By Nataša Kubíková, Amanda Figueras, Salma Essam
Egypt Oil & Gas Newspaper held the third technical convention in Cairo in May, bringing together key representatives of the oil and gas industry to debate one of the timeliest themes of common interest – Enhanced Oil Recovery (EOR) and Waterflooding. On 23rd May, leaders in the oil sector gathered at a roundtable to search for ways forward through enhancement of the economics of Joint Venture companies (JVs).
Managing Director of Egypt Oil & Gas, Eng. Mohamed Fouad, opened the session stressing the significance of discussions about integrated practical solutions for the challenges in the sector. The way to do so, said Eng. Fouad, is to provide “a platform that incorporates all elements of the solution,” which events such as EOG Convention offer. He also expressed gratitude to the 27-member Brownfields Technical Committee and to Egypt’s Minister of Petroleum and Mineral Resources, H.E. Eng. Tarek El Molla, for taking the event under his patronage and for his remarkable role in driving the oil sector forward.
In light of the ongoing efforts in the industry, Country Manager & Director of TransGlobe Energy & Chairman of the Brownfields Technical Committee, Brian Twaddle, who chaired the roundtable, stressed that “within the economic and social constraints in Egypt, it is important and critical to find ways to compete for capital that IOCs allocate on the global basis.” In exploiting the investment opportunity, a focus on consolidating JVs and enhancing their performance necessarily emerges, and if handled well, it could bring about substantial improvements in the economic environment in Egypt in the future.
The discussion thus addressed four areas of interest that can affect prospects of Egypt’s oil sector as a whole: The efficiency and performance of JVs; Flexibility with the current Production Sharing Agreements (PSAs); Concession terms for conventional, unconventional, and EOR investments; Partnership with service sector using risk sharing agreements.
In attempt to consolidate JVs, Tranglobe Energy Head, Brian Twaddle, affirmed benefits of the process. Although “consolidating JVs is every bit as challenging as consolidating companies in the private sector,” said Brian Twaddle, “rewards are immediate” in comparison to what the private sector practice may offer.
Benchmarking by JVs, as Bini Vallassery, Deputy Operations General Manager, Qarun Petroleum Company said, may be another important path to take.”We need to understand what JVs are good at and how we can leverage of each other,” he explained.
One way of approaching this is through audit. Eng. Sayed Rezk, General Manager of Enap Sipetrol noted that regularly conducted “auditing reports by EGPC need to be improved by sharing the process with IOCs seeking to enhance JVs performance and efficiency.”
Investing in People Development
In order to maximize the value from JVs, Bini Vallassery, Deputy Operations General Manager, Qarun Petroleum Company, and the discussion leader at the roundtable, emphasized the need for tailored training schemes. “Tooling our people to do the right thing” through training can “enhance” people’s daily performance, said Vallassery. He added that the challenge arises with attempts to form a training scheme beneficial to identified three employment levels: technical, operational, and managerial. In his view, it is crucial for “field people getting the right amount of training and [learn] proper ways to execute projects.” “We need IOCs and the national companies to come together and create a development center” for the purposes of a more focused and effective training structures, concluded Vallassery.
The idea of a more complex approach to the development of human resources in JVs in the oil and gas sector was further supported by Dr. Ahmed El-Banbi, from Cairo University. He proposed to establish “a development plan” as opposed to a single-minded concept of training. The development plan would consist of three pillars, of which training is just one, accompanied by on-job training as the second and mentoring as the third pillar. Reflecting on the limitations in human resources management within JVs, El-Banbi said that “the only solution is to have a development plan that is pioneered by EGPC” and that will be fully adopted by JVs, with promising benefits for smaller companies.
In agreement with the need to differentiate across disciplinary level, as proposed by Bini Vallassery, Eng. Abed Ezz El Regal, Chairman and Managing Director of GUPCO, said that in addition to the technical skills development, training should “build up managerial, leadership, planning, and negotiation skills [of employees] from early stage.”
In order to use financial resources efficiently, Samir Abdel Moaty, Country Manager of Beach Energy emphasized the need to develop a “Young Professionals program especially in JVs,” that would be elaborated in a similar manner as those offered to employees by most of the IOCs. Furthermore, “the training should start early on, already within the universities,” Moaty stated.
In the discussion, Geol. Mostafa El Bahr, Former Chairman of Agiba Petroleum Company, expressed confidence that in Egypt “there [already] is a system [of training], but it may not be working efficiently.” This is happening most likely due to the existing internal training structures and processes within JVs that are on many occasions executed in an unsatisfactory way. They thus fail to appropriately reflect on “the [present] needs of the industry,” said El Bahr.
