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Pharos’ main man goes back to the East Med future

The independent’s CEO was making oil discoveries in the Gulf of Sinai in the 1970s. Now he is back in the region

“We lit the flare on the oil discovery just as [former Israeli prime minister Menachem] Begin flew back to Tel Aviv following the peace treaty.” So says Ed Story, CEO of London-listed Pharos Energy, of his first experience of the Eastern Mediterranean upstream.

Now Story is back in the region, following Pharos’ 2019 deal for Merlon Petroleum El Fayum, which gives it production in Egypt’s Western Desert, and having taken exploration licences in Israel.

What attracted you back to the East Med? 

Story: We saw in the Merlon acquisition the potential to replicate what they had done—making a Western Desert discovery and subsequently selling that entity to [US independent] Apache, which generated Apache’s now dominant position in the basin. It had also been held in private equity hands and the owners, after they put it up for sale, were not as attentive as they could have been to best operational practice such as maintaining waterflood injection.

We then put together a consortium with [UK independent] Cairn and [Israel’s] Ratio to take eight exploration blocks offshore Israel. We have a longstanding relationship with Cairn and, as we do not operate in deepwater, we wanted someone like them who had that capability.

Pharos CEO Ed Story

Like most companies, you have had to change your plans somewhat in terms of capex, opex etc. And you have warned that this could lead to some short-term production declines in Egypt. 

Story: We are comparing investing in our Egypt assets to the fiscal terms that we have in Vietnam. There, we break even at $25/bl. So, if prices are above $40/bl, it is very attractive economically and would support further investment. But we took an opportunity during the downturn in pricing to seek, and we are hopeful of getting, an extension of the licence for the big field we have there. The Vietnamese authorities been very cooperative because they can see we will invest there in the future.

In Egypt, it has been more complicated and difficult because it is a regressive fiscal regime, in that operators bear a disproportionate share of fixed cost in a low oil price environment. This is not the case at different production-sharing contracts around the world.

But we are making some progress there with the fixed costs that persist no matter what the oil price might be, so that is a potential mitigating factor. At the same time, we are seeing what we can do to keep things moving without undertaking a massive investment programme.

If we had unlimited liquidity, we would do a massive investment programme because it is very clear what can be done with waterflood and very low-cost drilling. We could take the production rate up to 20,000bl/d over the next several years. It is very rare that you can do that anywhere, and that remains the fundamental objective.

So, we are trying to walk a fine line in seeing what we can do to have the terms made more realistic in today's environment and, at the same time, keep the asset afloat. It represents a very low-risk development and has significant additional exploration upside.

"In Egypt, it has been more complicated and difficult because it is a regressive fiscal regime, in that operators bear a disproportionate share of fixed cost in a low oil price environment"

One of our folks likened Egypt's onshore Western Desert to West Texas. It is not shale, but it is just as fragile in terms of low-rate wells, albeit much lower-cost wells than in shale. So, it is currently more about keeping it going and, at the same time, looking for mitigation in terms of the revenue-sharing or the net profit sharing with the government and seeing what can be done to grow it as soon as possible.

You were part of a consortium that was potentially interested in the Western Desert assets put up for sale by Shell. Why did you decide not to proceed? And is that the end of your Egyptian M&A ambitions?

Story: The market conditions at the time made the transaction just too big. There are several smaller producers that could look at M&A in the Egyptian market, perhaps with us at some point in time. We do not rule it out, but the challenge is finding the right fit. The Egyptian sector could do with a bit of consolidation, although it is hardly unique in that aspect.

If we move to your Israeli licences, are you expecting to find gas there?

Story: There is little doubt—there is always some in this business—that there are very large accumulations of gas in our blocks. A well was drilled there and we understand what they did and why it did not result in a very significant discovery. There has been a tremendous amount of 3D seismic acquired on the blocks; there are hydrocarbon indicators on the seismic; it is about as good as it gets.

There is no sure thing in this business, but I view it as a value inventory for the future when there is a greater demand and support for gas, either by pipeline or through LNG export facilities—including expanding those in Egypt.

Given the limited supply contracts signed for the Leviathan discovery, for example, relative to its size, is it justified to raise questions over export solutions for any Israeli gas exploration?

Story: Absolutely, and there are two aspects to it. Firstly, Israeli domestic gas consumption is obviously low and Tamar gas satisfies that with plenty to spare. On the other hand, looking forward, there is still a reasonable amount of coal-fired power generation in Israel which will disappear and be replaced with gas.

And, ultimately, Tamar and Leviathan phase two will not only send gas to Egypt but will also support additional LNG facilities. Yuval Steinitz, the minister of energy in Israel, is a strong diplomat and previously a minister for strategic affairs.

What is the logic of his appointment? He is a man who has worked with Israel’s neighbours, including the Arab countries, and he is the proponent of gas exports by pipelines. I think he has, single-handedly, been the catalyst in the whole [gas export] effort and we have not even begun to see the full impact yet. 

"There are several smaller producers that could look at M&A in the Egyptian market, perhaps with us at some point in time. We do not rule it out, but the challenge is finding the right fit"

Assuming your Israeli blocks yield gas to sell, do you have a ‘dream scenario’ for an export solution? If we assume Israel will never build liquefaction on its own coast, would you prefer brownfield expansion in Egypt, the Cypriot onshore solution or maybe even floating LNG?

Story: They would all work in the right sort of circumstance. FLNG may look prohibitively expensive. But if you look at the alternative gas price within Israel, domestic gas today goes for c.$6/mn Btu. Some of those contracts will likely drop down to $/4mn Btu and that then becomes the export level price for Leviathan gas.

So, if you have relatively unlimited gas supply and $4/mn Btu is the clearing price, you can justify a lot of things. You can maybe justify FLNG or you can justify more gas pipelines to, say, areas beyond Jordan or whatever. So, while the gas price may have tumbled due to the pandemic, the region’s gas could very well evolve positively in the future, for all the reasons that we know in terms of the environment, coupled with stability of supply and price effectiveness. 

Do you think that Chevron’s deal for Noble is a major confidence boost for the future of Israeli gas?

Story: From Chevron's perspective, Noble’s two cornerstones of US shale and Israeli gas are a good combination. And it is $5bn of equity to Noble shareholders at a time that they were taking a pause and a deep breath about what they were going to do with Leviathan-2.

One of the options for Leviathan-2 was discussion about FLNG. And the eight blocks we took could very readily tie in to Tamar and any gas could then go to shore or hook up in a different way.

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