2006: A mixed bag of goodies

With 2007 just around the corner, a look at what has happened the past year will undoubtedly aid in preempting what is to come. In Egypt, several changes have occurred in the energy sector in general, and the oil and gas sector in specific.
In 2000, the Ministry of Petroleum, headed by Sameh Fahmy, took propitious measures to revamp the sector. This in essence was marked by a complete restructuring of the industry and a separation between natural gas and petrochemicals activities and those of the Egyptian General Petroleum Corporation (EGPC). A stress on natural gas was pursued and much like Egypt’s pioneering days in oil, the country has now become the sixth largest producer of natural gas. The need for increased production was of course followed by the desire for greater exports, hence, the ministry turned to export-oriented super projects. The trick was then to balance domestic consumption with desired export and actual production. This was all realized with development in technology.
The latest developments of the sector no doubt made this an investor’s paradise with more than 98 agreements signed since the strategic move. These agreements with foreign investors have brought into the country over $6.8 billion. This is due in large to grand exploration efforts which have recently placed the proven oil reserves at an unprecedented level of 15.4 billion barrels in 2005. As regards the natural gas industry, Egypt exported its first shipment of liquefied gas in January 2005. In the past six months, Egypt has sealed contracts with Arab countries worth over $1 billion, an indication of local cooperation and competitiveness.
New discoveries of both natural gas and crude oil are made on a regular basis. Egypt, the first nation in the region in which oil was discovered, scored a total of 227 new discoveries since the year 2000. The discoveries are divided as follows: 153 crude-oil discoveries and 74 new spots of natural gas. These discoveries have prompted the desire to invest in Egypt and accordingly foreign and joint-venture company investments reached $9.5 billion. These companies mainly operate within the field of exploration and development.
It is worth mentioning that Egypt’s current proven gas reserves counts for 67 trillion cubic feet (tcf), and according to analysts, this figure is expected to grow rapidly; indeed the government’s claim that another 100 tcf are waiting to be found is not implausible. Besides, new exploration contracts are flying off the government’s table: a total of 77 contracts have been signed since 2003, the latest being in July, to a consortium of Petronas, BG and RWE Dea AG, through which $106 million will be invested to dig deep in the Mediterranean.
Last year, the reserves of oil resources increased to an unprecedented level of 15.4 billion barrels. According to Oil Egypt website, natural gas production could reach 100 tcf a year by 2011, an increase of 47% compared to the current production rate.
The attractiveness of the petroleum sector to major multinational investors has brought in a wave of foreign projects and joint-ventures which has added around $9.5 billion to the government’s treasure. The political and economic stability that Egypt is enjoying amidst a high tensioned region has been a major factor in attracting a number of foreign investors this year. Nevertheless, Egyptian investors from the public and private sectors also contributed to the development of the energy sector in Egypt. Most of their investments, mainly directed to oil exploration, production, refining, processing, transport and marketing, added more than $3.5 billion to the sector.

SWOT Analysis
The best means of understanding this sector is by applying a standard form of analysis which examines the Strengths, Weaknesses, Opportunities, and Threats (SWOT). This form of analysis allows any observer of the sector to appropriately ascertain the developments in the world of oil and gas.

