Sunday, February 26, 2017

Egypt turning the corner - IN CYPRUS / CYPRUS WEEKLY

February 26, 2017
Charles Ellinas

Tarek El Molla took over his role as Egypt’s Minister of Petroleum in September 2015, just after the discovery of the giant Zohr gas field. Since then, Egypt’s natural gas fortunes have been undergoing a massive transformation.

Firstly, gas from Zohr is expected to be achieved end of this year, and Egypt is now boldly predicting that it will achieve self-sufficiency by end of 2018, and re-start exports by 2020.

Egypt is in the process of implementing a modernisation programme with six major objectives to reform and transform all aspects of its oil and gas industry over the next four years:
  • Competitive industry: The most important part of the programme is to identify and eliminate inefficiencies, and thus develop a business-orientated and competitive industry.
  • New organisational framework: Involving structural reform with clear and segregated roles: the Petroleum Ministry, to set up policy and strategy, state oil and gas companies to concentrate on implementation, and an independent regulator to set up prices, tariffs, eventually eliminate subsidies and prevent monopolies.
  • Investments under upgraded terms: Involving upgrading and reform of existing types of agreements, including production-sharing agreements, to reflect best practice, with the aim of attracting new investments.
  • Upstream targets: Steps to improve production levels from existing reservoirs and concessions, using advanced technology such as EOR, with the aim of improving and maximising output.
  • Building up human capital: Capacity building is seen as key for the success of the programme.
  • Regional oil and gas hub: Setting up a clear path for Egypt to become a regional energy hub and thus position itself in the global market.
Egypt introduced its modernisation programme at EGYPS 2017, as part of its 2020/21 strategic vision of its petroleum sector to attract new investments, achieve gas self-sufficiency and become a player in the global energy market.

Turning the corner

Egypt’s Ministry of Planning reported that 28.6 million tons of crude oil, LNG, natural gas and other oil-related products were imported to Egypt in financial year 2015/2016, at a total cost of $16 billion, of which $3 billion was for LNG imports of 1.1 billion ft3.

The costs of these imports, combined with energy subsidies, have had a crippling effect on Egypt’s economy.

Following the recent agreement with the IMF, the government has been assertive in its drive to reform subsidies and move toward a free market system for energy products. This will ultimately rationalise demand and reduce Egypt’s budget deficit.

Subsidy reform and recent major gas discoveries have already started the process of eventually bringing production and consumption into balance. They have also attracted significant foreign direct investment into Egypt’s energy sector.

As part of this process, the Egyptian government is also determined to reduce the debts of international oil companies (IOCs) from $3.5 billion at the start of the year to $2.8billion by the end of 2017, and to be able to pay off the debts of foreign oil companies by 2019.

These policies appear to be working. The headlines during EGYPS 2017 were: “ENI and BP are pouring more investment into Egypt than anywhere else” by Bloomberg and “Oil companies are bullish on Egypt, eyeing more investments and more discoveries” by Reuters.

More gas discoveries
Major gas discoveries have been made in the Eastern Mediterranean over the last few years and, coupled with the discovery of Zohr in carbonate formations, there is confidence that much more gas can be found in areas still to be explored. That makes the region one of huge interest to IOCs.

The chief executive of Italian energy group Edison said at EGYPS 2017 he is confident more gas discoveries will be made in Egypt in the next three years. And he should know. Edison is one of the major players in Egypt’s oil and gas sector.

Based on the latest exploration data, El Molla said there is potential for new discoveries near the Zohr field in the second half of 2017. Rumours also abound of a new major natural gas discovery to be announced soon. This is in the Nile Delta and could be as much as 15 trillion ft3.

In addition, ENI has started drilling its eighth well in Zohr and it plans to drill deeper into potentially another gas reservoir under Zohr. This was estimated in 2015 to potentially hold another 10 trillion ft3.

Egypt is taking measures to step up exploration at potential gas fields. Several IOCs were awarded exploration licences last year, and oil and gas exploration agreements totaling $220 million were signed with BP, ENI and Total among others.

Achieving natural gas self-sufficiency
In a press release, El Molla stated that 2017 will witness a quantum leap in Egypt’s natural gas production, as the country is moving forward with its strategies to improve gas field production in order to cover the demands of the domestic market.

A number of projects are coming on-stream, led by the giant Zohr development. These are driven by Egypt’s more pragmatic approach to gas pricing, which has secured more than $28 billion in investment in the country’s upstream sector since 2015.

Eni’s CEO Claudio Descalzi confirmed that production from Zohr will start before the end of 2017, boosted by the entry into the project of BP with 10%, with the option to increase its share to 15%, and Rosneft with 30%, with the option to increase to 35%.

The Eni-led consortium developing Zohr is expected to achieve first gas in December, at a rate of 200 million ft3 per day, ramping up production to target of 1.2 billion ft3 per day by March 2018, reaching a plateau of 2.7 billion ft3 by 2019.

BP also expects to bring on-stream 1.2 billion ft3 per day by 2018 from its West Nile Delta project.

Egypt has 12 natural gas field development projects under way, with a total investment of $33 billion. These include West Nile Delta, Atoll, Noroos, Borollos and Western Desert gas fields. El Molla said that they are expected to collectively bring an additional 5.5 billion to 6.2 billion ft3 on-stream by 2019. This is much more than current production, which stands at 4.6 billion ft3 per day.

Egypt currently imports 1.2 billion ft3 per day costing $250 million per month, which it will save once new production exceeds this level by 2018. EGAS said that 2018 should be the last year for the country to import gas for its domestic market.

Gas exports by 2019
Gas production by 2020 will push Egypt back to surplus and exports. In fact, EGAS expects LNG exports to start by 2019, depending, of course, on global gas prices.

Speaking at EGYPS 2017, El Molla said that the Petroleum Ministry is aiming to create an attractive investment environment and turn challenges into opportunities. It is well on the way to achieving this. There is now a much more optimistic view of the country’s potential, despite the economic and political challenges it still faces.

Dr. Charles Ellinas is a non-resident Senior Fellow, Eurasian Futures Initiative, Atlantic Council