Tell us a bit about your experience in the petroleum sector.
I am geologist by training. I graduated with a master’s degree in geology in 1981 and a master’s in business administration in 2001. I have worked with Apache for 28 years, mostly as Exploration Manager at our US Central Region office. In 2002, I was asked to move to Egypt since it was a period of increased activity following our acquisition of Repsol’s Egypt holdings. I started as Geological Manager and in 2005 became Exploration Manager. In January 2010 I left Egypt to lead Apache’s Australian business as Country Manager. It was quite a learning experience and I enjoyed it very much. But then I was asked if I would be interested in returning to Egypt. I have always enjoyed working here, and my wife loves Cairo. I am happy to be back.
Egypt has been a top performing region for Apache. Production grew to the point where it represented 26% of the company, even though we had ten regions. Besides, we needed to raise capital and wanted to lower our debt that had accumulated as a result of the acquisitions we made a few years before. Apache’s current focus for growth is more on our properties in North America where we have significant unconventional potential. In 2009, just 32% of our production came from Apache’s five onshore North American regions, now it is close to 56%.
This is why we sold a third of our Egyptian business to Sinopec. However, Egypt is still a big piece of the company, representing 16% of the company’s total production.
There have been other sales too…
Yes, the Egyptian sale was just a part of an overall plan to re-balance our portfolio. In terms of divestments, we started with the Gulf of Mexico, where we sold our entire shallow water region, retaining the deep rights. In March of this year, we finalized the sale of the entire Argentina region. In April it was announced that we have sold some dry gas properties in our Canada Region.
Does the Egyptian sale mean that Apache is going to slow down its operations here?
No, in fact it’s just the opposite because we would have been capital constrained had we not found a partner like Sinopec, who is bullish on Egypt. Last year, when we had 100% of the business, our capital expenditures were $1.2 billion in Egypt. Now that Sinopec is a partner, we lowered our net capital expenditures to $900 million, but the overall Apache-Sinopec business plans on investing $1.35 billion in capital projects.
We still see a lot of opportunities on our leasehold position in Egypt that we want to go after. Concessions have clocks ticking to expire, so we cannot just sit back and wait.
Please tell more about Apache’s activities in Egypt.
We have two joint venture companies here, Qarun and Khalda. Qarun produces currently about 43,000 barrels of oil per day with no natural gas. Khalda on the other hand produces about 150,000 barrels of oil and condensate per day and 900 million cubic feet of gas. Our total gross production peaked in 2012 at 363,000 boe/d (barrels of oil equivalent per day). Last year we dropped to 352,000 boe/d, but we hope to have a modest increase in 2014 and reach 354,000 boe/d, 57% of it being oil.
Our biggest discovery in Egypt by far is the Qasr Field made in 2003, which contains recoverable resources of almost 3 trillion cubic feet of gas and 90 million barrels of condensates. Another achievement was our 2X Project. We accomplished a joint Apache-EGPC goal to double production between 2005 and 2010, it grew from 163,000 boe/d to 326,000 boe/d in that period. I think this was a time when our relations with the government started getting stronger. Not that relations were weak before, but working together during the 2X Project really highlighted a win-win partnership.
One more achievement I am proud of is what we have done with the three development leases that Apache purchased in 2010 as a part of a $7 billion acquisition with BP, which marked the exit of BP and Gupco from the Western Desert. Production on these properties was mostly discovered in early 70s and the highest oil production rate ever recorded was in July 1973 when the Abu Gharadig Field reached peak production of 37,478 bpd (barrels per day). In March this year we broke that record and produced 37,618 bpd. On a boe basis, our production reached a record 60,861 boe/d in March, which is 209% higher compared to the time we took over operations. The team at Khalda has done an amazing job with these properties. It’s thanks to exploration success, more development, plus water flooding of old fields and other operational enhancements. We have also improved operations at the Abu Gharadig gas plant and re-started operations at the Dahshour LPG Plant that has been idle for three years. The LPG plant started up in late February and is now producing over 3,000 barrels of LPG’s per day. That LPG is enough to fill over 20,000 cooking gas cylinders every day that the country so desperately needs.