By far, the most exciting aspect of this sector is natural gas, which is expected to reach 100 tcf a year by 2011, according to Hany Soliman, Undersecretary for Gas Affairs at Egypt’s Ministry of Petroleum and Mineral Resources. Egypt is now the sixth largest natural gas producer and new discoveries of gas are made on a frequent basis. This is regarded by many as the golden opportunity to meet local energy demands while still maintaining exports. All eyes are on gas, seeing it as the hope of stabilizing oil production and cutting down subsidies. In terms of gas there are several untapped resources which will certainly be explored within the next decade.
Many of the current exploration programs are financed and conducted by foreign investments in Egypt. One of the most recent agreements dedicated to the development of the oil and gas sector in Egypt has been offered by the International Finance Corporation (IFC), which has signed a $25 million funding package for Rally Energy Corporation, a Calgary-based oil and gas firm to be utilized in supporting upstream oil and gas projects in Egypt and Pakistan.
The IFC, the private sector arm of the World Bank, announced that this package will be used as well to help in satisfying the increasing domestic demand of oil and gas by strengthening energy production. Through this agreement, the main target for Rally Energy in Egypt will be directed to the development of oil industries in the 20,000-acre Ras Issaran oil field. This significant heavy oil development opportunity will be dedicated to solving the decline in production being witnessed there.
“The IFC credit facility has been put in place to give Rally maximum flexibility to supplement expected cash flow from its planned 2006 and 2007 work programs, and to enable us to accelerate the thermal development project in the Issaran Field in Egypt,” said Abby Badawi, president and chief executive officer of Rally Energy Corp in an interview published in the daily English newspaper, The Daily Star.
The energy sector in Egypt has witnessed a booming movement in most of its fields, and in mining and hydrocarbon in particular. This latter sector generates 15% of GDP, 37 % of export earnings and the bulk of foreign investment.
In the sector of petrochemicals, the Ministry of Petroleum has commenced two joint projects with investment from the Egyptian private sector and Canada, expected to produce an average of 1.65 million tons of Methanol and Polypropylene. The first is designed to enhance the production level of Methanol from the Mubarak Complex for Gas and Petrochemicals, with total investments reaching $620 million and an annual production capacity of 1.3 million tons. Canada will pay 60% of the total cost, while the other 40% will be divided into 24% paid by ECHEM and 16% from the private sector. Meanwhile, the second project will specialize in the production of propylene and polypropylene, with an expected production of 350,000 tons and $350 million in investments. This figure is estimated to increase and count for $400 million.
Besides these investment projects, the right to conduct studies and researches on many Egyptian concessions has been given to foreign enterprises. One of the most recent foreign exploration programs is carried by RWE Dea in the Desouk concession in the Nile Delta. This company, classified as one of the top petroleum corporations in Germany, has set a two-year plan of investigation programs in Egypt. It contracted two 2000 HP onshore drilling rigs from Croatian firm CROSCO Integrated Drilling Well Services; the first began drilling in September 2006, whereas the second will be in function by 2007. “The contractor has a 100% participating interest in the concession that covers an area of 5,523 km.”
In addition to RWE Dea, Centurion Energy International, has increased its sharehold of 25% participating interest to a full 100% in two concessions located in the Nile Delta region; the West El-Manzala and West El-Qantara Concessions. In return for this increase, Centurion has paid $20 million and has “issued a million common shares for the concession interests.” Also, according to the terms of this agreement, in case of meeting specific discovery volumes and development objectives, Centurion is obliged to pay additional future premiums of an average total of $25 million.
Exploration is not the only concern when dealing with the sector; the ministry’s interest in developing the infrastructure for this industry and providing the needed equipments at high quality was amongst the major strategies applied to ameliorate the levels of production.
On the supply side, Egypt is the sixth-largest exporter of liquefied natural gas (LNG) in the world, and developing the techniques of production would even put it in a higher rank. The Egyptian government has signed a joint agreement last June with Union Fenosa (Of Spain) and Eni (of Italy) to build a second LNG train to be located at Damietta, at an estimated cost of $1.5 billion. This new train, expected to be in function in 2009, will double the amount of LNG being shipped from Damietta.
Currently, Egypt owns three LNG trains: two of them located in Idku, owned by British Gas (BG), which is working on establishing a third terminal, while the third train is at Damietta and owned by Union Fenosa and Eni.
Early this year, there were a series of discoveries in the oil and gas sector. Shell Egypt announced two new discoveries in its Badr El-Din (BED) Concession in the Western Desert, in association with EGPC. “This is a great success story. The two recent discoveries confirm our strategy of optimizing production from mature assets and focused near field exploration. These results are very encouraging, and attest to the quality of our work. I must also express my deep appreciation to EGPC for all the support it offered us during our activities,” said Zainul Rahim, Country Chairman of the Shell Companies in Egypt.
One month later, there were two other oil discoveries; first of which was led by Agiba Petroleum Company in the Western desert with estimated reserves of six billion barrels and a daily production of 5000 thousands barrels with an API grade of 34, the second was found in the Gulf of Suez, northwest city of Tor expected to produce 5000 barrels daily with an API grade of 30. Moving back to the gas sector, it has also witnessed new discoveries at the beginning of 2006. Last March, Centurion announced a new gas discovery on the eastern side of the West Manzala concession.
Last September, Egypt had signed a production sharing agreement with Aminex PLC, a United Kingdom oil company for Onshore Block 2 in the West Esh El-Mellahah area in Upper Egypt. The process of drilling in this area could be accomplished soon as there are existing 3D-seismic data available on Block 2, said Brian Hall, Aminex chief executive.

Despite the financial profits resulting from foreign investment, Egyptian oil exports warned of a possible decrease in the production level of mature oil fields, which put them under pressure especially with the increasing domestic consumption. Moreover, the inability to meet domestic demand leads the Egyptian government to buy oil and gas from foreign partners, which creates a heavy economic burden.
Lately, the Egyptian government has been studying possible alternatives for oil and gas due to fear of resource scarcity. Egypt and Saudi Arabia, the largest power generators in the Middle East, signed an agreement to carry out a joint study on linking the two countries with a power grid. According to Hassan Younis, Egyptian Electricity and Energy Minister, this project is a way towards the government’s objective to find alternatives such as wind and solar energy instead of oil and gas. “We have been pursuing a program to use nuclear energy for electricity power generation since the 1980s but it was stopped following the Chernobyl nuclear disaster,” he explained. But, even with the implementation of this project, the government should be more concerned with this issue.
Over the past ten years, the cost of buying oil and natural gas has dramatically increased. According to Sameh Fahmi, Minister of Petroleum, the government paid around $5.7 billion to foreign companies in 2006 compared to $800 million in 1996. The minister attributed this increase to the international upsurge in energy prices. However, he assured that energy prices in the domestic market were very stable regardless of currency depreciation.
According to the fiscal year 2006-07 budget, a total of LE40 billion had been allocated in subsidies to oil products, mainly funded by the economic surplus generated by the petroleum sector, against LE22.1 billion in subsidies last year. Therefore, the bill of oil purchases is considered an obstacle to the development of the petroleum sector in Egypt and hinders its strategy to maintain the balance of payment.

