The Egypt Oil & Gas (EOG) 2nd Upstream Operational Excellence Convention witnessed a series of strategic panels which provided an opportunity for industry leaders to come together and discuss the most important topics that shape the oil and gas sector. Topics discussed included the upstream investment climate, the modernization of joint ventures (JVs), and service agreements for mature fields.
Building a Sustainable Upstream Investment Climate
The opening panel discussion of the convention saw six industry experts engage in an insightful discussion about one of the most important issues facing the Egyptian oil and gas sector today: attracting sustainable levels of outside investment.
The panel featured some of the most prominent figures in the industry giving their views on the topic. Representatives from four of the largest international oil companies (IOCs) operating in Egypt were in attendance to give their views: Fabio Cavanna, General Manager of Eni subsidiary IEOC; Gasser Hanter, Country Manager and Managing Director of Shell Egypt; Stuart Shaw, Vice President of Operations at BP Egypt; and Karim Badawi, Managing Director for Egypt and the Mediterranean at Schlumberger.
Representing the ministry was Mohammed Moanes, First Undersecretary for Production at the Ministry of Petroleum, while independent expertise was provided by Martijn Murphy, Upstream Research Manager at Wood Mackenzie. Moderating the discussion was Thomas Maher, President and COO of Apex Energy and Chairman of the EOG Technical Committee.
Current Capital Investment
Before the discussion began, Murphy delivered a presentation focusing on the levels of private and public capital investment in Egypt over the past five years. Noting that the government had put around $9 billion of public investment into the sector, he praised the high levels of private sector involvement.
“This is something that puts Egypt in pretty good stead with investors. It is an open market, it is not dominated by national oil companies (NOCs), and there is a real diverse corporate landscape,” he said. “The barriers to entry, compared to elsewhere in Africa and the Middle East, are fairly low.”
However, despite the promising levels of private investment, Murphy insisted that the government must go further if it is to maximize returns from brownfield sites – in the Gulf of Suez in particular. Using a Gulf of Suez Petroleum Company (GUPCO) contract as a case study, he estimated that an additional $425 million could be gained if the Egyptian General Petroleum Company (EGPC) reduced its stake, resulting in increased takes for the government in absolute terms.
Murphy then highlighted the government’s “great progress” in paying down arrears to IOCs, and predicted that all arrears will be paid by the end of 2019. “I think that this has really given confidence to smaller IOCs,” he said. He finished the presentation by discussing Egypt’s high rate of mergers and acquisitions (M&A), describing the country as “one of the most active M&A markets” in the Middle East and North Africa (MENA) region.
Following the presentation, Maher opened the discussion by asking each of the panelists for their opinion on Egypt’s current upstream investment climate. Cavanna announced that Eni would continue to make further investments in Egypt. “We will continue investing in Egypt; we strongly believe in the resources of the nation,” he said. “This is because we have an appropriate and stable climate for contracts.”
Hanter identified Egypt’s wealth of human capital and developed infrastructure as key foundations for nurturing the country’s investment climate. He told the audience that, going forward, Shell will be looking to increase its involvement in Egypt. “We believe that collaborating with the government and actually investing is the best way forward for making the industry more attractive,” he said. “We are here to stay, we are here to grow, and we look forward to working very closely with the government to turn our growth aspirations into reality.
Asked about Schlumberger’s approach to investing in Egypt, Badawi described the company’s role as becoming a “key enabler” for the ministry’s Modernization Program. “We are very proud of the collaboration in the key activities bringing in more investments into Egypt, such as the multiclient for the Red Sea,” he said. “This is going to be a key enabler to attract investment in Egypt.”
Moanes turned the conversation towards what the government is hoping to do to transform Egypt into a more attractive investment destination. He told the audience that the government will continue to move forward with the digitalization of the sector, and increasing the data available to potential investors. Initiatives like Schlumberger’s Upstream Gateway Project are important “in order to improve the data that is available in our hand, and to bring more companies to work in Egypt,” Moanes said.
Maher then asked Shaw about how the private sector views the role of the state in generating a sustainable investment climate. “If there was one word I would use, it would be stability,” he said. “Countries need a stable framework that enables companies to invest and form partnerships,” he continued. Shaw then praised the government’s perseverance with its economic reforms; a program that is hoped to stimulate investment in the country’s energy sector. “They show courage and vision, and they are creating the right momentum for energy investment in the future,” he said.
Closing out the discussion, Murphy sounded a note of optimism by predicting Egypt’s natural gas production to exceed 8 billion cubic feet per day by the start of the next decade. However, he cautioned that the country’s high domestic demand for hydrocarbons will necessitate new discoveries by the middle of the decade if the Egypt is going to build on current successes.
