Bottomless Potential: Venturing into the Depths of the Mediterranean

Egypt Oil & Gas speaks with Mohamed Shoeib before leaving his post as EGAS Chairman about the Mediterranean’s gas wealth, the challenges and opportunities facing the company, and the future of natural gas in Egypt.

How do you see the future of natural gas in Egypt?
Natural gas is one of the cornerstones of Egypt’s future. Gas is part of everything, if we use gas for petrochemicals, which is the best use for the gas, it can drive the growth of the entire country’s economy directly and boost it to new heights.

What is Egypt’s current production of natural gas?
Egypt’s production of natural gas is at a sustainable level of 6 billion standard cubic feet (scf) per day which is good, especially when you consider that it is challenging to maintain production because we actually have an annual decline which averages 800,000 million scf in daily production, and so we must have new discoveries, developments and projects and tie them into production to make up for the decline.

To tie in and put in production a Mediterranean discovery is difficult and takes time, but most of Egypt’s production now comes from the Mediterranean. It is a difficult challenge, but I hope we will be able to maintain this level of production for the next five years.

Are current production levels meeting local demand?
In my opinion, our production exceeds our local needs of gas, but we are wasting our gas by burning it for electricity with low levels of efficiency. If we make better use of our resources we would be able to meet local demand. If, for example, power generation in Egypt was working at an efficiency of 60%, we would save at least 30% of our natural gas.

What is the government doing regarding this issue?
We have highlighted the necessity of starting to fully utilize renewable sources of energy; it is very important in particular to begin using solar power generation. The costs of solar power generation have fallen by almost 90% in the last 10 years, and Egypt is one of the best 10 places in the world for electricity generation through solar power, so I think it is very important to develop that.

Is local consumption of natural gas expected to increase in the coming period?
It is increasing, and that is actually good, it is a good indicator because it reflects development in the country. What is truly damaging us and depleting our resources is the inefficient usage of natural gas for electricity generation.

Do you see the current and expected production levels in the coming period meeting the demands of a possible wave of economic growth in the country?
First of all, we hope that we do indeed witness a wave of economic growth in the coming period. Regarding energy, it is very important for economic growth, and we believe that our current levels of reserves and production will be able to meet the demands of economic growth, but we cannot count on new reserves in the newly offered blocks until the discoveries are actually made. Expectations for our Mediterranean area are high, and I believe the USGS estimated reserves in the area to be almost 223 trillion scaf, and if we find 50% of that amount it will be very good, but we cannot yet determine what will be discovered. We can only verify new reserves and production after the bid round is over and drilling begins.

What’s your strategy for EGAS in the coming period?
Regarding upstream, the new bid round will be one of the tools to increase reserves, and we are also issuing a bid round for seismic surveying in all of the currently operational areas in order to acquire new data. My instructions to my people is to have a bid round every 18 months. We issued a bid round in June, and we have a bid round ready to be issued after that by 18 months, and so on. All of the bid rounds will be focused on the Mediterranean and the Delta area. We will pursue any development that is economical for us. We will also be looking at optimizing the utilization of our facilities and those of all of the operating companies, in order to reduce the period it takes to put discoveries in production, and also to maximize the use of existing facilities.

Regarding downstream, one of the main elements of our vision is to maximize added value projects by extracting derivatives such as butane , propane and ethane in order to utilize them in petrochemical projects and to meet Egypt’s demand of LPG. Another goal we have set is to extend the gas grid so that it may reach every household feasible. In the last fiscal year, we connected almost 576,000 units, which is a record for Egypt, and the year before, we connected 550,000; the average for the five years preceding that was 320,000. The plan for the current fiscal year is 750,000, which is a very big number, but we hope we will be able to complete it and aim for a million and more in the coming years.