The continuous increasing demand over Egypt’s oil and gas creates a large chain of opportunities for the Egyptian society. On the international level, “global demand for gas continues to rise in response to the high price of crude.” Applying this phenomenon to Egypt, large markets such as the EU are keen to maintain their statue as the principal market for Egyptian LNG, especially when the EU expects to expand its demand level by over 10% in 2009.
Also, the development projects taking place in the gas sector all over the world bring advantages for Egypt. For instance, Spain, the third largest consumer of LNG worldwide, is building a new regasification plant in northwest Spain, which is designed to take in shipments from Damietta; this project will definitely bring positive outcomes for the Egyptian exportation sector and refresh the work movement in this vital LNG site.
Focusing on the internal management to generate more opportunities, the Egyptian government plans to extend its LNG network and have its gas be shipped to new further areas, such as Syria, Lebanon and Turkey through the north-bound pipeline which already supplies Jordan. According to officials, this pipeline can carry up to three billion cubic meters of gas abroad.
According to a study published in August by the Organization of Arab Petroleum Exporting Countries (OAPEC), the demand for gas in Arab countries has exceeded the demand for oil during the past ten years. The study pointed out that the demand for gas is expected to rise by a rate of 4 percent per year until 2020.
On the other hand, the development of the electricity sector is a vital instrument to augmenting Egypt’s production. The adequate supply of electricity is considered as a “prerequisite” for economic growth, since it improves the production level in all other industries. Based on this concept, the government has recently given high priority to promote the development of new and renewable energy and “to introduce energy conservation measures.”
With the assistance of Denmark, the Egyptian government set a policy to have maximum utilization of its wind energy, especially in the Red Sea district, one of the world’s most favorable areas in terms of wind resources. The Danish support includes the establishment of wind farms, as well as sustaining the Egyptian authorities’ capacities to plan, implement and operate large scale wind farms. In addition to these objectives, the program is expected to brainstorm new strategies concerning the development of biogas plants at major farms and the utilization of solar energy.
According to the German-Arab Chamber of Industry and Commerce, Egypt is on the road to reach loans counting for LE36 billion from different international financial institutions in order to finance its power projects under the five year plan from 2007 to 2012. The Egyptian government works tightly to satisfy the domestic demand for energy; this demand increases at a rate of 8% a year. The plan revolves around two main goals: to establish new power generation plants at a combined capacity of 7.857 megawatts and to construct related power distribution and transfer infrastructure.
One of the recent agreements signed to bring in more opportunities to Egypt is the $722 million contract for constructing six offshore rigs and a pipeline. An association of three Egyptian companies, Enppi, Petrojet and Marine Petroleum services have “won a bid for the design, supply and construction of six offshore rigs in the region of El-Khafgy oil fields north of the Arab Gulf.” This project, started in last August, is due to be completed within 30 months.
The potential for increasing energy conservation levels within both energy production and transmission opens the door for more opportunities in the Egyptian economy, which can upgrade the status of Egypt in the international market.

Leaving the bright side of economic profit and positive achievements, any field carries positive as well as negative aspects which constitute threats. On July 28 of this year, the prices of gas and diesel were raised to up to 30% overnight due to the government decision to decrease domestic subsidies on gas and diesel.
Although, this decision was expected, it has carried different effects for gas companies. On one side, increasing the prices of such a vital daily element for citizens is more likely to put downward pressure on domestic demand. On the other side, the reduction in subsidy can result in offering “sweeteners to the companies” in three ways. The first is the possibility that the government could pay more for the gas it buys. Second, it could take a smaller margin of the companies’ profits from exports (it currently takes 60% of the profits from Idku and 40% of the profits from Damietta). Third, the government could decrease the quota that companies are obliged to allocate to the domestic market, therefore having the ability to export more at higher international prices.
If the government continues to decrease its subsidies and companies become the sole gainers, both the government and the population will suffer; but the gas industry will rise. Yet, this is a double-armed privilege as there has been a long debate about government subsidies; while some are in favor of reducing them, others believe subsidies are a crucial element for a large portion of the Egyptian population.

In the petroleum sector, unpredictable events always occur, which contribute to the instability of the international market in general and the domestic market in specific. This year, July 17 was a landmark in the history of oil prices, which increased at an unprecedented rate; reaching $78.4 a barrel. Undoubtedly, this was a golden opportunity for many producing countries to gain quick fortunes. However, investors did not enjoy this paradise for long as this all-time high price decreased to around $60, recording a 23% drop. Yet, despite the major obstacles, there is always hope due to continuous expansions, explorations and projects that opens doors for more opportunities in the petroleum sector.


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