The faster-than-expected decline of gas output in 2015, highlighted by petroleum minister Tarek El-Molla in a recent speech, may be a misleading indicator of where Egypt’s energy sector is heading. The low level of production today and the minister’s muted expectations for production in 2019 have provoked widely varying assessments of whether the country can ever attain self-sufficiency, let alone start exporting again. In the long term, there is a chance that fresh reserves may be found in the prospective but unexplored parts of the deep-water Nile Delta – a western segment of which may be offered in a licensing round by Egyptian Natural Gas Holding Company (Egas) this year. But for now speculation is centred on the question of whether output reductions reported by companies such as Eni in recent years are solely the result of natural reservoir declines, or if they are partly caused by commercial decisions to hold back investment.
In late May, Molla said he expected domestic gas production to reach 5.5-6bcf/d by 2019, when production will have started from Eni’s Zohr, BP’s West Nile Delta and the latest phase of Shell’s West Delta Deep Marine. Together, these developments plus some smaller fields are expected to add approximately 4bcf/d of new production (AE 322/12, 320/13, 307/1). Some observers have extrapolated from Molla’s forecast an implication that the base of existing production will more than halve from about 3.9bcf/d currently to 1.5-2bcf/d by the end of the decade.
One pessimistic Egyptian gas expert consulted by African Energy said he was “surprised” by Molla’s estimate, which he believed was on the high side. He said that output of 5bcf/d in a few years’ time was optimistic. Expressing doubts about the ability of planned developments to do much more than mitigate current declines, he said that “while the current production is declining, production will not get anywhere above 4bcf/d. Even if they discover more gas, they will not be about to develop it quickly enough. If you do the simple maths, you can see that 2022-23 production will be very limited except for new developments such as Zohr, Atoll and smaller fields. But these will not change the picture.”
The downbeat assessment was supported by reporting on output from the offshore Baltim, North Port Said, Ras El-Barr and El-Temsah fields in the recently published Eni 2015 Fact Book. The combined gas output from these fields fell from 1.8bcf/d in 2014 to 1.45bcf/d in 2015. However, extrapolating this decline into the future may not take account of the new commercial incentives the government has introduced into the sector. Observatoire Méditerranéen d’Energie (OME) hydrocarbons division director Sohbet Karbuz told African Energy that a fundamental commitment on the part of President Abdel Fattah El-Sisi underlies the likely mitigation and eventual reversal of recent production declines. Sisi is “micro-managing” the energy sector and “is doing everything to avoid gas or electricity shortfalls in Egypt. Electricity is the number one priority. In order not to have any shutdowns they will not be reluctant to pay as much money as is required,” he said (AE 302/8).
Vital practical steps taken by the Ministry of Petroleum in recent years include the revision of the production-sharing agreement model and the renegotiation of prices on a field-by-field basis (AE 312/15). This is still going on. For instance, in early June Apache Corporation and Shell agreed with the ministry to increase the sale price of gas from the Apollonia field in the Western Desert from $2.9/mBtu to $4.6/mBtu. The top price agreed by the ministry for offshore gas is $5.88/mBtu.
However, even Apache’s new price is higher than the current European Union natural gas import price which fell below $6/mBtu at the beginning of this year, reaching $4.04/mBtu in early June, with little prospect of increasing substantially for the foreseeable future.
Karbuz said: “Besides agreeing to higher prices for new gas developments, the Egyptian government has also modified other terms in its contracts with IOCs [international oil companies]. For instance, upstream companies are now able to offset signature bonuses against any arrears they are still owed by the government for their output. With more favourable conditions, especially enhanced gas pricing policy, exploration, discoveries and field developments found a new impetus for the last few years.”
He added: “It is much more profitable and beneficial for foreign companies to increase production in Egypt today and also in the near future. They cannot earn that much anywhere else.”
IOCs still keen
The result is that most IOCs who can afford it still want to be involved in Egypt, despite the appearance of dwindling reserves. The key problem for such companies is currency availability and the high probability that Egyptian General Petroleum Corporation will continue to delay payments to IOCs despite its commitment to pay down the arrears. However, to the extent that recent production declines are the result of IOCs’ reluctance to invest because of doubts over low prices and debt repayment, that trend is now reversing (AE 324/1).
Natural declines, especially in the offshore fields, will continue until the first of the large-scale development projects reaches first gas, but once this happens, “the incremental production increase will be much higher”, Karbuz forecast, saying that the OME expects Egypt to be able to export small quantities of gas – probably by pipeline to Jordan – by 2022 and even to be exporting some LNG quantities by 2024. Up until this point, the large and growing fleet of gas-fired power stations will be dependent on relatively expensive LNG imports from two floating storage and regasification units (FSRUs). This is not a stopgap. The government is now planning to commission a third FSRU. In late May, an Egas official said the company would tender in early June for the import of ten LNG cargoes to be delivered in July and August, with a further ten cargoes envisaged after that. Paying for this will not be easy, even with President Sisi’s backing. “They decide what they are going to import and then decide how they are going to fund it,” said the Egyptian gas expert.
“The issue is that everybody is very concentrated on Zohr. It is an important field and maybe it will start producing at the time they have announced.” But other potential sources of additional production must also be factored in, said Karbuz. There is also the – still theoretical – prospect of new gas reserves being discovered.
As well as important exploration prospects in deep offshore areas licensed to BP, Eni and Edison in recent years, there is a large area in the western part of Egypt’s Mediterranean offshore, which represents around 50% of its Exclusive Economic Zone, where the seismic and geological data are very poor and where no exploration has taken place. Egas had intended to commission multi-client seismic and prepare the blocks before offering them in a bid round, but African Energy now understands that IOCs may be invited to do the work themselves and that opportunities in this area may be offered in a licensing round later this year.
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