Saturday, July 15, 2017

AllSource Analysis: Shell’s Idku LNG Ramps Up Exports - ENERGY EGYPT

July 15, 2017

The liquefaction terminals at Idku represent the only currently operating facilities in Egypt for the export of LNG. Since fall 2016, Egypt’s Petroleum Ministry and Shell, the operator of the facility, have agreed to increase the number of LNG cargo ships (hereafter “cargoes”) leaving Idku, which has been at extremely low levels for the past three years. Setting a target of 22 shipments for 2017, it is hoped that the facility can export enough to balance expenses and revenues. Imagery analysis confirms 4 cargoes leaving the port so far in 2017, illustrating tentative progress towards the goal, as well as beginning to pay down outstanding debts to Shell. The target of 22 shipments in 2017 will likely be revised upwards in 2018 and 2019 as the terminal approaches maximum output by 2020 to coincide with the massive Zohr field coming online and changing the Egyptian gas landscape entirely.

The recent LNG shipments from Idku represent a turnaround in Egyptian gas exports. LNG shipments bound for the international market from Idku have been reduced to a low level, between 750,000 cubic meters per year and zero, since 2014. In that year, gas supplies were redirected away from exports and into the domestic market in order to alleviate the frequent power blackouts that plagued the country, especially during summer months. Blackouts and long queues at petrol stations played a role in stoking popular anger toward the Morsi regime, which was overthrown by the Egyptian military in 2013.

The gas shortage was so severe that in 2014 only five LNG carrier ships were loaded for export at Idku, down from 50 the previous year. Each of these shipments represents around 150,000 cubic meters of the liquid fuel, given the class of most vessels observed at the terminal. In 2015, exports collapsed completely, with zero shipments leaving from the liquefaction terminal. Despite this fall in exports, however, many Egyptians praised the strategy since it gave the national power grid, principally run on natural gas, a measure of reliability in the tumult of post-Arab Spring Egypt. The North African country remains a net importer of gas, with two FSRUs (floating storage and regasification units) operating at Ain Sokhna on the Red Sea coast to augment domestic production.

Ramping up exports from Idku is an important step for the Egyptian economy for several reasons. First, the Idku facility is likely being run in order to begin paying down $1.3B of debts owed to Shell to keep it in the Egyptian market. Reports indicate that the Egyptian government owes Shell and other foreign companies a total of $3.6B in unpaid receivables. While these debts originate during the time before the revolution in 2011, they increased during the foreign currency shortage in the country, which itself was exacerbated by the reduction in LNG exports in 2014. Second, Shell is expected to begin investing in Burullus phase 9B, an undrilled portion of the Burullus gas field, once some of its outstanding debts are paid down. Large quantities of gas diverted away from exports into the domestic grid forced Egypt’s second LNG export terminal outside Damietta to shut down production, declare force majeure in January 2014, and suffer a lawsuit brought by the Spanish-Italian consortium Union Fenosa Gas. This experience serves as a clear example of the importance of satisfying foreign oil companies in order to keep them at the table to develop Egypt’s gas resources.