EGAS 2012 Bid Round: Bold Modifications to Lure Bold Investments

Geologist Mostafa El-Bahr, EGAS Vice Chairman for Exploration and Agreements talks to Egypt Oil & Gas about the new Bid Round and Future of Mediterranean E&P.

You are known to be one of the more progressive executives in the Egyptian petroleum sector in terms flexibility and vision. May you briefly talk to us about your background and professional history in the petroleum field?
Thankfully, I was educated well, and it is my obligation to repay the country what it has invested in teaching me. At first I was employed at the Ministry of Petroleum, and then I became Chairman of Oil and Gas Skills, then the EGPC’s Vice Chairman for Exploration. Then I went to Mineral Resources, and I went with the specific purpose of raising its importance. I found significant resistance, but I presented a new model. The model could be applied by anyone, and so my return to the petroleum sector was to be more productive, something I relayed to the minister, and he agreed with me. EGAS was very importance because the future of gas depended upon exploration and research to make discoveries, and there wasn’t much research and exploration activity, so I came here. Positions are not important for me; it’s about how I can best serve the country.

There is a growing anticipation for EGAS’ coming bid round. How many blocks are going to be offered for bidding? And in which geographical area is the majority of the blocks concentrated?
There are 15 blocks offered, 2 onshore and 13 offshore. Since we’re focusing on natural gas, the offshore blocks are all in the Mediterranean Sea where there is primarily natural gas. For the first time, we are offering regions along the Eastern maritime border, within Egypt’s determined economic zone. This is completely within our legal rights, and does not give any party room to complain. At the same time, if some of the discoveries made on our side extend to the other side of the border, this does not negate the rights of the other side in these discoveries, and vice versa, and there are laws that govern these cases. Ultimately, we absolutely will not wait until others make discoveries that extend into our territories and then start searching for our rights. We are going to take the initiative and make our own exploration efforts, and then respond to any claims made by others.

For how long will the bid round remain open?
The bid round will be open for 5 months, with no intention of extending this period. If a company does not manage to evaluate the offered block(s) in the five-month period, the additional month will not make much of a difference, particularly with regards to offshore areas. If the investor is serious and aggressive, they will manage to complete their evaluation within the announced timeframe.

Are there any criteria in place for the exploration plans?
The criterion for the exploration plans presented by bidders will be competition, and the competition will give priority to aggressive exploration plans. Exploration plans involve seismic and well-drilling operations, which is more important to us than signature bonuses for example. We have a committee tasked with evaluating and comparing all submitted bids and selecting the one that offers the highest returns for the country.

Do you expect a high level of competition across the offered areas?
I’m expecting more competition in the 3 Eastern areas than the Western areas. It is our target to become a major player in the gas market, to meet local market needs and to benefit from our natural gas wealth, to develop petrochemicals and achieve added value.

Do you expect the larger percentage of offers to come from newcomers or investors who are already active in Egypt?
We expect both. Most of the major players are already active in Egypt, but we expect some major players to come in as well. We hope and expect that we will get a large amount of offers.

In light of the coming bid round, will there be any amendments to the agreements model?  (Pricing – Cost Recovery – Abandonment)
In the last bid round there was no gas price and no criteria to determine the price, and we had given priority to the local market. What used to happen was that post discovery, the contractor would ask to modify the price, and it would be reasonable request as the price would not be suitable for growth, specifically deepwater deep targets with high cost of operations. We would have to modify according to equations. Therefore, we have criteria for determining price, as discussed in the roundtable. Offshore and onshore prices are completely different, as are shallow water and deep water and shallow targets and deep targets within either. Other variables are low or high pressure/temperature, as well as distance of the discovery from facilities, type of gas (sour gas, rich gas, etc.) discovered, and quantity of gas discovered, all of which necessitate consideration in the costs. The contractor comes forward with a development plan that gives a range for profitable gas price. We negotiate with in the context of the development plan, look at the price and how much IRR would be achieved in our model. We find the an acceptable IRR range for us, which takes into account the risk taken (high risk, high return) and based on this we determine the price for deep water/deep targets and shallow water/shallow targets etc.

