, with widespread summer power cuts threatening more social unrest, was economic liberalisation.
Human rights groups were unimpressed after his crackdown on the media and the Muslim Brotherhood, with hundreds of activists jailed. The murder of Italian student and activist Giulio Regeni cooled relations between Rome and Cairo — though not between Eni and its Egyptian partners.
But, economically, Sisi began to earn plaudits. The IMF moved in with a $12bn loan conditional on economic reforms, starting with the oil and gas industry. Sisi's solution was privatisation. Out went the national oil corporation model popular across the Middle East, where Egas, Egypt's state gas holding company, ran the show. Instead, ambitious privatisation laws were enacted giving companies the right to trade in gas. IOCs, meanwhile, were offered new terms, allowing them to sell gas for the best price, rather than one stipulated by the state.
"It was a realisation, just after the Egyptian revolution, that they [the government] had to do something quick and drastic," says Mostefa Ouki, senior research fellow at the Oxford Institute for Energy Studies (OIES), in a recent podcast. "One of the key constraints were the gas prices paid to the IOCs. The price paid to those companies at that time was not attractive. So they revised the gas-pricing mechanism."
When Eni found Zohr in 2015 the government pulled out all the stops, with Wood Mackenzie noting that the 30 months from discovery to first production was the fastest for any similar field in the world. Asked to explain the speed, the Egas official smiles. "Sisi," he whispers. The presidential palace put a rocket under the country's normally cloying bureaucracy to get it done. "The point is, we were very badly in need of Zohr," he says. "At the time, we were importing gas at $250mn a month."
Egypt has also been repaying its IOC arrears, which have fallen from $6bn to $1.2bn, with the expectation they will be cleared by 2020. Rising production has seen Egypt cease importing natural gas, moving back into export territory.
The key reason for the gas boom is that Egypt has become serious about reform
Dumping state control in favour of something approaching a free market for gas makes Egypt a trail blazer says Ouki. "When you talk about the Middle East North Africa region it is one of the few countries, maybe the only one at the moment, which has taken those steps."
Privatisation is good news not just for IOC behemoths but also for service companies. Under the former state system, nobody cared much about gunk dribbling into the pipelines to impede and contaminate the flow. Now they do. British firm Process Vision is bidding for contracts to fit cameras at intervals along Egypt's pipeline access points, with film charting the dribbling flow of contaminants along the pipelines. It is a technology already used by the UK's National Grid, and Process Vision's managing director Paul Stockwell is in buoyant mood. "It's so new that nobody knows much about it, we see great potential in Egypt."
Yet, amid the optimism, doubts linger about whether Egypt's liberalisation will work. Cairo has clipped, but not ended, subsidies, wary of hobbling its 95mn population with higher electricity costs. That means holding down gas prices for power generation, which accounts for two-thirds of total domestic gas usage, to $3/mn Btu, below the cost of extraction. It has set up a new gas regulator, but there is no certainty that it has the will to enforce a level playing field and provide transparency. "Price structures are not completely transparent for an upstream investor," says Dea's Hanssen.
As for Egas, the executive insists it will abide by the rules that stipulate it is now just one firm among many. "We are a company now. OK, we are owned by the government, but we will be treated as a company in the gas market."
The other cloud on an otherwise bright horizon concerns whether Egypt can get gas to market at a competitive cost. The deepwater drilling of which IOCs boast adds to costs, as does the process of feeding gas through LNG plants for export, meaning it will cost Europe more than exports from Russia.
Optimists point out that the big growth market is Asia. China may be experiencing a slowdown, but other Asian economies continue to expand. Moreover, the world is building more gas-fired power stations as it turns away from coal and nuclear power. And some think Europe will welcome Egyptian gas even at a higher price than Russian gas, nervous about whether Vladimir Putin will use dominance as a political weapon.
"It is difficult to see LNG landed in Europe for less than $4/mn Btu, which is what the Russians say they can deliver for, but it's not just a question of lower price," says Allman-Ward. "It's a geopolitical decision on diversification of supply, there are [European] players that believe you cannot put all your eggs in one strategic basket."
Realise its potential: Egypt's offshore gas fields Source: Petroleum Economist