Royal Dutch Shell and the Egyptian government have been at pains to downplay reports this week that talks on developing the West Delta Deep Marine (WDDM) concession 9B have reached an impasse. This comes as Italy's Eni is gearing up to develop an even bigger offshore gas field, Zohr.
Daily News Egypt reported that BG, now part of Shell, had demanded a price of $7/mn Btu from the government for gas to be produced at 9B, whereas the latter had agreed to pay $5.88. Its March 22 report cited a source close to the talks who said that Shell would only resume negotiations if the government gave into its price demand or else immediately paid $1bn back dues owed to BG. If Cairo agreed, the $7 could be negotiated downward once back dues were paid, the source added.
On February 5, BG said the Egyptian government still owed it $1.1bn, of which $0.9bn were overdue. Shell has not given a figure since.
The Egyptian newspaper said that its source had added: “The company halted work on stage 9B a month ago and withdrew from the Saipem drilling rig in the concession area after finishing its work on the development project in stage 9A.”
An industry source however told Natural Gas Africa that work on 9B had yet to begin, precisely because it is subject to a successful outcome to the talks. The same source also questioned why Shell would adopt a tactic of brinkmanship with Cairo just one month after taking over BG’s assets, before it had had an opportunity fully to evaluate its position in Egypt.
Shell declined to comment on the pricing positions cited in the newspaper report (Indeed a different report cited different prices). Nor would it directly say if work on 9B had been suspended, or say the latest amount it is due from Cairo. Instead it referred to a translation into English of an Egyptian petroleum ministry response to the Daily News Egypt article.
According to the translation provided by Shell, a petroleum ministry spokesman said: “There is no truth to what was published about BG suspending its production and development activity on 9A and 9B following the failure to reach agreement about a new gas price. Discussions are ongoing regarding 9B development and there are negotiations about the rescheduling of the project’s timeline.”
BG and its equal partner Malaysian state Petronas sanctioned the $1.5bn WDDM 9A development in March 2013 under BG's then CEO Chris Finlayson who was ousted a year later; he had previously worked at Shell for 30 years. All 15 wells scheduled on 9A are believed to have been drilled.
Fifteen wells are now also planned on WDDM 9B, also 50-50 owned by BG (now Shell) and Petronas, at a reported cost of some $1.3bn, involving production of 350-400mn ft3/d no earlier than 2H2017.
Despite Shell and Cairo’s attempts to smooth things over, a lot is riding on their respective positions.
Shell has committed to divest $30bn worth of assets during 2016-18, mostly later on in that period. It bought BG for its high-quality gas producing assets. Egypt though has less weight within Shell’s overall business than it did at smaller BG. Additionally, WDDM 9B is a high-cost development and Shell is looking to reduce its overall capital and operating expenditure. Yet would Shell want to scale back in Egypt a month after Eni's super-giant Zohr gas discovery offshore the Nile Delta took its final investment decision, and while nearby gas finds off Cyprus and Israel are pending development?
Cairo meanwhile is cash-short and its struggling energy-hungry economy could be stymied by rising domestic gas prices. It sees that gas prices elsewhere in the world have fallen -- not risen – in recent months. Spot LNG can be delivered to most world markets at $4.50/mn Btu. Egypt has two such LNG import terminals with a number of traders supplying state importer Egas. Moreover the country can count on the 30 trillion ft3 (850bn m3) Zohr discovery being developed by Italy's Eni between now and 2019 primarily for the local market.
Egypt’s major industries had called for the gas prices they pay to be reduced, Daily News Egypt reported on March 13. Fertiliser plants currently pay $3/mn Btu, whereas the government had said the price paid by steel plants would be reduced from $7 to $4.50/mn Btu.
Last week the same newspaper reported that four unnamed companies had applied to import gas, and that state-owned Egas was negotiating with them, pending adoption of a new law to regulate gas imports.
Zohr to produce by end 2017
Eni CEO Claudio Descalzi on March 18 said in London that Zohr will cost less than $12bn to fully develop, and is on track for first production by the end of 2017, with a contract agreed. Initial output of 1bn ft3/d by 2018 could be ramped up to 2.7bn ft³/d by 2019. Although he said Zohr gas will be "mainly sold on the Egyptian market", the CEO noted that Egypt's two LNG export terminals have enough spare capacity to enable some Zohr gas to be liquefied for export. He also said Eni was "in talks with interested parties" about farming down some of its current 100% working interest in Zohr. But he gave no details about pricing of the gas, nor of the expected ratio that will be exported.
Ratings agency Standard & Poor’s on March 24 lowered Eni’s long-term corporate credit rating to 'BBB+', outlook Stable, from 'A-', while maintaining Eni's 'A-2' short term credit rating. The recent decline in oil prices was cited as the primary reason, but Eni's ambitious capital spending may also be a concern, despite its reduction in average new projects breakeven from $45/b in 2014 to $27/b in 2015.
Mark Smedley
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