Last month, Egypt Oil & Gas organized The Future of Egypt’s Brownfield Development Roundtable as a part of a three-day convention that also featured an exhibition introducing the latest brownfield technologies and a workshop to facilitate exchange of experiences and discussion between the top players in the petroleum industry, drawing from domestic and foreign experts representing the private as well as the public sector. The roundtable gathered figures such as Former Minister of Petroleum Eng. Abdallah Ghorab, CEO of EGPC Eng. Tarek El Molla, President of Romania National Agency for Mineral Resources Gheorghe Dutu, and CEO of Cheiron Petroleum Service, Dr. Hani El Sharkawi, at the Intercontinental Hotel at City Stars in Cairo. As a result of the roundtable discussions, an agreement was reached between the government and attending companies to form a committee for discussing how to advance brownfields development in Egypt.

Brownfields to help solve energy shortages

Eng. Mohamad Fouad, President of Egypt Oil & Gas, introduced the discussion by saying, “In our globalized world, we don’t lack innovation, we don’t lack creation, but at times we do lack communication. We are here to bring you this communication.”

Fouad pointed out that this is the 7th roundtable event of Egypt Oil & Gas aiming “to provide an environment that brings government officials and industry executives together in order to hold a constructive dialogue.” There was general consensus between the participants of the event that the industry needs more communication, cooperation, exchange of experiences and information in order to progress with the development of brownfields in Egypt.

Ghorab initiated the conversation on a positive note, acknowledging the potential of Egypt’s reserves. “All the statistics say that Egypt produces from 35 to maximum 40% of the original oil in place. … Egypt produced 8 billion barrels of oil. If we are talking about 40% maximum, this means we have 20 billion barrels of oil in place. … If you produce 1% more, this means 200 million barrels. I think the potential is there.” Molla, however, went on to point out the challenges faced by the industry stating in his opening remarks that the “easy oil era is over”. He introduced a five-fold strategy for closing the gap between energy supply and demand in Egypt, which includes brownfields development. The five key points of the strategy are as follows:

• Encouraging exploration in frontier areas and new areas such as the Gulf of Aqaba and the Red Sea
• Increasing production and reserves from mature reservoirs
• Producing from unconventional resources, notably shale oil and shale gas
• Producing energy from non-fossil fuel sources, working towards electricity generation from geothermal wells
• Dealing with current challenges to increase production such as the development leases approval process, military approvals, gas prices, security issues, concession agreement extension policies, and joint venture policies in procurement and contracting.

Molla also acknowledged the need to improve payment of overdues, “to ensure good operations and investments at normal levels.” He went on to admit that new investment terms may be needed in order to succeed with brownfields development in Egypt. “We realize that enhanced oil recovery projects require significant investment and probably different duration terms in typical concession agreements,” Molla assured. “We are open to modify our typical production sharing agreements to encourage successful enhanced oil recovery projects.”

The Challenge of Defining Brownfields

Several participants pointed out the need to clearly define the term “brownfield”. “We don’t have a clear definition for brownfield. We are talking about brownfields without a definition,” stated Dr. Moharem Elgamal, Technical Advisor to the President of Kuwait Energy Egypt. Dr. J. Samuel Armacanqui, Development Manager SUCO-RWE Dea North Africa, posed a question whether marginal fields were brownfields, as a “marginal field” refers to an oil field that may not produce enough net income to make it worth developing. Eng. Diaa Kassem, General Manager Follow-up of Reservoir Behavior at EGPC, said in the workshop that “Brownfield is almost a new expression in the oil industry and it has been used alternatively with the expression ‘old field’ and ‘mature field.’” According to him,” brownfield in specific means the old field that has more than one cycle of development and production decline.”

Mr. Brian Twaddle, Country Manager at Transglobe Energy, said that the term “brownfield” has many definitions. He brought several examples of what constitutes the brownfields sector in Egypt:

• Mature fields (existing development leases) where recovery factors can be increased significantly beyond the original field development plan
• Mature fields where the economics of intensive investment requires development lease extensions and possible modification of commercial terms
• Under-capitalized assets operated by state institutions (GPC fields, development leases handed to EGPC after expiry etc.)
• Infrastructure: aging export systems, processing systems and shipping systems. Not covered by existing production sharing agreement model.

