Asked to describe Dana Gas Egypt’s performance during the last 12 years, company Chairman Dr. Hany EL Sharkawy summed it up in one word: Phenomenal. Dr. El Sharkawy sat down with Egypt Oil & Gas to discuss the past, present, and future of both the company and the Egyptian petroleum sector, particularly in light of the revolution and its aftermath.
How do you see the petroleum sector and its future in light of the past two years’ events?
The petroleum sector is going to show more strength, and it will be obvious in the next bid round, as I expect a lot of companies to be competing to enter into Egypt or expand in it. The events of last year didn’t change the fact that there are still a lot of opportunities in Egypt, a lot of undiscovered basins, a lot of deep targets that have not yet been explored. Oil companies will take the political events into account as part of their risk calculation process, but it will not stop them from investing in the country.
In your opinion, has the revolution had any positive influence on the petroleum sector?
The revolution took place due to the economic crisis in Egypt, and so for the government to succeed, it has to introduce reforms to advance the economy. This will have a positive impact on the country and on the economy in the short-term as well as in the long-term, and it will in turn reflect on the petroleum sector, particularly when it comes to policies aimed at attracting investors. We are hoping to see better terms and conditions for agreements, and see less bureaucracy in our dealings. I also believe that transparency is improving, and people now are more vocal and more open. I would say the outlook is a positive one after the revolution.
When you speak of the promising bid rounds in the near future, are you referring to the new Mediterranean bid round?
The bid rounds are coming from EGAS, GANOPE, and the EGPC, and that’s the beauty of it, there’s something for everyone. The major companies will be competing for the Mediterranean deepwater blocks, while the rest of the companies will be competing for onshore and shallow water blocks.
Do you think that changes should be applied to the standard terms and conditions of agreements in order to attract investments?
I think the rights steps are already being taken. For example, it is my understanding that the new EGAS bid rounds do not dictate a gas price, leaving it open for negotiation, which is an extremely important incentive for people to come in and look for gas even in difficult and expensive areas. So I think there will be modifications to attract more investors and maintain the current ones.
The revolution and its aftermath have had a massive effect on the country’s economy. How has Dana Gas felt this impact?
There has definitely been an impact; we cannot deny that the revolution affected everybody including Dana Gas. We have noticed for example that the issue of receivables has become much more complicated as well as much more severe. This limited our ability to execute a full work program in 2011, and partly in 2012. The effect was that we reduced our drilling in both exploration and development due to budget limitation, and as a result our reserve replacement factor and our production were both lower in 2011 and 2012 than in previous years. There has been a huge improvement this year in comparison to last year in terms of receivables; we have entered into agreements with the authorities, and they have honored these agreements. As a result, you can see that we have been more active this year than last, and so we will see more reserve findings and higher production.
How do you see the future of Dana Gas in Egypt, particularly following the appointment of the new government?
Dana Gas is here to stay. We come from the Emirates and are familiar with the lay of the land. We’re not scared of the new government, we have a very good relationship with the government in place. Dana Gas will participate in new bid rounds, as a signal of our intention to expand in Egypt, and we will continue to seek new opportunities in the country.
What are Dana Gas’s plans in Egypt for the coming period?
We are actually beefing up our drilling activities. We started this year slowly for several reasons, some of them beyond our control, but we started the second half of the year very strongly. We have more rigs currently operating, more exploration wells being planned, and we’re going to be very busy in the coming period.
Should we expect to see more drilling activity by Dana Gas in the coming fiscal year?
Yes, we are in process of preparing our budget and drilling program for 2013, and we’re putting forth proposals to the board for a very aggressive drilling plan for 2013.
What is the company’s current production rate?
It is over 30,000 barrels of oil equivalent
Are you planning to look into the coming Mediterranean bid round?
We will look into the bid round, but if we do end up submitting a bid, it will most likely be in partnership with other companies, which is very common in the industry.
Will the company be focusing exclusively on exploration and production in the coming period, or will you expand into other fields?
Dana Gas is interested in all aspects of the oil and gas sector in Egypt. We actually discussed the idea of establishing gas cities with previous governments, which is a downstream project. We think it would have a very good impact on the Egyptian economy, particularly regarding the unemployment situation, and we’re interested in pursuing it with the new government.
How would you rank Dana Gas among your competitors, and do you see the company becoming one of the three biggest gas producers in Egypt in the foreseeable future?
I would rank Dana Gas as the sixth biggest gas producer in Egypt, and I do believe we can become among the three biggest producers in the country.
Dana Gas has had the unique privilege of being allowed to market its own share of gas to the local market. How do you see this concept and its applicability to other companies in the coming period?
Dana Gas has the right to market its own gas right now; we are in negotiations with end users but we have not sold anything yet. I believe that the trend in Egypt is moving towards allowing everybody to do their own marketing. I expect that within a few years, Egypt will have a free energy market, including gas and other hydrocarbons. This is a very positive move from the government, and will attract investments.
Do you think the Egyptian market is ready to become a free market?