We are trying to encourage contractors to develop discoveries immediately upon making them rather than exhausting a lot of time, and so we have put in place a timeframe for development. If the investor is serious, they will develop the discovery in the determined timeframe, if not they will leave it. We are looking for investors who are aggressive in both exploration and development because we are in need of gas production.

Regarding marketing, we have already discussed the criteria judging the price at which we will be willing to purchase. If this is unsatisfactory for the investor, they have the right to seek their own customers in the local market. If they find customers they can proceed to negotiate pricing with them, but we will be actively present in the negotiations, since they’ll be using the national grid and will consequently be paying us tolling fees.

The modifications we have applied to the agreement model are natural advancements, and if we do not implement them, then we are not doing our jobs.

What about Cost Recovery in deep water prospects?
There is a pool for cost recovery, if cost is high as in deepwater, pool of cost recovery should reflect this. Agreement should determine cost recovery within a given amount of time. Deep water, deep target cost recovery pools will differ in terms of percentage from shallow and land targets, and this will be competitive, but it will also have a limit.

Will there be an Abandonment Clause?
There is an abandonment clause this time, something that was not present in previous bid rounds.

What if it is more feasible to develop a discovery with a model other than PSA?
If the discovery is made within the context of a concession agreement, then the terms and conditions of that agreement are applicable. If the discovery reveals variables that cause the investor to claim that it would not be economic to develop the discovery with the agreed price, they are free to look for other buyers at whatever price they wish for a certain period of time, after which the discovery is relinquished to us, which is fair. This is a common practice; it is not something we came up with.

Are the modifications being applied to gas agreements applicable to oil agreements?
The market needs production, and the greatest potential for gas lies in high-risk deep-water deep targets, which require incentives for investors. This new model looks 10 years ahead to meet market needs in that time, but cannot be applied to oil because it does not meet short-term market needs. The modified model cannot thus be applied as it is by the EGPC in oil agreements because variables such as well cost are different, but they can take from our modifications and we can take from theirs; there is no impediment to that. Also bear in mind that the EGPC and GANOPE do not face a major problem with pricing in their agreements because they have Brent as a reference.

Deepwater exploration entails the use of very advanced technology. Will there be different criteria in the tenders for services and technologies in deepwater in order to ensure a balance between adequate prices and required quality of services?
There are two different sets of terms and conditions for shallow water and deep water, which is a very important distinction. There is no point in issuing tenders if we don’t issue them in a proper way. The very point of issuing tenders is to attract investors who have the monetary capability of taking the risks we would be unable to venture.

What is your take on the issue of subsidies and government regulation in the sector?
It is inevitable that subsidies will eventually be removed, and this is the current observable trend globally. There has to be a vision guiding our movement. The industry must be de-subsidized but not de-regulated, as it is our role to continue regulating the market and it is necessary. Subsidies actually make it more difficult to regulate the market, as their removal would grant us more freedom according to factors that should be considered in regulation.

Experts agree that within 5 to 7 seven years, the Egyptian petroleum industry will have to focus almost exclusively on natural gas. What is your vision for the evolution of agreements to suit the challenges of future gas E&P?  (Deepwater, High Pressure High Temperature (HPHT)

It is not true that oil reserves will be depleted in 5 to 7 years. Last week there was a discovery of 55-56 million barrels of recoverable oil, and oil in place exceeded 250 million barrels. This well’s initial production is 4,500 barrels per day and will reach 10,000. These are all additional reserves.

Has EGAS taken any steps towards adopting models for Shale Gas and Light Tight Oil?
We are organizing a workshop for shale gas in the coming period. Investors are interested in shale gas prospects in Egypt, but they do not have enough data. A committee was established particularly for the future of shale gas in the country, comprising of representatives from all government entities that can contribute to exploration for shale gas. Since EGAS is primarily responsible for gas exploration in Egypt, we are taking the lead, and it is my honor to head this committee. There are 2 representatives from EGAS, 2 from the ministry, 2 from the EGPC, 2 from GANOPE, and 2 from Mineral Resources. It is tasked with gathering all possible relevant data. This includes assessing what we have in terms of shale gas, looking at reports and research conducted in other countries on a regional level, and looking at what producing countries have done to reach the stage of production. We have collaborated with services companies such as Halliburton and Schlumberger in order to gather data regarding shale gas exploration, and we hope this will encourage exploration companies to begin working in conjunction with us in this field. We can expect to be discussing investment in unconventional resources in Egypt by the next fiscal year. We need to start steps now because the more we wait, the costlier the process will be.

