Improving economy and new petroleum minister heralds upturn in fortunes
Egypt’s gas output has fallen steeply since 2022. Declining production at its key Zohr field and legacy Nile Delta fields, compounded by a challenging macro-economic climate and limited exploration success, has turned the country to a net gas importer again. LNG exports, a great source of US dollars as recently as 2022, have become scarce. To meet domestic demand, Egypt has increased gas imports – both piped imports from Israel and LNG imports on the spot market.
The near to medium term outlook for Egypt’s gas balance looks challenging. Demand continues to grow, albeit at a slower pace than historically. On the supply side, there are projects waiting to be developed, Chevron’s 2023 Nargis discovery, in the eastern Nile Delta, being the most material amongst them. Egypt will likely increase its reliance on LNG imports until the end of the decade to meet domestic demand. Yet a tight gas market presents investors with demand certainty and opportunities to backfill declining production.
Egypt’s economy turned a corner in H1 2024 and its upstream sector shows signs of a revival. The newly installed Petroleum Minister, Karim Badawi, has approached the brief with zeal and pragmatism.
Marginal fields are being reevaluated, incentives to increase production studied and legacy gas pricing renegotiated. Egyptian Natural Gas Holding Company (EGAS’) latest bid round is well underway, hoping to entice investors to more frontier deepwater areas and ensure a steady inventory of future prospects for explorers to target in the prolific Nile Delta. Keenly anticipated frontier wells in the Herodotus Basin are imminent with play opening potential. There are strong drivers to fast track any discoveries made.
Egypt looks to Cypriot and Israel gas longer term
Longer term, the outlook for Egypt remains bright. Israel hosts 37 trillion cubic feet (tcf) of gas, much of it undeveloped and uncontracted. Its domestic market is well-supplied for decades to come. And its government is keen to maximize its upstream potential and capitalize on increased regional demand, having recently awarded exploration acreage to Majors. Egypt offers the optimum market for Israeli gas, including additional phases of development at the giant Tamar and Leviathan fields.
Cyprus has 12 tcf of undeveloped gas located in its southern exclusive economic zone. With a small domestic market, E&P companies must turn to exports for viable development solutions. As the global market for LNG facilities heats up and costs spiral, utilizing Egypt’s existing facilities presents a cost-effective development solution.
Much still has to happen before additional volumes of Israeli and Cypriot gas can flow to Egypt. Intergovernmental agreements, gas sales contracts and tolling arrangements, providing for some volumes to be exported, must all be firmed up. Significant capital investment in upstream and midstream infrastructure is also required. But Egypt represents the best bet for monetizing Eastern Mediterranean gas. If final investments on Chevron’s Leviathan 1B and Aphrodite and Eni’s Block 6 discoveries can be reached next year, first gas in 2028 is a possibility. Combined, both countries could double Egypt’s supply, ensuring sufficient feed gas to restart continuous exports of LNG.
Fundamentals for exploration remain strong
To fulfill Egypt’s ambitions as a gas export hub, exploration must also deliver. Several high-profile wells chasing deeper plays since Zohr’s discovery have mostly disappointed. Replicating the success of Eni’s Cretaceous carbonate discovery has proven challenging.
Yet amidst shrinking exploration budgets, Egypt and the Eastern Mediterranean, will continue to be an exploration hotspot. The fundamentals for success and value creation remain strong: unmet gas demand, underutilized LNG capacity, accessible markets open to investment and a pragmatic regulator in EGAS.
Wood Mackenzie estimates prospective resources of 24 tcf in Egypt and 54 tcf in the wider Eastern Mediterranean region in established basins (based on a creaming curve methodology). Following a lull in deepwater exploration drilling offshore Egypt, activity will pick up again imminently.
BP will explore areas adjacent to its West Nile Delta project, seeking to backfill declining production there, whilst US Majors Chevron and Exxon will spud keenly anticipated wildcat wells. Both are targeting gas plays in the frontier Herodotus Basin to the west of the established Nile Delta. Any discovery here could be a play-opener.
What next for Egypt?
Egypt will continue importing large volumes of LNG until the end of the decade. Increased volumes of US and Qatari LNG entering the market from 2025 will soften pricing. With no permanent regas facilities, Egypt will rely on the spot market for procurement, paying a premium. Egypt has been on the gas merry-go-round before when it experienced a similar deficit a decade ago. And as with then, the experience of paying top dollar for LNG imports could be a catalyst to progress stalled and marginal developments with incentivised terms or pricing.
Larger undeveloped discoveries in Cyprus and expansion projects in Israel present a unique opportunity for Egypt to capitalize on becoming an import-export hub, providing domestic demand can be met. Investment in over 12 Million Metric Tonnes per Annum (mmtpa) of LNG export capacity has been sunk. Europe’s refocus on energy security and the need for diversified supply could be a driver in the development of Cypriot gas via Egypt.
Gas in Egypt’s energy mix, which provides around three-quarters of electricity output, will endure. Its eventual displacement will be slow and gradual. Gas’ longevity will provide investors in Egypt and the region with certainty around long-term demand. As such, Egypt and the Eastern Mediterranean will remain a prominent E&P hotspot for many years to come.