We have an integrated technical presentation planned for the Brownfield Convention that will explain a lot of this in more detail.
Has Apache reached their peak in production?
It will take more capital investment, finding another field like Qasr, a little bit of luck, and a lot of hard work to increase production from where we are today. We are up for the challenge and focus every day, on trying to increase our production.
It will require additional new field discoveries but we are off to a strong start with a couple of nice discoveries in the first quarter; more details about them will be released to the public in May.
We are the third largest natural gas producer in Egypt, and the largest oil producer with a fairly comfortable margin. On a boe basis, Eni is slightly ahead of us as the leading producer of oil and gas in Egypt, but I hope that before I leave this assignment, Apache becomes the top boe producer in Egypt.
The minister signed an Apache-record 20 development leases in both 2012 and 2013. That level of activity – 40 approved development leases in just a two-year period – is quite extraordinary, I believe.
Is one of the reasons why this was accomplished the way the Egyptians are doing business after the revolution?
I haven’t thought of it along those lines… I think you have two very competent professional leaders now with Tarek el-Molla at EGPC and Sherif Ismail as the Minister of Petroleum. They are very passionate about their jobs and dedicated to the country. They are anxious to get things pushed through and production on to help the nation.
We really need their collaboration to get it done and they have worked very well with us on this. In the beginning of last year when I came back to Egypt, I noticed it had taken too long for some of those development leases. When these things happen, we get together. We do quarterly meetings now with EGPC. We talk about the challenges and what EGPC as a business partner can do to help us. One of the meetings focused on what actions would be required to approve development leases more quickly. And they did.
Did you have any doubts about the future of Egypt’s oil business when the January 25th Revolution started?
I wasn’t here at that time; I had my own issues in Australia. But Apache has been here for 20 years, and we have always felt the government recognized and appreciated the value of the oil and gas industry. We have had excellent relations with them over that time. I personally wasn’t fearful and I don’t think our executives in Houston were either. We hadn’t heard of any intention to nationalize or expropriate any concessions, and we didn’t feel it was imminent. We are still of that mindset. It’s obvious that the government is trying to encourage foreign investment and not reduce it by taking properties away.
What about Apache’s future capital spending in Egypt?
We have been the largest US investor in the country for about ten years. Our three-year plan is to continue with the current level of investment in Egypt.
How does Apache see its future when it comes to unconventional production in Egypt?
We still see a lot of potential in the Western Desert, including unconventional opportunities, but 95% of our activity pursues vertical, conventional targets.
In the Western Desert there are a few world-class fields but most are fairly small, especially by Middle East standards. Our business model is that we have developed a network of facilities along our acreage and hence can economically drill for these smaller targets, from 1 million to 10 million barrel fields. One-hundred million barrel fields are extremely difficult to come by here even in conventional sense, but we still see many smaller traps in our 3D seismic. We are well positioned to aggregate and economically produce these smaller discoveries, which might not be commercial for a newcomer who doesn’t have the infrastructure we have.
What do you think the government needs to do in order to attract more investments in the Western Desert?
Certainly a higher gas price is going to help because it’s hard to make economics, even with shallow gas discoveries, at $2.65 per thousand cubic feet. And I know that this issue is on the minister’s radar screen.
While I still think there is good liquid potential in Egypt, there’s certainly natural gas potential too, maybe even more so, but people aren’t really looking for gas at that price. We are because we have gas plants here and we want to keep them full. We are not putting in a lot of capital, but we are doing enough to ensure that the plants are at capacity, and we understand well that the country needs as much gas as it can get. In fact we would like to find even more gas and build more infrastructure, but to be able to do that, the government has to come up with a higher price because putting in more gas trains is very capital intensive.
What is Apache’s position regarding the government’s debts to IOCs?
This is a problem that surfaced before the revolution. I think we started noticing it in mid-2000s. It got progressively worse up to the point that in 2008-09, we were really concerned about it. We worked very hard with the government to come up with win-win strategies, to keep the level of receivables manageable and to allow us to continue investing. The level of receivables owed to us is pretty high, but considering the amount we produce and the revenue we generate, it is manageable.
