Issue 137 • 25 April, 2008

Abu Qir bidding points to intense competition for gas reserves to feed domestic and export demand

The race for a stake in the Abu Qir gas field, plans for a second LNG train at Damietta and fresh investment from Italy show that Petroleum Minister Sameh Fahmy’s willingness to negotiate higher prices for gas sold locally has won Egypt renewed favour with IOCs – but the price to pay is a growing subsidies bill, writes Nadine Marroushi.

Gas reserves estimated at 72.3trn ft3 and its generally business-friendly environment mean Egypt is perceived as an attractive location for international oil companies looking at North Africa and the Mediterranean basin. But in a partially reformed economy a requirement that two-thirds of production be sold to the government, which it then sells on to the local market at a subsidised rate, has meant that past E&P agreements have not necessarily been commercially viable, particularly in deep-water offshore exploration where most of Egypt’s gas reserves are located.

Until March, the government had capped the price it buys gas from IOCs at $2.65/m Btu. With the rising cost of developing gas fields, lobbying by IOCs – some of whom boycotted licensing rounds – and the need to supply growing consumption rates, the government finally agreed to pay higher prices for natural gas to oil companies with prospects in the Mediterranean, which holds an estimated 78% of Egypt’s gas reserves (AE 133/19).

An upsurge in upstream activity has followed. Petroleum Minister Sameh Fahmy told the 20-22 April International Energy Forum in Rome that the race to develop the Abu Qir gas field was now between BG Group, which produces 40% of Egypt’s gas supply, and Edison, Italy’s second-largest power group. Abu Qir has attracted considerable international interest, with IOCs including RWE Dea lining up to bid for the redevelopment of the gas field, where state-owned Egyptian General Petroleum Company (EGPC)’s output has been in decline – from a peak of 170m ft3/d in 1993, production is now estimated to be running at around 130m ft3/d. The contract is expected to be awarded in June (AE 135/19).

The plan is for a major international operator to drill more wells and increase gas output, which would ideally be enough for domestic and export needs. According to various estimates, Abu Qir – which is close to Alexandria and the Idku LNG train – holds reserves of 1trn-2.5trn ft3, in one of Egypt’s oldest natural gas fields, discovered in the mid-1960s. In recent years, it has suffered from declines due to field maturity. Some additional fields around the original Abu Qir field were developed in the 1980s and 90s.

Where will the gas go?

How the Abu Qir gas will eventually be used is the subject of much debate. In Rome, Fahmy said export was one option for the field, but despite its proximity to Idku continuing high-level talks about adding a second train at Damietta meant it was still unclear where the gas would go. Abu Qir is already being tied into the national pipeline grid giving planners considerable flexibility.

Idku’s chances of securing the gas would rise were BG to win the contract, since it has been eager to add a third train at facility. BG Egypt president Ian Hewitt told last year’s Intergas conference in Cairo that a third train would be added to the Idku facility by 2010 (AE116/5). The Idku site has space for up to six liquefaction trains – but BG has not of late enjoyed the same upstream success as it did to supply the first two trains, which are operated by Egyptian LNG Holding Company, in which BG and Malaysia’s Petronas each hold a 35.5% stake, EGPC and state-owned Egyptian Natural Gas Holding Company (Egas) have 12% and Gaz de France the remaining 5%.

New major gas finds by Italy’s Eni and BP have given justification for another train at Damietta instead (AE 132/19). But this does not mean BG’s plans at Idku have come to an end, particularly after the collapse of its gas sales to Israel. BG had planned to sign an agreement for the sale of 1.5bn m3/yr of gas from acreage off Gaza, Palestine, to Israel, but the UK-based company pulled out after talks with the Israeli government over the sale of natural gas from the Gaza Marine field collapsed. Since BG still holds the licence for the Gaza Marine field, suggestions have been made that the gas will be shipped to Egypt for conversion to LNG and exported to Europe or the United States – providing the geopolitical situation allows for this.

Domestic needs

Supplying the domestic market is another option for the Abu Qir field, particularly with increased calls from the Egyptian parliament to use gas finds for local needs. According Cairo-based investment bank EFG Hermes’ latest figures, production of natural gas in 2006-07 (fiscal year to end-June) stood at 41.3m t/yr, while consumption was 27m t/yr.

The tightness in supplying the local market is suggested as a cause of delays for signing off the second train at Damietta. Wood Mackenzie’s Egypt analyst Ross Millan told African Energy: “BP and Eni are continuing to explore to prove the volumes required, but how much can be exported versus how must goes to the domestic market is still being wrestled with by the Egyptian parliament. Initially, they estimated that 50% would be for export and the remainder for domestic supply, but this was then changed to only one-third for export.” Millan argued: “The fact that exploration efforts are ongoing suggests that Damietta 2 will not be sanctioned without further success.”

Eni said in February that it planned to go ahead with a second train at Damietta, which would have a capacity of 5m t/yr, following the latest gas find in the Nile Delta, including the Satis well and other discoveries over the last two years (AE 132/19).

Italian investment

Italy has become a major investor in the Egyptian gas sector, where Eni is a leading producer through its International Egyptian Oil Company subsidiary. Were Edison to win the Abu Qir bid this would add another major Italian player to the scene. But most recently it has been Enel, Italy’s largest and Europe’s second-largest utility, that has made headlines – in April signing a gas exploration agreement and agreeing to sell gas jointly with Egas in all Enel’s markets, which includes Spain, Egypt’s largest export market. Enel operates in 21 countries in Europe, North America and Latin America.

Fahmy told a signing ceremony the deal would “encourage the contribution of Enel to support the growth of our energy sector and it will open the door to Egas to expand its presence in the international gas market.” Reuters has reported Enel chief executive Fulvio Conti said that the company will be supplied with at least 1bn m3/yr under the deal, and will invest around E1bn in Egypt where it will participate in one or more gas fields and take a stake in an LNG plant. There are suggestions that Egas will also supply an 8bn m3 LNG import terminal in Sicily. However, Enel’s foreign media head Roberta Vivenzio declined to approve these comments or provide further details.

Italy imports about 85% of its natural gas; its major suppliers are Algeria and Russia, and it is now looking to diversify. The Enel signing followed the visit of a large Italian mission, which brought 300 business representatives to Egypt in mid-April. Deals were signed across a range of sectors including energy, infrastructure, logistics, engineering, food and textiles.

Tackling subsidies

Egypt’s energy subsidies continue to expand, despite moves to cut them out for energy intensive industries. According to EFG, the expected spend on energy subsidies in FY2007 is around E£57bn ($10.6bn), which is an increase on the previous year from E£40bn. And it is expected to rise to around E£63bn in FY2008.

The high global price for energy is one factor affecting the subsidies bill, as is the increase in the prices of gas sold by IOCs to the government. This means that Egypt’s budget deficit won’t be reduced by next year, as the Finance Ministry, led by Yousef Boutros Ghali, has planned. The deficit stands at 6.9% of GDP.

A timetable was revealed by the government last September to gradually phase out subsidies for around 40 industries, including cement, fertiliser and petrochemicals, over three years (AE 122/1). But, according to EFG Hermes economist Simon Kitchen, this has been revised. He told African Energy: “Industrial users won’t be getting any subsidies by this time next year.”

Another change in the local market is that industrial users are starting to buy gas directly from the IOCs, albeit in very small volumes. For example, because of high fertiliser prices, companies are looking to increase their production, and although they have guaranteed supply agreements from the government, the extra gas needed is coming directly from IOCs.