Optimism despite the economic collapse

Despite the status of worries and anxieties dominating the rig market and postulations of how far would the global economic crisis affect the industry, most of the key petroleum players have kept their 2009 plans unaltered; believing that it will not be as worse as analysts assume and opting for the relief to come soon

Dr. Hany El-Sharkawy, President and General Manager of Centurion Petroleum Corporation, the subsidiary of Dana Gas, has denied any downsizing of the company’s projects in Egypt or any cancellation of rig demand, confirming that none of the company’s current rigs were dismissed. However, he added, some projects were postponed and the drilling schedule for 2009 has been modified.

As for the measures taken by Centurion to confront the challenges of the economic crisis, Dr. El- Sharkawy highlighted that they are prioritizing essential projects and applying a strict cost reduction and financial controls.

“I think they are already here in Egypt, but they will be emphasized during the first quarter (Q1) of 2009,” expressed Dr. El-Sharkawy his expectations for the negative effects of the economic collapse on the Egyptian petroleum sector. “I believe we should see a relief by Q3-Q4 of this year.”
Neeraj Agrawal, Dana Gas Finance Director, elaborated on the Company’s financial results, saying in a statement, “Dana Gas has not been negatively impacted by the recent global financial crisis as it has maintained a good level of liquidity and has cash reserves and positive cash flows to support the ongoing project and drilling expenditures.”

Dana Gas, the Middle East’s largest regional private sector natural gas company, has announced quarterly results to September 30, 2008, posting revenue from oil and gas production of AED 320 million, a 16 percent increase over the same period last year. Dana Gas’ oil and gas production in Egypt ended the quarter with a production of 2.57 million barrels of oil equivalent (boe) and contributed higher revenues due to better realizations of LPG and condensates.
Dana Gas’ arm in Egypt, Centurion, has set its 2009 plans on two basic segments; continuation of exploration activities and enhancement and maintenance of the company’s production levels.

Similarly, Sea Dragon has not postponed any planned activities or cancelled the planned drilling program, regardless the burdens of the market collapse. Ahmed Farid Moaaz, Sea Dragon Country Manager for the Egyptian operations, highlighted that the company would turn this crisis into a positive opportunity to grab and purchase another asset in Egypt or worldwide.

“Petroleum sector most likely will see a slow year as all the major players will reduce their activities waiting to see the light at the end of the tunnel. Yet, Sea Dragon has maintained its plans unaltered,” added Moaaz.

Carrying the same goals of extending its reach in Egypt, Per Johan Buggee, General Manager of Norway’s leading company StatoilHydro in Egypt, highlighted that the company is seeking opportunities to grow business in the country. Buggee affirmed that StatoilHydro has not postponed or reconsidered any of its plans. On the contrary, the company is actively looking for a deepwater rig for its drilling activities in the Mediterranean scheduled to commence in 2010.

“Due to the current crisis, the focus on costs in the company has increased significantly, but StatoilHydro enjoys a solid financial situation,” stated Buggee.
Concerning his expectations over this year, Buggee believes the activities of the Egyptian petroleum sector would be “slightly lower than in 2008”.
In his opinion, Buggee presumes that the service industry is the one to be noticeably affected and it would experience an increased pressure to reconsider its prices during 2009.

Having the service companies under the crisis spotlight, Halliburton, one of the leading service companies worldwide, see no need for any major downsizing or activity postponement, yet the pricing issue would be probably reconsidered. Hesham Ismail, Halliburton Area Vice President, Egypt and Libya, said, “we are sticking to our 5-year capital plan. However under the circumstances, it will be difficult for us to hit the growth margins that we achieved and sometimes exceeded during the past few years given the market activity slow-down driven by the steep decline in the commodity prices. It will be also challenging to monitor significant improvements in the profit margin expansions in the interventional markets, as there will be likely pricing pressures across the sector.”

Ismail added, “It should be understood that we operate in a cyclical, commodity price-driven market, we’ve been in tough times before and we know how to handle the downturn. In fact, from a longer term perspective, the energy supply and demand fundamentals are strong, especially when you consider the fact that even with no demand growth at all – which is not the case now, its just slower demand growth level – the world’s hydrocarbon production rate declines approximately 4% annually, so we need to compensate for that supply drop.”