The Prevalence and Potential of Brownfields

Speaking to the main issue that inspired the brownfield convention, Eng. Kamel El Sawi, President of Kuwait Energy, stated “There is an absence of new discoveries all over the world since about more than ten years back. … This brings a very big importance for the development of brownfields.” He added that “Since 2008 when the oil price reached $147, most of the companies all over the world started thinking in a different way, to develop the mature brownfields.” Kassem added the statistics that “approximately 60% of the world’s oil production is delivered mature fields in the state of decline. Oil production from brownfields in Egypt is close to about 77%.”

Dr. Darius Shahsavari, Vice President Technical Services at IPR Group of Companies, pointed out that “As Mark Moody-Stuart, the former Chairman of Shell, himself an exploration geologist, said, most of their reserves were added by engineers who develop the fields, including brownfields and so-called depleted fields” rather than by exploration.

In his workshop presentation, Jim Gillett, Senior Advisor, Business Development, at Gaffney, Cline & Associates, pointed out that brownfields are worth to be exploited because many new discoveries exist in extreme conditions such as deep water, sour formation, high pressure and temperature, and shale.

Elgamal argued that brownfield terms can in fact be considered less risky than exploration terms because in case of brownfields, it is already known that hydrocarbons are there, the only issue is to get them off the ground economically. According to Shahsavari, “One of the biggest advantages of brownfields … is the extensive database and existence of infrastructure.” Fouad made a related comment in the opening remarks, pointing out that “While a new discovery may take from five to six years and onwards to develop into production, new projects on existing fields will yield value creation opportunities in short to medium term.”

Technology Is There, Economics a Hindrance

In his workshop presentation, Kassem offered some examples of enhanced oil recovery projects in Egypt: Gupco’s bright water pilot in Morgan Field and a low sal study, Agiba’s pilot project on polymer flooding, Petrobel’s pilot project on bright water, Shell’s study on low sal, Petrodara’s study on polymer flooding, Khalda’s CO2 and miscible flooding study, Badr Eldeen’s study on CO2 and miscible flooding, and GPC having started steam flooding in Asran fields, which yielded an increase in oil production rate from 200 to 7,000 b/d. Sawi informed that, “We have a very good experience in Egypt as Kuwait Energy with the development of one mature oil  field in Gulf of Suez with GPC” with the production being raised from 1,500 to more than 7,000 barrels by now.

Egypt indeed has some brownfields development and enhanced oil recovery initiatives, but as the participants of the roundtable agreed, much more are needed. However, brownfields development entails a lot of challenges, several of which were outlined by Gillett in his workshop presentation:

• Poor quality or missing data
• Stranded or bypassed hydrocarbons
• Remaining oil not addressed by the current development
• Aging wells, facilities and infrastructure
• Legacy technologies
• Technical problems, such as with produced water management
• Economic barriers
• Historical environmental damage
• Logistics, especially offshore
• Conflicting objectives between IOCs and NOCs
• License terms not applicable to the field in today’s conditions

Several participants said that technologies to develop brownfields are there and the main hindrance to their development is economics. “In my view, t’s not a technical issue in most cases, it’s an economics issue,” stated Gillett. Mr. Thomas Maher, Vice President of Apache, also recognized that the technologies exist, but there are challenges on a fiscal basis concerning cost recovery. “It would be good to get a clear message [from the government] that the IOCs are welcomed to invest in brownfields,” he added.

It was stressed that as Egypt is in competition with other oil-producing countries, the need to act quickly is imminent. Eng. Tawfik Diab, Managing Director at PICO International Petroleum, pointed out that the lack of funds being invested in Egypt is favoring projects elsewhere. “Once they are invested elsewhere, they are not invested this year alone, they are invested this year and the years to come,” he cautioned, adding that by the time an agreement on a model has been reached and there will be a tender, “we will not get the focused, mature oil players that will really add a lot of value. So I think the key point here is that time is really of essence.” On the same note, Eng. Hesham Ismail, Vice President North Africa at Halliburton, said “if we are not going to speed up the process, whether it’s EGPC or EGAS or the ministry, we will lose a lot of investment and we will lose a lot of credibility. … There are terms and conditions that need to be amended, there are prices that need to be revisited, and if we are not doing this now, we are losing the money, we are losing the cash that should be in the country now, should have been in the country now.”

Molla confirmed Ismail’s point, agreeing that the decision-making process needs to be accelerated. Mr. Jerome Jammal, Vice President at Baker Hughes, stressed an obligation to future generations of Egypt to move faster with brownfields development for the sake of economic development. Ismail stated, “Discussions on developing mature fields have been going on for quite some time and I believe the main step to be taken now, and I mean now, should be a serious will to start and EGPC to develop a plan with the operators… We need to see EGPC putting a model in place.”

