LeAnne Graves, April 21, 2016 Egypt’s mega gas discovery hangs in limbo as its developer cuts jobs, potentially adding it to the long list of energy projects affected as the near two-year lull in oil prices hammers budgets.
Eni, the company that discovered the offshore field on the Zohr Prospect, has begun to downsize its upstream division in Egypt, according to people familiar with the matter, suggesting that the pace of exploration could now slow.
The Italian firm last August announced the Zohr discovery, one of the Mediterranean’s largest gas finds with an estimated 850 billion cubic metres or 500,000 barrels of oil equivalent per day.
However, extracting the resource will be expensive and offshore investments have suffered as a result of low oil prices. The United Kingdom, for instance, will receive less than £1 billion (Dh5.3bn) for new projects this year compared to the £8bn annually over the past five years, according to the trade organisation Oil and Gas UK.
The start of production at Zohr is expected by the end of next year, with initial development costing US$5bn, a fast start-up time for such a project. But Eni’s chief executive, Claudio Descalzi, has maintained that existing infrastructure will help to accomplish this quick turnaround, with a full scale-up expected by 2019.
Just last month, the Italian firm had completed the production test of the Zohr 2X, the first appraisal well on the discovery. And later this year, Eni claims that it will drill a further three wells in addition to building an onshore gas treatment plant.
However, one employee working as an exploration geologist, who asked not to be named, said he was informed on February 29 that his last day would be June 13. “They fired all of the expatriates from exploration," he said. “Eni bonuses [staff] by dismissing [them] after such a huge discovery."
Eni declined to comment on the matter.
Richard Mallinson, a geopolitical analyst for UK-based consultancy Energy Aspects, said: “Clearly it’s going to need a lot of investment to bring the Zohr to development, and Eni will need to see a decent price."
Egypt General Petroleum Corporation (EGPC) previously paid producers about $2.50 per million British thermal units of gas. However, that was not enough to encourage offshore development.
“EGPC has improved payments, which has slightly spurred investments, but it’s still a case-by-case negotiation," Mr Mallinson said, adding that the price was now between $3.50 and $6.
But Egypt has other issues, according to the analyst. “The big reason for projects and investments in Egypt [stalling] is the state of receivables, or rather the backlog of payments because of the financial crisis," Mr Mallinson said.
A shortage of foreign currency has also affected Egyptian businesses amid sluggish economic growth.
However, the Zohr field is somewhat of a flagship discovery for both Eni and Egypt, which offers the North African country the potential for transformation from an energy importer to an exporter by the end of the decade, said Mr Mallinson.
It could erase gas deficits and reduce power outages, a major crux for economic growth in the country. “For Egypt, there is a strong imperative to make sure that it goes ahead and develops this field," he said.
For Eni, the project offers a big financial opportunity. It is offshore and there is a clear market – the gas will go directly for Egypt’s domestic consumption.
Despite the downsizing of Eni staff in Egypt, there could still be hope for the Zohr development to stay in schedule. “It depends on the staff being cut. It could be that Eni is focusing all of its cash on developing the Zohr and is not interested in other exploration opportunities because this is a full plate," Mr Mallinson said.
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