Do you believe that the new blocks offered in the most recent bid rounds will add substantial new reserves, particularly deepwater areas?
This is our expectation, particularly in light of the fact that our neighbors have made significant discoveries in the area and in the same formations ,in different locations of course. The last bid round EGAS issued, in June 2012, included 15 blocks, 13 of which are in the Mediterranean offshore and 2 of which are onshore in the Nile Delta area. 6 of the offshore blocks are located in deepwater areas, in the North and Northeast of Egypt. A number of the blocks were issued on the boundaries of Egyptian economic waters, and so we hope that we will make discoveries in this area, which will boost Egypt’s reserves and production rates of natural gas.

What results has the new bid round produced so far? Is the participation mainly from newcomers or current operators?
Participation is mainly from current operators, the big companies, because costs of drilling a well in the deepwater Mediterranean may reach $300 million, and so you have to have big contractors who have experience in deepwater drilling.

Is there  possibility of legal disputes or conflicts arising with our neighbors over the blocks located in the border areas?
There are no legal disputes, and I do not see any disputes or conflicts happening in the future.

Do you see a possibility for unitization with our neighbors in the Mediterranean?
If we end up producing from the same reservoir as one of our neighbors, the standard practice applied in this case internationally is to unitize. If it happens in the Mediterranean, we will unitize with Israel or with others, it is standard practice. We are not inventing the wheel.

Is the current agreements model suitable for deepwater production in your view?
In the new bid round, we have offered new terms and conditions. It is the first time they are offered in Egypt, and we held some meetings to announce, discuss, and clarify the modifications with the investors. We are offering three options for the cost recovery and profit share of the contractor. One is to agree a gas price with us. There is no fixed gas price, it will be agreed in accordance with the discovery in terms of location, size of investment, facilities it will tie into, and other factors. The contractor is also given two other options; the first is to sell to the local market, and the second is to export. This will gives the contractor the advantage of being guaranteed a fair price, because it will create an open market with multiple buyers and sellers. It will also eliminate the problem of late dues because the contractors will be selling by themselves.

What mechanism will the contractor use for transportation of the gas if they choose to sell to the local market?
They will be allowed to use the national gas grid, as we stated in the bid round. They will pay a certain fee, and we will determine the fees in accordance with international standards.

Deepwater exploration and production require highly advanced technologies which entail very high cost recovery. Do you see a problem arising regarding that?
Not really, because it is included in the cost recovery. When they need to use advanced technologies they will use them, and that cost will be included in the investments and the cost recovery. If we have a fair price for the discovered gas, there will be no problem.

The issue of debts to foreign partners is one that plagues the Egyptian petroleum sector, and one that the government is taking steps to amend. What is your take on this issue?
Let us say with complete transparency that this is one of the major problems that we face, but I would like to take this opportunity thank our partners because they have supported us greatly during the last couple of years. We believe that they understand the circumstances of the transitional period and that they will continue to support us, and at the same time we acknowledge that we have to address the problem.

Does working under the new government present any new opportunities or challenges?
Our current plan was approved in January, before the new government was appointed. As a sector, we are continuing to do business, we are not inventing much.

Does EGAS have a plan for unconventional gas development?
We are always ready to welcome our partners to speak economically regarding any discoveries, any production possibilities, any one million BTUs we can produce, and we are open to discuss all terms and conditions. If the only way is to have new terms and conditions, we will do it.

Do you see any challenges facing you in this fiscal year?
We are now working on factories and commercial units as well as firms, restaurants, bakeries; we are attempting to tie in everything. This week we will be applying a CNG unit pilot project in one restaurant in order to see how we can utilize CNG in cases where the network is not physically nearby to the activities that require it.

Is there anything else you would like to add?
I would like to tell investors that Egypt offers very good opportunities for investments, particularly in oil and  gas; Egypt is still one of the best locations in the world for stability and investment. I would like to assure our partners that their rights will be protected and as a government we will respect them. Our partners who have been working here for a long time already know the quality of the people working in this industry, and to newcomers I would like to say welcome, and I would like to assure them that they will find great cooperation and professionalism in the Egyptian petroleum sector.



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