Challenges With the Current Fiscal Regime

Many participants said that the current fiscal model is not suitable for brownfields. “The current concession agreement will never be able to survive in case of developing a brownfield” said Mr. Ahmed Moaaz, Country Manager of Sea Dragon.

“As we get into mature brownfields, we want to look at new technologies. Investing in new technologies is a different risk profile than was perhaps perceived in initial concession agreement, which is hard for EGPC to manage,” noted Twaddle. “I’m sure all the IOCs, investors here have regular discussions about whether something will or will not be recoverable as we start to look at new ideas and that’s managed in a very ad hoc way at the moment,” he added. “I’d try to pin that down to something a bit more structured that allows new technologies to be more freely implemented.”

As fields tend to enter the brownfield phasr close to the end of development leases, Twaddle highlighted problems with cost recovery during the last few years of a concession agreement. Ghorab made a comment along similar lines, saying that “Sometimes the current agreements allow companies to go for unconventional work, the problem may come if you have a cost recovery constraint or you have not enough years left for the agreement to recover the contractor´s money, then will negatively impact the economics.” Sharkawi pointed out, “When these concessions were introduced 20-30 years ago, they did not imagine there would be  a second recovery coming and tertiary recovery coming, so they were always limited in terms of 20 years, 25 years and so on, now we realize that fields could produce for another 50 years if we use the right technology.”

According to Twaddle, there is a problem with the current production sharing agreement because the parties are very focused on cost recovery. “There’s a breakdown in trust between the regulator side that thinks the contractor side doesn’t care about cost, and the contractor side that thinks the regulator doesn’t understand why the cost is required,” he noted. “We have to refocus that to look at volume rather than cost, and make sure that we’re making decisions based on volume, based on economics.“ Fouad also pointed out the pervasiveness of mistrust between operator and regulator. “In the past couple of years, we’ve organized several of these roundtables and one common issue that I have realized at these rountables is that there is always a barrier between the IOC or the investor and EGPC in the mindset,” he said, highlighting the conflict of interest in which “EGPC still looks to the contractor as looking towards his personal interest and EGPC is always trying to protect the government’s interest.”

Shawkat introduced the position commonly held by the roundtable participants, that there is a need to attract the “small players” — especially service providers— when it comes to easing terms. “The bid rounds for the exploration go for big acreages that [are] really lucrative to IOCs while the brownfields are not that lucrative to the international companies, whereas small players can really have interest in [them], but the current regulations will not allow them to participate in this campaign,” he explained. Twaddle on his part pointed out that “the technologies and technical expertise that sits within service companies [could] be better exploited and better utilized. That allows operators and service companies to work as a different sort of partnership than we currently do.”

“We are ready to adopt any possible, let us say, change or amendment to our agreements in order to accommodate whatever we can reach,” responded Molla to calls for a change in terms. Fatah, also representing EGPC, solicited proposals, saying that EGPC would be willing to study them if they are deemed to achieve economic value, “in order to … achieve success … for our partner and for Egypt”.

Adjusting the Regime for Brownfields

“The concession agreement is prepared before the exploration start, so when you include a mechanism or different fiscal regime to develop the brownfield later on, this will complicate the agreement too much,” said Geol. Mostafa El Bahr, Chairman of Agiba Petroleum, recognizing the difficulty involved in establishing the point when to incorporate brownfield terms into agreements. “I think we need to include this while we are signing the development lease because in this case you will be in a better position to identify more or less how much oil you have, how much of this will be recovered and the recovery factor and what do you need to spend to recover this oil,” he suggested. Bahr also pointed out the need to set a clear border between the greenfield and brownfield phase in order not to mix their recovery schemes. “Let’s say after the production you still have some reserve that needs additional investment. This could be the border, the additional reserve, which is not included in the booked value of the oil in place,” he proposed, adding that there could be a need to study each case separately, and define the fiscal terms accordingly.

Elgamal had another idea for accommodating the current regime to brownfields development. “By the end of the terms, we can offer [the operator] he can invest so and so under certain conditions and change the production sharing agreement into a service agreement,” he explained, adding that “service agreement doesn´t prevent you from booking reserves.”

Shawkat on the other hand proposed to “have another agreement which is talking about the leases that are dropped from the international companies or dropped from the national companies like GPC.” In this regard, he pointed out the example of GPC area A developed in cooperation with Kuwait Energy that turned out to be a big success.