“It is imperative that Egypt continues to host annual bid rounds,” Murphy said. “This is going to be important in ensuring that there is an inventory of prospects available to IOCs.”
The Modernization of Joint Venture Companies
The second day of the convention took off on December 3 with a strategic discussion on the implementation of the Ministry of Petroleum’s Modernization Program in all Egypt’s joint venture (JV) companies.
The panel, entitled “JV Company Modernization”, was moderated by Layla El-Hares, GM Development Egypt and East Mediterranean at Shell.
Panelists included Abed Ezz El Regal, Head of EGPC; Osama Mobarez, Undersecretary for Technical Office at the Ministry of Petroleum; Mark Konecki, Region Operations Director at Apache; Alaa ElBatal, Vice Chairman for Exploration at EGPC; and Dina Fouda, Transformation and Value Capture GM at Shell.
Ezz El Regal opened the section, remarking that developing JVs is the first step to achieving modernization across the entire sector. “ The first target to achieve such modernization is focusing on people, so we will build the capacity required for such revolution in all aspects of the value chain, starting from the upstream. Second, the excellence of performance and operation,” he said.
“Bapetco is a good model to start with, as it took the lead on this issue,” Eng. Ezz El Regal added.
Bapetco as a Role Model
Bapetco, a JV between EGPC and Shell, was chosen by the government to be the pilot for the modernization of JVs in Egypt. According to the head of EGPC, this choice was made considering a number of factors.
“Number one, it is a mature company with a huge number of employees, and the capability of the staff in Bapetco and the willingness to accept such change makes it an easier process. This in addition to Shell’s willingness to collaborate even apart from the Modernization Program,” he said.
Mobarez explained that the idea of having Bapetco as a role model for the modernization of JVs came from the necessity to implement the Modernization Program simultaneously in holding companies and their affiliates.
“In the overall Modernization Program, we are trying to improve the organizational structure of the sector, including EGPC and holding companies, and also improve the governance of the sector in the upper tier; but we do not have the luxury to wait until we have improved the upper tier and then move down to the affiliates,” he explained.
“That is why we are planning, and have already started, to move in parallel to improve EGPC and the holding companies as well as create a role model, starting with Bapetco,” he added.
This process, according to Mobarez, is done by a committee composed by CEOs of holding companies and first undersecretaries of the ministry, whose main role is to build a map of the challenges, and support and inspire the teams working on different tasks within the modernization process.
Commenting on Bapetco’s experience, ElBatal said the company has already implemented many of the steps recommended by the ministry’s program. According to him, the pillars for the modernization of JVs are three: governance; human capital development; and key processes like procurement and tendering. “If we are going to improve our working environment, we have to stress on these points,” he said.
“I advise all JVs to follow this model, as it is very important for the future,” ElBatal added.
How to Reach Modernization?
According to Mobarez, the Modernization Program was created from the willingness to make pre-2016 achievements sustainable.
In order to achieve this goal, Konecki stated that JVs should heavily invest in their human resources. “The industry here must develop leaders for the future,” he said.
“When [Apache] advances people through our organization, we advance them because of their competencies and because of their performance, and not just because of how long they have been in a particular job,” he mentioned.
Konecki also stressed that Egypt must work on retaining its skilled employees, who often go to other countries in order to have better opportunities. “We have many talented individuals here in Egypt and we need to nurture those talented people,” he added.
Building on this, Mobarez emphasized that personnel are at the core of any reforms made to the sector. “We are talking about a transformation that is going to have a long journey, so we need the collaboration of all stakeholders,” he added.
In order to exemplify the importance of investing in human resources, Fouda mentioned how the motivation of employees has impacted the Modernization Program itself.
“We have a team of over 30 people from Bapetco who are working on implementing this change within the company and we are getting great value from the passion and the willingness of the team working on the program,” she said.
For Fouda, “the ministry’s vision is all about unlocking the sector’s value.”
This value, however, cannot be unlocked without serious health, safety, and environmental (HSE) management, ElBatal argued. “I want to ensure that Bapetco is giving a lot of attention to HSE, and we are willing to stop any business if we are not achieving our HSE requirements. We are not celebrating any success without HSE,” he said.
Konecki also disclosed that he expects the modernization of JVs to open the way for other positive changes. “Once these pilots are finished, I hope it will be feasible to perhaps have some different business models, because one size does not fit all. The way JVs were organized 30 to 40 years ago does not fit the model of business here in Egypt today,” he said.
Ezz El Regal closed the discussion, stressing his positive expectations for the future of JVs in Egypt; having companies fully digitalized, with everyone in the company having a clear vision both for the modernization process and their individual career paths.
