Egypt's Era of Self-Sufficiency Nears

Egypt may be facing a widening gas deficit, but it has the means to turn a shortage into a surplus, if the right policies are adopted. Last year the government plugged the 7bn m³ shortfall in domestic production with imports of relatively expensive LNG, and the oil minister said recently that Egypt is facing an estimated $8bn on energy imports this fiscal year – a drain on the country. Without new oil and gas production this will increase.

Gas production could go down from a projected 42bn m³ this year – compared with demand of 52bn m³ – to 15bn m³/yr in ten years, as most of Egypt’s existing oil and gas wells are either at maturity or beginning to decline in yield. By that point, demand could be above 65bn m³/yr.

However, the giant Zohr field and a number of new gas-field developments, spurred on by the new gas prices negotiated recently between the Egyptian government and producers, are coming to the rescue, with the UK major BP and Italian Eni leading the way.

A combination of a switch to renewables, reduction of subsidies, higher gas prices and an awareness campaign by the Egyptian government on ways to rationalize energy consumption may also help stem the rampant increase in demand.

Egypt’s hydrocarbons are produced in: the Western Desert, Eastern Desert, the Mediterranean Sea, Upper Egypt, Nile Delta, Gulf of Suez, and the Sinai Peninsula. Gas reserves are expected to grow mostly due to discoveries in the Mediterranean and the Western Desert. While Zohr has grabbed the headlines, most of Egypt’s oil and gas is produced from relatively small fields that are tied into regional gathering systems.

Egypt has revamped its energy sector strategy and is on a drive to increase oil and gas production. It is dealing with the crippling problem of energy subsidies, it is signing new exploration contracts, and has renegotiated new and higher gas prices, between $4 and $5.88/mn Btu that have prompted gas companies to speed up project development.

BP, Eni and others operating in Egypt stand to gain from this new pricing regime, which has become a massive incentive to develop new projects. And with a gas-hungry domestic market, they do not have to look far or hard to find end-consumers. Through its unused LNG plants, Egypt also has the capability to export excess production. Provided also the security and fiscal situation improves, so that Egypt can catch up and keep up payments for gas, producers have huge growth potential there.

New gas projects

Last year, Eni announced the discovery of the giant 100 km² gasfield Zohr, in the Shorouk block about 190 km offshore and close to the border of Egypt’s exclusive economic zone with Cyprus. Zohr was drilled to a total depth of 4,130 m, in 1450m of water. It is estimated to hold about 850bn m³ gas. This was confirmed by the first two appraisal wells just completed, which showed there may even be as much as 20% upside in comparison to original estimates. Zohr was discovered in a Miocene carbonate formation with excellent reservoir characteristics with a 630 m hydrocarbon column and 400 m net pay.

Eni plans to drill six appraisal wells by the end of the year, including a dedicated well to test out a deeper Cretaceous prospect. Based on evaluation of seismic data, Eni indicated that this may hold another 280bn m³ of gas.

Encouraged by an attractive gas price of $5.88/mn Btu, Eni and the Egyptian government agreed a fast-track development plan that will bring Zohr online by the end of 2017 with an agreed initial production of 10bn m³/yr, to reach a plateau of about 27bn m³/yr when full production is achieved by 2019, for a total investment of about $12bn. Eni’s CEO Claudio Descalzi confirmed that civil works have already started and said Zohr gas will be "mainly sold on the Egyptian market." But he noted that Egypt's two LNG export terminals have enough spare capacity to enable some Zohr gas to be liquefied for export, especially if Eni discovers more gas beneath Zohr.

Eni, as the operator, and BP are also expanding development of Abu Madi West block in the Nile Delta through Nidoco North 1X in the Nooros prospect, having been successful with Nidoco NW3 late 2015. They plan to increase output this year initially to 45,000 boe/d and later to 60,000 boe/d by drilling additional development wells. Eni has also identified significant additional potential in this area, which will be tested with two exploration wells.

The $12bn West Nile Delta (WND) Project involves the development of gas and condensate fields located about 65-85 km off the coast of Alexandria. BP, as the operator, and DEA – now owned by Russian investment vehicle Letter One – have started work on phase I, which involves the development of five fields: Taurus, Libra, Giza, Fayoum and Raven. They are to produce over 140bn m³ of gas and 55mn barrels of condensate. First production is expected to start in 2017, with peak production expected to reach 12.5bn m³/yr of gas, which is about 30% of Egypt's present gas production.

WND also includes other discoveries: the Maadi, Viper, Ruby, Polaris and Hodoa fields, which will be further explored and developed in later phases. These are expected to produce another 140bn m³ to 200bn m³ gas, potentially adding another 12bn m³/yr to 16bn m³/yr to the Egyptian gas grid.

BP is also accelerating development of the 42bn m³ Atoll gasfield in the North Damietta Offshore Concession in the East Nile Delta, with production expected to start in 2017. This is expected to add another 2.5bn m³/yr to Egypt’s gas grid.