“Regarding the agreement, I think we have three cases,” shared Eng. Mohamed Baydoon, Chairman of SUCO, his ideas. “The agreement which about to be expired an in this case we can actually ask investors before renewal to prepare a study to chose unconventional methods to increase the production and the recoverable oil and then if they can show us an unconventional method before we renew it [the agreement], then we can have a new agreement about conditioning in the new, incremental oil.” As for the current agreements, he suggested that the investor could be given some flexibility to amend terms in case it can show that it is possible to increase oil recovery with advanced technologies. As for the third case, new agreements, “we actually should include a statement indicating that it can be revisited in case unconventional work is required, which leads to increasing the oil and gas production,” Baydoon elaborated, explaining that this creates some flexibility, whereas currently agreements are very rigid.

Agreements Rigid or People Inflexible?

However, in Twaddle´s opinion, “probably bigger than the wording that sets the contract somewhere gathering dust in the shelf is what is in people´s heads and how people behave – regulator side, contractor side, because there is … a lot of flexibility actually available in contract now.” According to him, it is probably possible to develop brownfields within the current concession agreement, “but people are a little bit wary or frightened to do it, are ivery linear in their application of tendering and contracting process.”

The latter can derive from the fact that people working in Egypt’s public sector are afraid to take risks. Elgamal admitted that when he was working for a national company in Egypt, he was afraid to make decisions, thinking he could be blamed of wasting money. “Imagine you spend $100 million in one project and at the end it didn’t work. Who is going to be accountable? I’m investor and I know exactly what I am doing, I’m willing to take the risk, but here nobody will take the risk working for the government,” he stated, adding that overall laws need to be changed in Egypt to encourage some risk taking, as the latter is an inevitable part of brownfields development.

Twaddle’s argument that the existing agreements actually are flexible was supported by an example by Eng. Nabil Salah Gaber, Engineering General Manager of GUPCO. “4-5 years ago there was a concession renewal between BP and EGPC and there was a debate in terms of value or the number for the reserves,” he recalled. The parties reached an agreement that BP would drill a certain number of wells in certain areas in order to confirm this value and then booking for the reserves could be made. “So I think the agreement itself is flexible,” concluded Gaber.

Fatah said that recently in a few occasions, such as the successful Kuwait Energy case, EGPC has made a new bid round at the end of development lease in case the operator does not make an offer that is deemed reasonable, whereas in the past the lease would have been renewed so it remained to the same company. He mentioned EGPC is considering wider use of this practice and also suggested that companies themselves could offer terms and conditions instead of EGPC stating them. “Actually GPC used to make bid round related to this area with brownfields, and this one model came according to the competition between the companies that offer the terms and conditions regarding the economics and production,” he said, speaking about the Kuwait energy success story. “So it should be through a normal bid round, but this bid round, it is open without specific terms and conditions, it is open for everyone.”

Drawing from past experience with the UK and several East Asian and Latin American countries, Gillett said “It’s always a difficult political issue for any government, and EGPC is no different I’m sure, to change terms that have been in place for a long time. … I’ve lost track how many governments we worked with in the past who are wrestling with a similar issue.” Mr. Gheorghe Dutu, President of Romania National Agency for Mineral Resources, noted that, “Petroleum represents 10% of economics and 90% [of] politics,” adding, “I wish that this percentage would be turned the other way round.” It could be less difficult to ease the terms of agreements in case people realized more the importance of the petroleum industry for Egypt. Along those lines, Eng. Shamel M. Fahim, Director of Marketing Sales and Engineering at Baker Hughes, stressed the need to advertise the value of oil industry to Egypt and its importance as an employer.

Lessons to Learn From Other Countries

“It will be very, very helpful, very effective if EGPC and the authorities look at other countries, what they are doing in terms of attracting investors in the field,” stressed Sharkhawi. Several other participants said as well that Egypt should look at the models that exist in other countries. Some of them could be applied in Egypt after making certain changes according to the country’s unique circumstances and needs. The most commonly cited successful model was that of Mexico, whereas Malaysia, Columbia, Indonesia, Argentina, Equador and Romania were also mentioned.