The companies that are more levered towards gas production seem to be hurt the most. We are fortunate to have in our Egyptian commodity mix 55% of oil and 45% of gas on a boe basis. Natural gas is pretty depressed in most markets, so we are trying to move our commodity mix more towards oil, condensates and natural gas liquids.
Are you going to look into any offshore opportunities?
Probably not outside the one block we picked up in the Gulf of Suez and certainly not deepwater gas. The offshore gas business is very tough currently, and as of now, our plate is just full with our onshore operations and the Gulf of Suez block.
Can you tell more about this new block?
It’s called North West Abu Zeniema. We signed it with the minister in December last year. We have a couple of good-looking shallow oil prospects there. We think we might be able to access them from onshore rather than setting up a platform. However, we are still bringing in data from the EGPC data center, so we don’t have the final exploration work program yet. We do have a two-well commitment, which we will meet.
Do you see a big potential in this block?
We have hopes of getting some tens of millions of barrels. I don’t think it will be anything really huge, but you never know…
Will we see Apache investing more in onshore blocks?
I suspect so. There’s a bid round we are evaluating right now.
We lost 3 million acres in January as we had seven concessions expiring all at about the same time. We were successful in extending three of them; they should be through the cabinet by now and ready for the president’s signature. In the other four concessions we could never reach agreement with EGPC, who valued them more than we were willing to pay, so we relinquished them, which amounted to 3 million acres.
We have contracted 50 rigs in Egypt, including 27 drilling rigs and 23 workover rigs. To keep those rigs busy, we need more acreage and to shoot more 3D seismic. Our business model has been quite transparent: we would like to aggregate as much acreage as we can, to cover it with 3D seismic and just drill as fast as we can.
So we are very interested in bid rounds. However, we found that the terms of the last bid round were very tough. We were surprised that some companies would extend such terms. We have always been financially astute and we are not going to bid just for the sake of winning a block if it doesn’t give an acceptable rate of return.
Do you see potential for unconventional oil and gas in Egypt?
What is going on now in North America is just unprecedented. Currently we are the most active driller in the US. In Oklahoma, nearly all of Apache’s rigs are drilling horizontal wells. In the Permian Region, half of the rigs are drilling horizontal wells. I don’t see that happening in Egypt because geology and basins are different here.
But this is not to say that Egypt doesn’t have unconventional potential. Last year one of our goals from the corporate office was to transfer that technology from North America and apply it here. So we had a goal to drill seven horizontal wells before the end of the year and we actually spudded eight. Some of them have been very good successes while some have not worked out and tested only water.
Horizontal, multi-stage fractured wells can produce quite a bit more than vertical wells. Unfortunately I don’t know if it’s going to be economical because we had problems operationally. But everyone in North America goes through similar issues; it takes a while to get up the learning curve to be successful. We are not applying a large proportion of our budget, but we are looking at drilling probably another eight to ten horizontal wells in 2014.
Shale gas is a bit different resource. Khalda is drilling a vertical well now in cooperation with Halliburton and the Ministry of Petroleum. We will run several different logs to get as much data as we can to help us understand if this particular shale is as good as forecasted by the EIA (US Energy Information Agency) study.
How did the EIA get that information?
That’s a desktop exercise. Consultants that did work for the EIA went through literature and looked at basic things like what is the mineralogy and total organic content of the shale. So on paper it looks like a good candidate, and they did some volumetrics and estimated a resource potential of 101 trillion cubic feet. But someone actually has to look at real rocks and say if this is for real; that’s what we are doing now.
And to confirm that estimate it’s probably going to take more than just this one well. This is a vertical well. It will eventually take a horizontal well and doing multi-stage frac, but you don’t want to start spending that kind of capital until you have done all the technical due diligence. Unlike conventional plays, you need to consider several different parameters for these shale plays to work technically; then the fiscal regime, concession terms and commodity price must be considered to assess whether the project is economic.
Do you think Egypt will see investments in unconventional in the next 2-3 years?
