BP contract renegotiation could revive Egyptian offshore
A platform in BG Group’s Rosetta field offshore Egypt. Better prices will be key to offshore development. (BG Group)
Talks between Egypt and BP over the pricing of gas produced from the $10 billion deepwater North Alexandria field are part of a slow renaissance of Egypt’s wider offshore sector, even though they have not yet been successfully concluded.
Ahmed Moazz, Egypt manager for Sea Dragon Energy, said old-fashioned contracts and bureaucratic practices were responsible for Egypt’s poor upstream performance over the past decade. He called BP’s initial contract renegotiation in 2010 “a revolution” and said the current talks are extremely important for the industry.
“I think it is a game-changer in the sense that BP has also got a concession agreement [which had been] ratified by the [Egyptian] parliament – which is normally the last thing you can change – changed.”
Others share Moazz’s confidence, with one industry source saying: “Something is happening now because the government and the decision makers finally see that BP is not playing games”
The source added that the outcome of the talks between Cairo and the oil major will indicate how flexible the government is prepared to be in renegotiating contracts with other operators.
A BP spokesman confirmed no contract had yet been signed, but that “progress [was] still being made”. Should a deal be reached, the government still plans to use the estimated 5 trillion cubic feet (142 billion cubic metres) of reserves to supply the domestic market, said the spokesman.
Egypt’s Petroleum Minister Sherif Ismail said in June that BP’s West Nile Delta North Alexandria project – the biggest gas development in Egypt – had restarted after being shuttered during the 2011 revolution.
However, this turned out to be untrue, and the project is unlikely to come onstream before the end of this year. BP would not comment on Ismail’s premature announcement, nor would it provide details on what is holding up the restart.
The field is expected to produce gas at a rate of up to 28.3 million cubic metres per day (MMcm/d), potentially meeting up to 25% of Egypt’s gas needs. Had the project been restarted this year, Ismail estimated in his June announcement that initial production would have reached 12.7 MMcm/d by 2017 and 22.7 MMcm/d by 2018.
BP has already renegotiated the West Nile Delta contract once. In 2010, BP and its partner RWE Dea signed amended contracts for the North Alexandria and West Mediterranean Deepwater blocks, altering the deals from product sharing agreements (PSAs) to concessions. This allowed the companies to fund development themselves, pay royalties to the government instead of sharing the gas, and bypass the slow spending and work approvals process involved when operating with a government joint venture.
Cairo will be able to afford to sweeten the price it pays to gas producers from the historic $2.65/MMBtu as subsidies are slowly reduced and prices for some industrial users rise to as high as $8/MMbtu. Wood Mackenzie analyst Martijn Murphy said other concessions in Egypt’s Mediterranean region were receiving upwards of $5/MMbtu.
Price is key
Officials and private sector managers say securing better gas prices for existing concession holders is a key element to developing offshore fields.
Murphy said BP’s DEKA project in the Temsah concession was an example of this. BP and Eni announced first gas from the Denise and Karawan fields on 21 August, with peak production of just over 6.5 MMcm/d expected at the start of next year.
“I think that they likely achieved better pricing that allowed them to proceed with the development and that has probably incentivised it,” Murphy said.
RWE Dea Egypt General Manager Maximilian Fellner told Interfax the company’s offshore North Idku and Northeast Almeria concessions included some gas discoveries, but the company needed a higher price to develop them.
Fields in production include Edison International’s shallow water Abu Qir development, and BG Group’s Rosetta, Sequoia and West Delta Deep Marine concessions – the first of which is aimed at the domestic market, while the other two are export-oriented.
But price is not so much of a hindrance for new offshore exploration.
Exploration incentives
Egypt has returned to annual bidding rounds, and is allowing IOCs to sell privately to industrial users and to negotiate prices after gas is discovered – instead of locking a figure into PSAs. These changes make it commercially viable to develop Egypt’s deep offshore and technically difficult high pressure reservoirs, such as BP’s North Alexandria deal, which require either much higher prices or better fiscal terms.
The results can be seen in the latest Egyptian Natural Gas Holding Co. concession awards. Three of the five offshore blocks offered in the 2013 bidding round received bids – all of which are in deep water.
In September, Eni announced it had won the North Leil block, covering 510,500 hectares in 2,100-2,800 metres of water, and a half share with BP in the Karawan Offshore block, covering 456,500 hectares in 2,000-2,500 metres of water.
A Petroceltic and Edison International JV was awarded the North Port Fouad block, which is in 1,400-1,800 metres of water and close to the Levantine basin.
Link to source: http://interfaxenergy.com/13804