Diab impressed upon the discussion that the world has surpassed Egypt, that the global conversation has moved beyond the service agreement to booking reserves. “Countries like Mexico,” he said emphatically, “are changing 50-year-old constitutions to allow foreign investors to book reserves today, and they are producing 2.5 million barrel of oil, this is the attention that this topic is taking worldwide.” Hesham A. Ibrahim, Marketing Director of PICO Energy, spoke about Mexico as well, in reference to an integrated drilling well tender that his company took part in, which could be used as a good example. There was no registration needed to participate in the tender, Ibrahim said, which made it easier to participate. Besides, profit margin and other terms and conditions were not negotiated in said tender, which made the process quicker — simply, the one who offers the best price will be the winner.

Armacanqui also highlighted the North Sea area, where “companies allocate 5% of the total investment for application of new technologies right from the beginning.”

Integration of Service Companies and Other Remarks

Eng. Sayed Rezk, General Manager of ENAP Sipetrol, advocated for the application of performance-based contracts for service companies, with the support of EGPC. “In Sipetrol,” he said, “we have already applied performance-based contract.” Fatah of EGPC agreed that service companies are indeed very important, and just selecting the lowest price may not be the best option. When evaluating service contracts in the tender, after evaluation by the partner and joint venture, he suggested that a couple of companies with high technical quality could be selected, and from them the company offering the lower price would win the tender. However, a few participants pointed out that it is not currently the case, and the support from EGPC is required to establish this practice.

“Service companies are not in alignment with the joint venture companies,” stated Geol. Magdy Wedad, Managing Director of PICO Energy. Joint venture companies should take quality a bit more into account, while on the other hand service companies should be willing to take more risks, he said, suggesting the heart of the issue are legal challenges. “If the government is willing to devise as new vehicle, new mechanism whereby brownfields have a different service agreement than the conventional service agreement we have, I think that will give room for further development in brownfields,” offered Moaaz.

Twaddle brought up the issue of establishing adequate brownfield infrastructure, another pressing concern for the development of mature fields, as much of the existing technology and equipment is very old. “The production sharing agreements as they exist don’t allow easily investors to upgrade infrastructure, to contribute to infrastructure,” he said, adding that the “economics of all brownfield opportunities across different parts of the country can carry the cost of operating infrastructure, but it’s not possible for any individual party.” Rezk suggested that the structure of joint venture companies should be changed in order to improve the availability of infrastructure.

“Data for all the concessions [could] be available at no cost to everybody,” proposed Mr. Hisham Refaat, Business Development Manager of Waqud, another measure for encouraging brownfields development in Egypt, citing the benefits of more industry professionals looking at concession data, which would increase the probability of good ideas coming to light. “Selling the data is peanuts in overall terms for EGPC, but it’s a lot of money for small players if it’s available for free,” he argued.

Forming the Committee

“I don´t think that today we will be able to find a solution, but we can agree about forming this committee,” initiated Baydoon, soliciting ideas for who would take responsibility for the formation of the brownfield development committee. Many participants agreed. “We need to form a committee as soon as possible,” Jammal said, adding “because the last thing you want is to do … is to have same forum next year and we are talking about the same thing.”

Molla supported the idea of forming the committee, citing success with similar committees that have been established, one to cover gas prices and another for unconventional oil exploration. It was proposed by several participants that the committee would include representatives from the government — the Ministry of Petroleum, EGPC, EGAS, GANOPE — as well as IOCs and service providers.

“I would like to … see a committee that has a very strong legal advisor representing the government and its laws that can put all the ideas in here and phrase it,” said Wedad. “And I don’t think we can go too far without it.” Molla on his part suggested that “The committee should include different disciplines, from each speciality — economics and legal, plus the technical members.” Fouad said that it should be EGPC’s responsibility to lead in forming the committee and bring everyone to the discussion table. Conclusion

Ismail congratulated the efforts of EGPC following last year’s roundtable on unconventionals, and the initiation of projects inspired by the roundtable. “EGPC led by Eng. Tarek and Dr. Ahmed did an excellent job. A tremendous effort has been done on starting this project on unconventional, shale gas,” he said, adding, “If we continue the same effort done on unconventionals, we will get there in the mature fields.” Meanwhile Fatah encouraged the participants to keep in contact and present their proposals and ideas to EGPC for consideration. Armacanqui expressed confidence that looking down the road, Egypt’s petroleum sector could still see a lot of success. “I spent ten years in South America, ten years in the Middle East, and here I have been since the last four years. I am still impressed by the things I see,” he said. “So in a few years, if put right model [in place], Egypt can become a hub in the Middle East.”

By Laura Raus – Lily Leach – Mai Marei