Shell is holding talks with producers of Israeli gas on the possibility of supplying its Idku LNG plant in Egypt, but analysts say the Anglo-Dutch major is just testing the waters.
After Egypt signed a deal to buy gas from Cyprus at the end of August, Shell met representatives from Delek Group and Noble Energy. This was followed by a meeting with Delek in Cairo, according to three sources working for international gas producers.
The talks are a continuation of discussions that took place between BG Group and the Israeli companies over the four years before BG was taken over by Shell, according to Nati Birenboim, chief executive of energy consultancy Tamuz Group. They have discussed building a pipeline from the Tamar field and buying 105 billion cubic metres of gas over 15 years.
Shell is working out what to do with its new Egyptian assets. In March, the company said it was lining up a $30 billion global divestment programme that was to be finished by 2018. However, Shell public relations representatives did not respond to several requests for an update on the company’s plans for Idku.
Shell is spending heavily on only a few areas in Egypt, including Phase 9B of the West Delta Deep Marine project and those relating to unconventional gas.
In 2014, BG wrote down $1.3 billion on its Egyptian assets, including Idku. The plant sent out only five cargoes that year, and it has shipped just two during 2016 so far.
A source in Egypt, who works in the private gas sector and wished to remain anonymous, said it was possible Shell was considering investing in Idku to bring it back up to full speed. However, at the moment all investment activities are still on hold, the source added.
Ahmed Ezz, production manager at Idku’s operator Egyptian LNG, said the plant was still working at minimum levels. He refused to comment on whether any upgrades have begun.
The Israeli firms are still optimistic about their chances of selling gas to Egypt via Shell and Union Fenosa Gas (UFG), the owner of the Damietta LNG plant, but consultant Charles Ellinas told Interfax Natural Gas Daily these ideas may be somewhat misplaced.
UFG is reportedly ready to drop its arbitration case against Cairo over a supply contract in exchange for being able to buy 6 bcm/y from the Israeli consortium for Damietta.
Who will pay?
Although upgrading Idku would not be expensive because it is still operational, a major hurdle remains for Shell over who would pay for the pipeline from Israel to the LNG project. Delek and Noble are unwilling to take on the risk.
Ellinas said it is unlikely Shell would retain BG’s commitment to building the pipeline since it wants to reduce costs across the company. He said a pipeline to Idku would be a "marginal at best" project for Shell, which has one of the largest LNG portfolios in the world. "Anything now has to pay for itself and produce good results, and this one will not," he added.
Ellinas expected prices from gas from Israel’s Leviathan field to be no less than $4/MMBtu "at the platform". Once the cost of a pipeline and transporting LNG to buyers is factored in, cargoes from Idku would be expensive compared with those from other projects.
Furthermore, Cairo expects to produce an extra 60 bcm/y from 2020 onwards, which would allow it to become a net LNG exporter again by 2021.
The Egyptian gas sector source said any move by Shell to upgrade Idku was likely to support the economics of its own projects, as major developments such as Eni’s Zohr field and BP’s Atoll field were targeting the domestic market. Consequently, Shell may decide to use Idku to export gas from its own Egyptian projects. Unlike UFG, which holds an 80% stake in Damietta, Shell has sizeable Egyptian reserves.
Badr El-Din Petroleum (BaPetCo), Shell’s joint venture with the Egyptian General Petroleum Corp., reported on Sunday that production stood at 14 million cubic metres per day of gas and about 50,000 barrels per day of oil crude and condensate after several new wells started up.
Additionally, BaPetCo made a new discovery this month using unconventional drilling techniques in Egypt’s Western Desert that could hold as much as 14.2 bcm of gas. Aidan Murphy, head of Shell in Egypt, said it could eventually account for as much as 10-15% of BaPetCo’s overall production.
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