Being one of the early major operators in the Egyptian sector, Ismail views that the sector has been already engaged in the crisis. “I think we have already started to see the negative effects of the downturn, but to varying degrees from one market to another. It is true that the US market is spiraling downward at the moment, but the rate of change is different within the international markets.”

The different market segments lead to different market reactions, stated Ismail. “For instance, our market in Egypt tends to be primarily mature operations rather than exploration-driven, hence less vulnerable in the downturn markets when exploration activity tends to be among the first to be scrapped out, Halliburton in this case is well positioned as our portfolio in general is not highly leveraged on exploration-type of activity. The other factor that impacts the activity level is the E&P customer mix, typically the smaller independents tend to feel the cash squeeze the most, impacting their funding and hence activity levels. In Egypt, we have just the right mix of large IOCs and smaller Independents, and with our broad mix of services portfolio we believe we can cater to the needs of those smaller Independents in this crunch time as we are able to offer them bundled services that can maximize their overall value returns.”

Halliburton’s 2009 agenda continues to focus on the technology portfolio coupled with the effective and efficient service bundling for value-maximization to different client bases. Cost efficiencies are also high on the company’s agenda to weather the downturn and ultimately to continue with people and capital development to be ready for the up-cycle whether in 2010 or shortly beyond when the world economies recover from these tough times.
On the other hand, some petroleum mega players believe that service companies are the main, but not the sole, corporations to be negatively affected by the crisis’ challenges.

“The main challenge is that the Egyptian Petroleum Sector service companies have adopted very high prices in 2008, which mid term will burden some projects, if not revised in due time,” said Hans Andreae, General Manager of RWE Dea in Egypt. The degree of the crisis’ negative effects varies; “Each company is in different position, depending on the phase they are in, whether exploration, development, production…etc.”  

RWE Dea is currently in the middle of an ongoing field development work in the North Idku. “For our Egyptian demand, we contracted in addition to Crosco rigs 801 and N-2 which work onshore, a Jackup to drill our North Idku wells in 2009 and to perform offshore exploration work later on,” declared Andreae.
The 2009 agenda for the Dutch company in Egypt focuses on North Idku development and continuation of exploration work in the concessions of Disouq, Tanta and North el Ameriya.

Local and International Rig Markets Standing
On the international level, and prior to the current economic disaster, the rig market has witnessed an increasing demand, as there has been a worldwide shortage of highly developed rigs used for the deepwater drilling. This shortage resulted in a 98 to 100 percent increase of the daily rental fees of rigs, over last year.
In West Africa, the rig cost mounted from $92,500 a day in 2007 to $135,000 and from $171,000 to $243,000 in the area of North Sea.
As for the cost of offshore rigs manufactured for the deepwater drilling, up to a 5-thousand feet depth, it increased from $245,000 in last November to  $400,000 a day during last month.
In the U.S, latest reports resolved that the costs of offshore rigs have scored first-time increase in years. For instance, in the Gulf of Mexico, the daily cost of rigs were four times higher compared to 2003, due to several factors among which, rig and equipment shortage, high personnel wages, lack of experienced workforce…etc.
Moving to the local market, the volume of E&P activities, whether onshore or offshore, has tremendously increased, according to the latest reports issued by the Ministry of Petroleum. Egypt’s rig count has increased from 73 rigs in 2005 to 102 rigs in 2007, which increased by its turn to 112 rigs at the end of 2008. The Gulf of Suez and the Mediterranean areas include approximately 23 offshore rigs, while the areas of South Egypt, Delta, Western and Eastern Deserts have approximately 79 rigs operating in the fields.

The country’s rig number is expected to reach 146 rigs over the coming five years. However, in light of the economic deficit, precautions should be made to maintain a status of stability in this strategic industry. According to the Ministry reports, the exploration projects in the Gulf of Suez and Western Desert are financially covered for a year ahead. This means that any project downsizing will not emerge before this year. Thus, what would happen after this year? Is there any definite possibility for companies to halt their projects in the country? Maybe it is still early to get the questions answered, however, all the crisis features should be weighed from now on instead of falling into the future ambiguity.


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