With a market for its gas assured, and at attractive prices, BP plans to also step up investment in its existing operations through its joint ventures with Gupco in the Gulf of Suez and the Pharaonic Petroleum Co (PhPC) in East Nile Delta, as well as continuing to progress its exploration program in the Nile Delta. BP with its partners now produce 30% of Egypt’s gas and it expects to more than double this over the next four years.

BP’s North Africa regional President Hesham Mekawi said in an interview with Reuters that future discoveries will revive the Damietta LNG plant, and allow restart of Egyptian LNG exports. He added "There is still a lot of gas to be found in Egypt in the Mediterranean."

Another successful operator in Egypt is Apache with major presence in the Western Desert. It operates there through its JV company with state Egas, Khalda Petroleum, and raised gas production to close to 9bn m³ in 2015. Apache allocated close to $1bn last fiscal year to drill 94 development and exploratory wells.

Apache, through Khalda Petroleum, has also embarked on a shale gas exploration programme in the Western Desert through a JV with Shell as the operator. Three wells will be drilled at the field by June, when Shell and Apache will discuss the full-scale development of the project with the Egyptian government. Initial indications are good.

Dana Gas Egypt and its partner BP successfully drilled Balsam-2 and Balsam-3 wells onshore Nile Delta in 2015, discovering more gas reservoirs. In addition to Blocks 1 and 3, Dana Gas also has another three concessions onshore Nile Delta: the El Manzala, West El Manzala and West El Qantara.

The concessions now consist of 14 development leases with gas and condensate production from 12 fields, and with a further two fields in development. Current gas production is about 2bn m³/d and 4,800 b/d condensate. Dana plans to increase it to 2.5bn m³/d and condensate production to 7,000 b/d during 2016. As a result, Dana plans to spend $400mn in Egypt over the next three years on an ambitious upstream program that includes drilling at least 20 development wells and up to six exploration wells.

In the meanwhile it was reported in the Egyptian press that BG Egypt, now fully owned by Shell, and EGPC have patched up their differences on the gas price associated with the development of the West Delta Deep Marine Phase 9B project. The compromise appears to be that Shell will be allowed to export gas through Idku LNG terminal, but it has not been confirmed. Development of the project should now resume with the drilling of 15 wells, with production scheduled in 2017 and estimated to be over 4bn m³/yr.

Finally EGPC has just signed a cooperation agreement with Edison International to develop the second phase of the offshore Abu Qir gas field. This is expected to add another 1.5bn m³/yr to the Egyptian gas grid, possibly in 2017, in addition to the 2.8bn m³/yr it produces now.

Potential for new discoveries

Zohr is encouraging producers to look more carefully at carbonate formations in the east Mediterranean. The region has produced some significant discoveries in recent years and it is believed that the region still has massive hydrocarbon deposits to be found.

Among the blocks close to Zohr, and east of Shorouk, are North Thekah and North Port Fouad operated by Italy’s Edison. It has done 3-D seismic surveys and Edison is in the process of planning its drilling campaign in North Thekah.

It has been reported that initial indications are good. The plan is to tender for a similar survey for North Port Fouad by the end of the year and decide if and where to drill by 2018 or 2019. Eni has two other exploration blocks, North Leil and Karawan, west of Shorouk.

Shell through its ownership of BG has three offshore concessions – El Manzala, North Gamasa and El Burg – where two discoveries were made: Harmattan Deep-1; and Notus with an estimated 170bn m³ gas. It remains to be seen how Shell progresses these.

Onshore prospects are also good, particularly in the Western Desert where Shell and Apache are drilling for shale gas.

Having awarded four offshore licenses last year, and 56 concessions in total between 2014-2015, Egypt plans to announce a new international tender in 2016 for eleven new exploration blocks in the Mediterranean Sea and the Nile Delta.

Egypt’s gas production set to surge

Based on these new discoveries and development plans, Egypt expects to more than double its current gas production by 2020, bringing onstream another 50-60bn m³/yr of gas.

This was confirmed at the Offshore Technology Conference in Houston this month. In fact, two of the presenters said that gas production in Egypt is expected to increase by more than 90bn m³ by 2022, with increasing future prospects. This should mean gas is available for exports. In fact significant reductions in LNG imports should materialize from 2018 onwards.

The good news is that it is not just Zohr coming to the rescue, but also development of many other smaller gas fields spurred on by new government policies, higher gas prices and a guaranteed domestic market.

With BP planning to develop the other WND discoveries soon after phase I, Eni progressing with new finds, Shell and Apache progressing with shale gas, and the exploration and development of new offshore blocks, Egypt is experiencing a remarkable transformation of fortunes and is well placed to continue expansion of is gas production well into the next decade.

The outcome of all these developments is a dramatic reversal of fortunes for Egypt from gas shortages to self-sufficiency and exports. These impact the hopes of its neighbours Israel and Cyprus who had hoped to export their gas to Egypt. Not only this is commercially challenging, but the markets for it may no longer be available.

Dr Charles Ellinas  @CharlesEllinas