As firms flock offshore Egypt, can the nation reverse its energy fortunes?
Egypt’s recent signing of three exploration agreements with Total, Eni and BP are just the latest in a flurry of offshore activity following a major gas discovery by Eni in 2015. The Egyptian government is keen for the country to prosper from its resource wealth, to repay mounting debt and end a reliance on energy imports, but what potential still resides in the region and will the risks for investors be worth the rewards?
Outside of OPEC, Egypt is one of the biggest oil producers in Africa. Yet the country has often swung from being a net exporter of oil and gas to a net importer, and since the political unrest of 2011, it has largely remained in the latter category.
Today the country needs to end its reliance on costly imports, but also attract foreign investment to pay off mounting debts it has accrued with foreign firms, including Shell, which reached $3.5bn by the end of December 2016.
But the government has a lot to be positive about. The discovery of the giant Zohr gas field offshore Egypt by Italian-Eni in 2015, and subsequent gas finds by BP and Eni in Egypt’s Nile Delta in 2016, have piqued the interest of foreign firms and the country's energy ministry announced in December 2016 that Total, Eni and BP had all signed new exploration agreements worth around $220m.
“Signing the three agreements is the result of a global bid launched by the Egyptian Natural Gas Holding Company for gas and petroleum exploration,” Egyptian Minister of Petroleum, Tarek El-Molla, said at the time, according to the Daily News Egypt.
BP chief executive Bob Dudley said at a 2016 conference that the company is investing more money in Egypt in 2016–2017 than in any other country. The British firm has been present in Egypt for over half a century. In November 2016, it acquired a 10% stake in the Zohr field, which holds reserves estimated to be around 850 billion cubic metres (bcm).
The Nile Delta project it is involved in is expected to come online later this year. The project has 5 trillion cubic feet (tcf) of gas resources and 55 million barrels (mb) of condensates. The company’s other offshore Egypt assets includes the North Alexandria Concession and the West Mediterranean Deepwater Concession. In 2015 the company increased its interest in both by 22.75% and by 2.75% respectively.
A positive outlook on Egypt
Senior director of IHS Upstream Research and Consulting, Graham Bliss, says the existence of a high-quality hydrocarbon basin, a growing domestic demand for gas, available skills and a desire by the government to see new sources of gas be developed are just some of the reasons companies are bullish on Egypt.
“The country offers very competitive pricing for operational support due to highly qualified Egyptian staff and the existence of domestic Egyptian service companies,” Bliss says.
Production from Zohr and the new fields discovered in the Nile Delta are expected to exceed current domestic demand when they come online later this year, freeing up opportunities for gas exports also, which will most likely be in the form of LNG.
“The advantage that Egypt has over other new projects is that the Egyptian LNG liquefaction plants are already in place,” says Bliss.
However, there is a concern of an oversupply in the market. “From the Zohr play and other new Egyptian deepwater discoveries, such as Leviathan [Israel] and Aphrodite [Cyprus], where will this gas find markets – Egypt, Turkey, Cyprus or in wider Europe?” Bliss asks, adding: “This is the overriding question surrounding the jigsaw of possible outcomes in the Eastern Mediterranean – access to markets is key.”
Yet Egypt is well positioned in the region. The Suez Canal gives the country access to Asia and the Mediterranean access to Europe. “Pipelines could be laid, albeit at higher cost, but some of it will be done through shipping,” says senior expert at NRG Expert, Edgar van der Meer.
Investment could be hindered by political instability. In 2011, the country went through what became known as the ‘Arab Spring’, a series of popular pro-democratic uprisings in Arab nations. Six years on, Egypt has returned to relative stability under Abdel Fattah el-Sis, but political volatility will always remain a risk factor for companies operating in the region.
Yet firms such as Apache, the largest oil and gas producer in Egypt, and BP did not stop working in Egypt during these uncertain times.
“This is the Middle East, there will always be geopolitical tensions, but the larger international oil and gas companies are experienced in managing a multitude of both above-ground and below-ground risks, as long as they know what they are,” says Bliss.
Currency fluctuation, the financial solvency of existing companies already active in Egypt and any partnerships foreign firms might need to undertake, are all risks that will need to be assessed by companies trying to enter the market, says Van der Meer.
How much opportunity remains?
BP, Eni and Total have been busy snapping up acreage, so how much opportunity remains?
“Most of the attractive areas are tied up by a small number of large companies; opportunities for others to muscle their way in may be limited,” says Bliss. “The narrow access to quality acreage is a challenge that inhibits attracting more investment into the country.”
Furthermore, to maintain momentum and attract further investors, Bliss says the government needs to provide a gas price that enables deepwater projects to be economic. “The current price ranges from $4 to $5.88 per 1 million British thermal units (BTU), and will not exceed this range under the current terms,” he says.
However, according to Adam Pollard, an upstream analyst at Wood Mackenzie, who spoke to the Financial Times in December last year, the outlook for gas prices in the region can be considered good.“Egypt it is different, because the gas price for newer contracts is relatively high and you are insulated because there is a price floor and a ready market,” he said. “EGAS [the state gas company] is willing to negotiate the price to encourage investment, meaning that Egypt is bucking the global trend of reduced spending.”
To create further security for investors, Bliss adds, “the government could open the gas market to allow direct access to the domestic user sectors, to industry for example, and encourage ongoing growth in domestic gas usage, at the same time removing subsidies”.
Presently, Egypt uses more oil than gas for energy production, which is likely to change considering its abundant natural gas reserves.
The future of offshore Egypt
Egypt’s debt, slowness at making payments and potential political instability do not appear to be a deal-breaker for those firms experienced in dealing with such risks.
Even smaller companies exploring in the region are optimistic there will be new gas finds.
Marc Benayoun, chief executive of Italian energy group Edison, which is exploring areas near the Zohr field, told Reuters in February: "We find here [in Egypt] there have been very competitive costs and operating costs in a context of volatile prices. This is an area where we think we will continue to make investments and develop, as opposed to other regions which are higher in cost.”Certainly, Egypt can be a challenging environment for investors. But as resources are gradually diminishing elsewhere, it offers an exciting opportunity for oil and gas companies, as well as a potentially rewarding investment in terms of available infrastructure, local talent and gas markets.