Service Agreements for Mature Fields
The third strategic panel witnessed five industry experts discuss the pros and cons of service agreements for mature fields in Egypt.
Panelists included Kamel El Sawi, President of Kuwait Energy Egypt; Memet Kont, President and CEO of Mediterra; Hussam Abuseif, Director and General Manager of Egypt, Sudan and South Sudan at BHGE; Thomas Maher, President and COO of Apex Energy, and EOG Technical Committee Chairman; and Colby Fuser, Vice President Egypt and Libya at Halliburton.
The session was moderated by Mohamed Fouad, Managing Director of Egypt Oil & Gas and Technical Committee Co-Chairman.
Kont introduced the session with a presentation explaining Mediterra’s experience working under a service contract in Egypt. The company entered into a service agreement in 2017 covering the Sudr Matarma and Asl mature fields in the Gulf of Suez. Under the terms of the contract, Mediterra was required to pay a signing bonus and made a work commitment for the first three years. The company managed to achieve this within just 9-10 months after signing the contract.
Kont then explained that the EGPC agreed to pay the company a small fee after the fields reach baseline production. Any amount above the baseline is then shared between EGPC and the company according to the terms agreed to in the contract.
Since it took over the fields, the company has drilled 11 appraisal and development wells, one exploration well and completed 38 workover, recompletion and testing projects. Production has increased rapidly from around 1,750 barrels of oil per day (b/d) in August 2018 to more than 4,500 b/d at the end of November.
“It’s a great model, it works for us,” Kont said, before cautioning that service contracts still require work to make them truly effective. This is to be expected, he said, because the model is still relatively new.
Benefits and Challenges
Tom Maher kicked off the discussion stating that, although the production sharing agreement (PSA) model has been beneficial for the country, it is not best suited to brownfield sites. For him, service contracts provide a way of getting around the problem of high recovery costs associated with mature fields. This is especially important, he said, because of the growing number of mature fields that have drifted back into government ownership only to be kept in stasis.
“It is no secret that the next big challenge is stabilizing oil production, and I feel very strongly that service agreements are one avenue to do that,” he said, emphasizing their potential to introduce new technology to restore production from late-stage fields
El Sawi emphasized the necessity of maximizing production from mature fields, highlighting the fact that two-thirds of global oil and gas production come from such assets. “One of the issues with the PSA is to recover the cost at the last period for the concession agreement, which will place a burden on the contractor and even the government to inject more cash,” he said, agreeing with Maher.
Kuwait Energy Egypt has operated in Egypt under a service agreement with considerable success. Over the past 10 years, the company has produced 27 million barrels of oil from its concession in the Gulf of Suez, and drilled 15 wells – five of which were producible.
“With the application of practical and focused engineering, tied with geology and enabling technologies, you can do something,” he said. “It became very important to introduce this model to the market. It gives the contractors the freedom to do it their own way to control the overheads, to introduce whatever technology the company needs.”
Following on from this, Fuser suggested that service contracts may provide the sort of incentives necessary to persuade companies to operate late-stage sites. “In a lot of cases there are no incentives for companies to go back [to bypassed wells],” he said. “If a company wants to re-look at bypassed production zones, there should be some incentive from the government to provide the benefits to do that. That only gives more barrels back to the country.”
Kont, however, highlighted the ambiguity of some service contracts, and said there was still work to be done to make their implementation easier. “You need to eliminate the uncertainty in the contract,” he said. “The language of the contract is often very vague… it defeats the purpose of the contract itself.”
Abuseif then emphasized the success of service contracts in bringing new technologies into the sector. “Service contracts are a good tool to apply technology,” he said, adding that he would like to see their usage increased in Egypt but acknowledging an important barrier to achieving this. “I think we need to make a lot of effort to change the mindset of approaching mature fields,” he concluded.
The panel concluded with a short question and answer session that allowed audience members to put their thoughts to the panelists. Ashraf Menawi, from Apex International Energy, asked about the prospects for service agreements in Egypt, and whether the sector can expect to see them become more widespread in the future. Maher pointed out that the upcoming Red Sea bid round will have attached a new form of contract – the details of which are still to be announced by the ministry – and that new “fit-for-purpose” agreements are on the horizon with regard to mineral wealth.
Another audience member asked how the sector can enable service agreements to become commonplace with mature fields. “The ministry is very open to new ideas about how you can do contracting… but you need to have the maneuverability in the contract language,” Fuser said. “If the government adds the ability to have a contract change, you are still guaranteeing the ability to produce more barrels. You need to go in together in order to achieve that.”