Similarly, EGPC Vice Chairman for Production, Eng. Diaa Kassem, affirmed that Egypt’s oil sector “provides training courses locally as well as overseas.” The training model, he added, will be further evaluated in the upcoming period as the oil minister has recently called upon “EGPC, EGAS, and GANOPE to make a committee for [assessing] training courses for the leaders of the future.”
“The training is very important as it is part of the investment and is crucial both for the young professional and for the leaders,” summarized Geol. Adel Fahmy, Vice Chairman for Exploration in EGPC, adding that “the EGPC has also launched a leadership training scheme.
Before ‘a development center’ is established or ‘a development plan’ is newly formulated, it is imperative to look into the ways in which allocated budgets for training are spent in line with the agreements with partners, Mahmoud Shawkat, Director Sales & Marketing NAF at Baker Hughes, noted.
In terms of the oil companies’ hierarchies, Eng. El Regal explained that while “some companies have a plan for the career path requirements” qualifying candidates for promotion, this is being viewed as an obstacle to the companies rather than an advantage; the obstacle being that promotion requirements would allegedly delay employees from taking over responsible posts. In attempt to counteract this perception, El Regal suggested that these requirements are to be defined clearly, as this is in fact “essential” for the development process of young professionals, as well as for “planning for the future, and analyzing the existing problems,” and eventually for searching for solutions.
Geol. Mostafa El Bahr, Former Chairman of Agiba, also agreed with the concept saying that the key is to define “a set of competencies [to be achieved via training] for each level of technical and non-technical employees,” which should then be linked to the promotion scheme and for the time being “enforced” efficiently.
As “benefits packages are a part of the whole discussion about the efficiency in JVs,” said Dr. Hany El Sharkawi, International Oil &Gas Advisor, Member of the PICO/Cheiron Board of Directors, “these should be revisited especially in the times of low oil prices to make them more effective, and more efficient.” In a realistic scenario, “we have to look at how we utilize our financial resources and the cost of running our operations from the labor point of view to ensure incentives for people to improve their performance and thus further enhance the efficiency of the companies,” explained El Sharkawi. He recommended that “JVs and IOCs collectively sit together to re-structure benefits packages to make them more efficient in the service of the companies.”
Furthermore, on the side of individual competencies, collaborative competencies are also to be developed, argued James Pendergrass, Deputy Exploration Manager and Board Member in Petrosilah, where “geologists, geophysicists, and reservoir engineers are trained in a team to resolve issues together.” In line with this proposal, Pendergrass emphasized that “interdisciplinary team training needs to be designed” in the future, as it is the safest bet that will eventually “improve Egypt’s competencies” in the industry.
On the notion of collaborative approach in people’s development, Brian Twaddle commented that while “we often talk about seconding people in IOCs,” other parallel paths are also available. One of them lies within the service companies. “The service sector has a huge amount to offer, which is often underestimated,” noted Transglobe Energy’s Country Manager.
Given the current climate, it was aptly noted that the timing of training also remains crucial. “It is incorrect” to save on training costs in times of financial slow-down, added Mahmoud Shawkat. He thus stressed that “at the time of the downturn there should be a focus on the training more than ever” as it is then, when employees are actually available for training sessions, unlike during the periods of high activities. “It is now the time for us to develop our industry employees” exploiting on the existing education schemes that need to be adopted by JVs, concluded Shawkat.
In the final note on the subject, Brian Twaddle eloquently expressed his belief that the notion according to which IOCs were reluctant to train people within JVs as they may be then moved to a competitor beyond the control of IOCs, should no longer be applicable, and the prevalent protective approach should be omitted. “If all of the IOCs funding JVs contribute to training in competence development and fulfill development plans, the total competence level rises,” and the industry will benefit from competent leaders in a collective way, Chairman of the Brownfields Committee, Brian Twaddle, concluded.
Access to Central Inventories
Moving from the human resources development, the roundtable focused also on material resources of JVs in inventories. Participants agreed that access to central inventories plays a major role in JVs’ performance.
Commenting on the EGPC’s role in the facilitation and control of material resources, Eng. El Regal pointed out that the central body provides an online database of surplus and left-over material and items owned by EGPC for all the JVs. They then have a direct access to them and are able to bid for resources they need. Eng. Nabil Salah added that while the database is available on the EGPC website, “it still needs to be itemized.”