Yes, probably. We are actually doing it now. Unconventionals is a broad term. I think that what we are doing in the Abu Roash G and the Upper Bahariya is unconventional. Other people may argue with that because we do get production from vertical wells, even though they may not be commercial. So I look at those zones as unconventionals and we are going to invest in those types of plays with newer technology; they are less expensive than the shale plays we are talking about. The shale plays are going to be deep, expensive and probably gas and we are not going to pursue those opportunities for $2.65 per thousand cubic feet.
What difficulties do you see that that the whole sector is facing and what is your message for investors to succeed in Egypt?
Two things come to my mind. First, the diversity of commodity. You don’t want to be a 100% natural gas player and maybe even not a 100% oil player because historically oil prices have varied a lot. And you also have to have diversified portfolio in terms of what basins you are in. It may be okay to be only in one province like we are in the Western Desert, but we operate in six different basins within that province.
Second, understanding concession agreements is critical in this business. You have to spend a fair amount of time to really understand the agreements and work through some scenarios on how cost recovery, profit splits and excess cost recovery work. It seems to me that some new folks coming in want to establish their position here so badly that they don’t realize the terms are not going to be economic.
EGPC does not appear to be concerned whether winning bid comes from Apache or a company they have never heard of. If a competing bid is slightly better than ours, they are going to get it. All things being equal, EGPC is strictly looking at what gives Egypt the best return on paper, which is a natural thing to do. However, some of those smaller companies never finish their work programs; they may lack the capacity to operate, lack the facilities to process any petroleum they discover or lack the capital to develop those discoveries. The best bids for Egypt are really from companies that execute their work programs and deliver production quickly; production is where the value is for Egypt.
Will the production sharing model work for Egypt also in the future or should we be looking at different types of agreements?
The production sharing contract model has served both Apache and the government well in the 20 years that we have been in Egypt. I think it puts both of us in the game; we constantly need to watch our business, our costs and margins. I like it, I guess because I am used to it.
But I know that it is not going to work when it comes to unconventionals or even offshore. I think one size doesn’t fit all in this case. You have capital intensive unconventional and deepwater plays alongside relatively inexpensive conventional onshore plays. Maybe Egypt needs to look at different models.
Would you like to add something?
Yes, I would like to mention our Corporate Social Responsibility initiatives. One of the things we are proud of is the 200 one-room girl schools we have built along the Nile Valley. We maintain those buildings, each accommodating about 35 girls, at our cost. And we are building more schools. I will be traveling to Matruh this month [in April] to help dedicate a sixth co-ed one room school we have built close to our operations. In December Apache Egypt was nominated as a finalist for the US Secretary of State’s Award for Corporate Excellence, the ACE Award. We were selected among 12 finalists from 42 nominations submitted by US ambassadors all around the world.
We are also one of the leading parties in the forthcoming awareness campaign called the Egyptian Initiative for Energy Conservation. I think energy conservation is fundamental. The country wastes energy like nothing I have ever seen. We went through something similar when I was growing up in the US. We had the Arab oil embargo, there were huge queues at gasoline stations and people had to turn their thermostats down. It was painful, but I think from that experience we learned how to conserve energy and these lessons are passed on to the future generations. I think Egypt is at that state now where there really needs to be concerted national effort to teach people how to conserve energy and show them the importance of it.
It’s easy for the IOCs to say that the problem is easy to fix; just end subsidies and the government will be able to raise money and pay us. We know that is not going to happen in a vacuum; there are certain fundamentals that have to happen first and I think energy conservation is the most basic one. The minister of electricity is convinced that it would be possible to save 20% of electricity generated in Egypt just by basic conservation measures. Can you imagine how much of the state’s budget that could save?
This initiative was BG’s idea and Shell is leading the project. We have some staff in the committee with them and I’m currently trying to motivate other IOCs to contribute. We have raised about a million dollars to date and would like to raise well over that. It’s hard to ask companies that are owed $1.5 billion to contribute to this campaign out of their corporate social responsibility budgets, but BG is doing it, Shell is doing it, we are doing it, and recently Dana Gas and GDF Suez have also come to the table.