Unconventional resources like Shale Gas require unconventional terms and conditions. The terms and conditions by which current concession holders operate do not encourage them to explore for unconventional resources. However, before we determine new terms and conditions, we have to do the research and determine the variables such as where the resource is located and the cost of extracting it before we can settle on new terms and conditions. We also have to take advantage of current wells being drilled for conventional resources in order to gather data for unconventional resources, which is basically free research.

Do you predict difficulties in acquiring parliamentary approval for agreements in the coming period?
The bid round is an agreement based on economics. If I clearly show my rights and obligations in the agreement, how it will be beneficial to the country, and the opportunities we’re missing if we do not go through with it, all in complete transparency there should be no problem. There are no direct negotiations, it is a competitive bid, and so what we present is the best offer we can get in a competitive environment. All of us, including the parliament, have to be aware that we have regional competitors such as Libya to the West and others to the East who are vying to attract the same capital we are. If we do not offer competitive terms, investors will go elsewhere in the region, and we gain nothing

Which are the most serious competitors for Egypt in the region?
All regional competitors are serious, but the most significant competitors are the countries to the East and North, extending Lebanon, Syria, and Cyprus. This is because they have access to the Levant basin in the Mediterranean Sea. Most discoveries in this Eastern region are made in this basin, and hopefully most of our Eastern and Northern discoveries will be made there.

How much of a share of resources in the Levant Basin lie in Egyptian territory?
There is not enough concrete data at our disposal to determine what we have and what we don’t. This is one reason why we issue bid rounds seeking the most aggressive contractors, in order for them to conduct seismic surveys and better clarify the extent of our hydrocarbon wealth. After the exploration phase of this bid, we’ll be better placed to determine our share in the Levant Basin. Geographically speaking, we’re in the area. The USGS released a report in 2010 revealing that there are 223 trillion cubic feet of undiscovered natural gas. We have a significant share in this wealth, but we have to exert an immense effort to identify it. What we have discovered thus far is substantially lower than what we’re looking for and hoping to discover. There is a good chance that exploration in the coming phase will reveal new reserves that exceed our current proven ones.

What effect, if any, will the presidential elections and their results have on the bid round?
There is a risk that is taken into account in the process of investment. Bear in mind that offers will not be presented until November, no one will present offers in June. They’ll spend the coming months evaluating the blocks. There are two factors that are significant when it comes to the political events transpiring in the country. The first is that there is significant potential for gas discoveries, and the companies know this, it just requires work. The second is that this is a transitional period and we won’t remain like this forever. The country will eventually return to stability, and the investors know this as well.

Some view that free information sharing should be more wide-ranging in the sector. What is your opinion on this matter?
There are principle data packages that are free of charge, but there is data which entailed a significant cost for me an authority, and therefore it is fair to sell it. We do not sell at the original cost for us, as we sell the same data to multiple buyers, and so there is a pricing committee that determines the price. Moreover, serious investors understand the need to pay for information and allocate a specific budget for this purpose, and we are looking to attract serious investors. Take into consideration that the information packages actually save the investor the cost of gathering this data themselves, which would be more expensive for them.

What are your hopes for the new ministry?
My hopes are not related to the new ministry but the new government as a whole. I hope that the new government will understand that those working in the Ministry of Petroleum are doing everything they can to keep current investors, to attract new investors, and to develop new resources. They have to understand that we are doing all we can, and I do not think there is anything more that can be done in current circumstances, we are working based on our successful history with our partners, a history which gives them hope for the future. This is the only industry in Egypt in which no investors have minimized or ceased their operations in the countries. I hope that the new government will support the sector in order to continue playing its natural role, and that we continue to work along our current development plans in order to meet local demand and look to tomorrow.

Can we expect to see more bid rounds from EGAS in the near future?
What we are working on, and what I can guarantee is that there will be another bid round in 2013 and another one in 2014.

By EOG Team


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