Moreover, as Eng. Sayed Rezk, General Manager of Enap Sipetrol, emphasized, “there needs to be a differentiation between surpluses owned by EGPC and surpluses of IOCs.” In agreement with the measure, Geol. Abu Bakr Ibrahim, Former Chairman of GANOPE proposed to establish a parallel database of inventories by JVs themselves.
In a final touch, according to Dr. El-Banbi, “the supply chain for all the JVs should be consolidated further” which will provide more benefits to the tendering companies.
As a solution to the consolidation requirements, Mahmoud Shawkat from Baker Hughes, recommended using practices of service providers that employ “a ‘filter system’ that blocks processing orders once required inventory is available, located in another country, with another JV company.” He further explained that “this system can only be executed if it is connected to the JVs, and controlled by the EGPC.”
In this way, “there will also be a gate in the SAP system that drops all surpluses or excess inventory, making them visible to all the JVs before these go off to manufacturing and processing,” Shawkat added.
JVs in Tendering Processes
In the debates about organization and availability of inventories, an important issue emerges that relates to the ways in which tendering processes are executed, for these majorly affect performance of JVs.
The issue of efficiency of tendering processes is important. Eng. Sayed Rezk, General Manager of Enap Sipetrol, said that “the tendering process often takes longer than the project itself,” and this needs to be addressed.
In the current setting of lengthy tendering processes, JVs tend to tender for larger amounts of inventories in order to minimize the time spent on repetitive procedures, and stock up purchased items in high quantities, which at times of low oil prices is hurtful to companies’ economics. Therefore, Bini Vallassery, Deputy Operations General Manager, Qarun Petroleum Company, suggested ending the cycle in a way that “EGPC would take a lead on setting the directives and the terms to the JVs” in order to restructure the entire business, which would eventually make economic sense to all actors.
Geol. Adel Fahmy, Vice Chairman for Exploration in EGPC also pointed out that there is “a need for transparency within the tendering procedures that should rely on a clear scope of conditions and items, and simplified rules to speed up the tendering process” in both the exploration and development phases.
In efforts to identify a constructive solution, Mahmoud Shawkat proposed to imitate already established practices, according to which “pre-issuing any tender, the terms and the conditions should be agreed upon in order to shorten the cycle of discussions on the contractual obligations between the two parties. By the time the tender is issued, the terms will have already been approved and incorporated in the call for tender, hence these cannot be disputed. The contract will therefore be ready for signature and the execution will thus be very fast.”
PSAs to Be Modified
With a goal to balloon up investments in Egypt’s oil and gas sector, the existing Production Sharing Agreements (PSA) should gain more attention.
According to Geol. Mostafa El Bahr, ex-Chairman of Agiba, PSAs should be modified in order to incentivize further inflow of investments into the country.
EGPC, which seeks to reflect on industry’s needs, is studying the issue, confirmed Eng. Diaa Kassem, EGPC Vice Chairman for Production. “We are discussing how to revisit the PSAs and any new model of agreement for the benefit of EGPC and our partners. We are preparing a high committee to discuss the model agreements so any suggestion on the PSA in the existing fields from any partner will be welcome,” clarified Eng. Kassem.
In attempts to boost performance of the sector, “JVs have done creative things and have exploited flexibilities within the current contracts as ways to improve their business,” Brian Twaddle noted, adding that “in the current climate, these are great times to be sharing those ideas so that we, as a sector, can attract the capital back to Egypt and move forward.”
In pondering changes to the existing PSAs, there are elements that need to be assessed especially in regard to the mature fields, as Geol. Mostafa El Bahr mentioned. “One important factor in the PSAs emerges in the late stage where it is not easy for investors to recover the costs” when the fields become mature, noted the ex-chairman. Therefore, their interest in investments is constrained, which can be “overcome by introducing service agreements or modifying the terms of cost recovery as in providing a guarantee for extension or amending the percentage of recovery” with a goal to ensure “the continuity [of investments] when the fields turn brown,” as El Bahr elaborated.
As outlined by Mahmoud Shawkat, PSAs represent a percentage of cost-recovery of a project for investors, whereas with the alternative model applying “tax and royalties the government has no hands on the expenditure of assets, and gets only the privilege of price.
On the other hand, service agreements may propose a viable alternative. “Service Agreements (SAs) in Egypt were applied with a successful example of the Kuwait Energy company.” However, even in the comparative perspective, SAs may pose some challenges on investors if they opt to copy Kuwait Energy’s case. The challenges relate to the fact that “EGPC will have its hands on part of the mature fields, on which it can issue bid rounds,” said Shawkat.