You have to start somewhere, and if there is a will there is a way. It is in the benefit of everybody to see a free market, and from the experience of other countries that is working very well. Maybe the country is not used to it but it will be a learning curve, and it might take a few years for the market to fully understand the value of direct gas and hydrocarbon sales to consumers.
What do the companies and the government need to do in order to successfully implement this concept?
The companies need to start adding marketing departments to their staff, which has not been the case because we have only ever had one client. The government also needs to be ready to be competitive because they will no longer be the only game in town, and so they need to beef up their marketing skills.
When the Egyptian energy market becomes a free market, do you believe companies will look primarily to local consumers or to exportation in marketing their goods?
The logic says local market, especially if the price is right. Given the demand that is expected in the local market in the coming period, the return on investment of selling in the local market will be very attractive to producers.
Do you see demand increasing in the future?
If the economy picks up demand will undoubtedly increase because more industries will be expanding, and gas is becoming a very important source of energy for all industries. I expect the petrochemical industry to pull ahead, and that will require additional gas as well. So I believe that demand for gas will witness an increase in the local market.
In your view, was the previous minister of petroleum (Eng. Abdullah Ghorab) successful in navigating the sector through a difficult phase?
Given the severe economic situation in the country, I think the minister managed to get through the difficult past two years very well. There were line-ups in front of gas stations, but nobody went home without gasoline, even if they maybe had to pay a couple more pounds. We managed to get through a very severe crisis in the past two years, and so I would definitely say he was successful.
How do you see the new minister’s prospects for success?
We’ve seen him for only one month and so its very hard to judge his performance based on that, but I know the gentleman personally and he is a very active, sharp individual who genuinely wants to do something for the country.
Besides the Mediterranean, where do you see the biggest potential for new discoveries in Egypt? You’ve been working in the Nile Delta and Ganoub el Wadi, do you believe there is significant potential for valuable discoveries there?
As an exploration specialist, I look at the South and Southwest of Egypt as places with very high potential. In the past, no one has been interested in these areas because of their remoteness. In order for a company to have an economic discovery in these areas, the discovery needs to be of a certain magnitude in order to justify establishing infrastructure in the area. Now that the Western Desert and Nile Delta have been heavily explored, the trend is starting to shift towards moving to these remote areas. I believe that Dana Gas’s Komombo discovery in Upper Egypt was very important because for many years people believed there were no hydrocarbons in this area. The same thing was being said about Southwest Egypt, and I am now very optimistic that there are substantial potential reserves in this area that have to be looked at in unconventional ways. Those parts of Egypt still need to be explored in a serious way, and I see a lot of potential for unconventional resources in the future.
Unconventional resources are a very expensive industry though. Do you believe new conditions and policies will have to be implemented in order to exploit these resources?
That would definitely be the way to do it. You have to provide incentives for companies to go into remote areas, in terms of the fiscal terms of the agreements and in terms of better pricing for products. The government must provide incentives for companies to go in and explore and spend money in a high-risk but high potential area.
The issue of debts owed to investors by the EGPC has often been raised as a concern recently. What is your opinion regarding this matter?
We all know that the country is going through a financial crisis, and its not going to go away overnight. The whole issue is what the government is doing about it. Recently we’ve heard that the ministry of petroleum is talking to other government entities such as the ministries of electricity and civil aviation in order to collect its own receivables. There has also been talk of easing subsidies, which should provide funds. If steps such as these are taken, the government should be able to gradually get out of its debt situation.
Do you think that the government’s expansionary fiscal policies are crowding out investors in Egypt’s oil and gas sector?
If we’re talking about lending rates and how this will affect investors, I believe the impact will be minimal. The fact remains that we are an industry that operates primarily in foreign currency, and we are only slightly affected by the interest rate of the Egyptian pound.
What is your take on the rising phenomenon of protests and sit-ins in the petroleum sector?
It is a negative phenomenon, I do not think people are serving the country in any way by going on strikes and participating in sit-ins, whether for legitimate or illegitimate reasons. The right to go on strike is granted to anybody as long as it does not prevent other people from carrying out their work, but when you interfere with the working process of others, it is a negative phenomenon. I believe the government should take a very strong stance against those who abuse the right to strike, and take some severe measures to prevent them from carrying out such activities. They need to introduce and implement some very strict laws against people who conduct this type of strikes and sit-ins.
Has this issue affected Dana Gas directly or indirectly?
Yes, we have had some strikes and sit-ins in some of our facilities. Lucky for us, we have very good relationships with the communities with which we work, and they have been very helpful in stopping harmful acts of this nature. Overall, it did not last very long, the problem was resolved swiftly, but other companies are not as lucky as we were.
In your opinion, could this phenomenon have an effect on investment?
That’s definitely a fact, if people do not stop these actions, then the government’s current efforts to attract investments will not be very successful. I think it is the responsibility of both the government and the people to attract investment to the country. The public has to understand that these acts of blocking roads, stopping work, and threatening to damage property is not helping the economy and is not helping them at the end of the day. It damages the country’s reputation and consequently the economy, which in turn will hurt everybody’s pockets.