As Shawkat further explained, “service contracts can be divided into pure service contracts – flat fee, or risk service contracts – reward a percentage of production over expenditure. The risk is represented by the pre-studies, analyses, equipment cost, operational problems, and maintenance of production level at no return. Rewards for the risk are either a percentage of production in cash or percentage cash pay over the spent efforts, which is called the R-factor.”
R-factor represents “an equation that limits the benefit for the investor, and gives him only an incentive over the expansion in the field,” said Shawkat. Hence, “the R-factor is a dynamic approach where both production rates and expenditures are considered tied to each other,” he added.
The R-factor application “proved very effective in other countries – with Petronas in Malaysia – and beneficial for both the government and the investor, where service provider offered his technology in studies and equipment to withdraw more oil or gas from prospects that were producing zero oil before. The government agreed on a certain profile of incentives over expenditure and the agreement was successful,” argued Shawkat.
“While the R-factor is not implemented in Egypt, given the appetite of lots of small players including service providers to apply it, the potential is high for Egypt to withdraw more oil by giving a chance to those small players and service providers,” clarified Shawkat.
In the discussion, Samir Abdel Moaty, Beach Energy’s Country Manager, further developed the idea to introduce new models that will not be determined and constrained by the phased production line, as it proves less viable. He said that instead the agreement model of Kuwait Energy should be adapted, nonetheless, this “technical service agreement needs to be further modified to make it economic for the newcomers,” concluded Moaty.
The debated experience of Kuwait Energy with the service agreement is that while “a baseline production was agreed by the EGPC, production costs exceeding the baseline will be shared by both partners with benefits going to both the government and the contractor,” said Eng. Kamel El Sawi, the company’s President.
In favor of service agreements, Eng. El Sawi stressed that this model allows flexibility for an operator to run the field according to his standards, unlike “PSAs that put a burden on IOCs due to the joint-venture framework of cooperation.”
“Service agreements give us freedom to apply the standards we need, and to approach service companies directly in order to apply the best technology to recover more oil,” which in effect leaves out the EGPC from the relations, explained El Sawi. This will then allow IOCs to “build their own economics” with a positive outlook for EGPC itself. The arrangement will eventually generate benefits for the Egyptian oil sector in terms of continuous oil production at a promising level and active, engaged development of mature fields, instead of a scenario of a standstill, when a field is left unexploited, he said.
Proposed structural modifications through agreements would lead to a more competitive environment with larger benefits involved, Mahmoud Shawkat emphasized. With smaller service companies coming into the field, “larger companies would become very conscious of their costs, and this would bring more technology in, with optimized price,” he added. With a target to “heat up the competition,” Shawkat argued that this would “shake the big charts, and the big companies will reconsider their position in the country and will conduct more investments to protect their assets.”
Some of the recommended solutions have already been adopted and included in the new 2016 model agreement put forward by the EGPC, noted Samir Abdel Moaty, Beach Energy’s Country Manager, and the effect of this new agreement will be visible in the scope of 10 to 15 years. However, Moaty expressed hopes that benefits would materialize sooner, within a year or two. Therefore, as he proposed, “some of the current concession agreements may need to be amended now to help enhance the production, boost operators’ economics, and to invest more money in the remaining period of the concession agreements.”
On that note, Geol. Abu Bakr Ibrahim, Former Chairman of GANOPE stressed that “there is no only one solution for the agreements, and the Ministry of Petroleum has been open to all solutions over the last few years.” “Tax and royalties can be applied in Egypt,” assessed Eng. Ibrahim. On the other hand, he noted, “service agreements are suitable only for certain companies, for which PSAs are not, because they are not allowed to have equity. Although service agreements can be applied, they cannot be used during the exploration period, because all the major companies prefer another option in this timeframe. They need SAs first in the production phase with a set baseline.”
According to Eng. Kassem, EGPC has expressed commitment to explore alternatives to PSAs. In doing so, PSAs, tax and royalties, and Service Agreements (SAs) that IOCs sign with the Egyptian government are to be weighed against one another.
In fact, “the Ministry of Petroleum through EGPC and other holding companies tried to enhance the PSAs model [already] by introducing amortization, which in fact started at GANOPE three years ago,” ex-Chairman Ibrahim said. “It was stated in the model agreement that the contractor can get cost recovery at the end of the development phase. In case of the extension of the development lease, the cost recovery pool will be extended too, according to EGPC, unlike the previous practice. This was introduced as a continuous pool to encourage the expenditure and avoid defer in production,” detailed Eng. Ibrahim.
The extension of the agreements with partners depends on the contractors’ timing. Eng. Abed Ezz El-Regal, Chairman & Managing Director at GUPCO, commented saying that “IOCs often opt for an extension of the agreement at the last moment, in some cases during the last six months, which does not give enough room for negotiations to EGPC and the contractors to agree on an optional extension.” He, therefore, recommended launching the negotiating process at least five years before the expiry date of the agreement.
In order to face the challenges that the oil and gas companies in Egypt is dealing with, leaders in the sector called for flexibility to stabilize JVs economics that would help to boost oil industry’s overall performance.
Importance of JVs Economics
Further debating the viability of proposed alternative agreements models, Geol. El Bahr pointed to the fact that regardless of the form of an agreement, “as long as there is economic balance and there is a value coming to both parties,” mutual cooperation will make sense. “This has to be carefully evaluated and studied case by case,” El Bahr continued, adding that “we cannot apply one model to all the fields because the cost of production will be different.”
In his opinion, the framework of the PSAs works good in the ‘green’ phase’, however, there is still a gap to examine a model suitable for ‘brown’ fields, drawing on the example of Agiba’s 1987 concession in the Western Desert that is still exploring within a larger location that offer possibilities for additional oil. Based on this case, El Bahr proposed that the way to “identify a development lease is to expand the focus beyond a single block, as there are many other potential blocks around the original discovery.” According to his recommendations, “having a bigger development lease around the discovery would allow investors to spend more and find more hydrocarbon.”
In later stages, however, “the economics [as defined by the agreements] need to be revisited versus the remaining reserves in order to come up with the best scenario for both partners,” the former chairman added.
The aim of the roundtable was also “to broaden the discussion out to look at how we can make investments in mature assets economic in Egypt,” said Brian Twaddle. He added that “the brownfield assets in Egypt are predominantly onshore and in shallow water,” both of which “should be economic for investment in the current climate, and that is an opportunity.”
In relation to this, Shaheen Shaheen, IPR Vice President, said that “finding new oil is risky and costly, and even when oil is found we still need to construct production facilities, which also requires large investments.”
Hence, “almost 70% of oil production in Egypt comes from mature fields, which can be developed with modern enhanced oil recovery methods that require huge investments for both reservoir studies and pilot testing,” Shaheen noted. Currently, “the common recovery factor (RF) in Egypt is an average of 34%,” which would entail that “about 30 billion barrels of residual oil will be abandoned in the Egyptian reservoirs after recovery by all the conventional production techniques,” according to IPR Vice President.
“In order to increase RF and make EOR projects economically viable, Egypt’s oil sector is to undertake specific legislation reviews and deal with new flexible petroleum agreements to achieve a successful development of the marginal reserves,” added Shaheen. Equally important, “new incentives are needed for highly expensive and risky model of the EOR in the coming decades; we need unconventional solutions to develop proper EOR methods for each reservoir to develop the fields and reduce expenses,” he elaborated.
In this way, “legislative amendments may help convert currently marginal fields into attractive projects,” according to Shaheen. Similarly, “partnerships with the service sector and JVs under the Risk Sharing Agreements (RSA) will encourage investors to apply modern EOR in order to maximize RF and mutual revenues for both the government and the investor,” he concluded.
In tackling oil recovery from mature fields in an economic way, Eng. Nabil Salah, Operations Manager at GUPCO, said that his company has recovered 57% of oil from the original site in the Morgan field with primary and secondary methods. “We need to make more engineering reservoir studies in mature fields,” for which IOCs are requested to send proposals to EGPC not only at the end of the concession, but also during the life of the reservoir. This will then allow EGPC to be more flexible with companies’ needs.
Companies such as GUPCO have already initiated waterflooding and EOR processes, with ‘very good results’ in the Morgan field. “GUPCO has almost finished all studies for low salinity (LoSal) water injection, which will freeze around 25% of the residual oil,” added Eng. Salah, scheduling the execution of the project with EOR methods in 2017.
Also “Petrobel started working in EOR about five years ago with a series of trials and tests in chemical EOR and low salinity water injection methods expected to be applied in July 2016,” said Santo Giannone, Petrobel Deputy Reservoir General Manager and Board Member. He added that Petrobel is now testing the method of polymer injection in the Belayim Land Field, as a pilot project launched in 2015, with first results expected by the end of 2016. “Having only 3% or 4% of additional RF through EOR will be a very good result from the economic point of view,” added Giannone.
The vivid debate at the roundtable succeeded in shedding light on possible practical solutions in the oil and gas industry that may impact different policies in the future. The Brownfields Committee thus hopes for opportunities to help advance the tackled issues in order to enhance performance of the Egyptian oil sector.Download