On Monday, May 11th, a room packed with the industry’s major key players welcomed the second Egypt Oil & Gas Convention Roundtable with a mix of excitement and curiosity. This year’s conference centered around production optimization, an important challenge for the industry’s main stakeholders as the international climate forces Egypt to shift focus from exploration to boosting production in existing fields. As part of the four-day convention, the roundtable brought industry experts together to discuss issues involving the public and private sectors. The participants faced each other on the large square table, including EGPC Chairman Tarek El-Molla, Former Minister of Petroleum, Abdullah Ghorab, as well as top-level IOC representatives and engaged in a discussion that acts as a stepping-stone towards greater collaboration between key players.
Tarek El-Molla kicked off the discussion by urging the industry’s key players to turn their efforts to unconventional energy resources. “By 2050, the world is expected to consume twice the energy, as fast population continues to grow and the opportunities for easy and accessible oil and gas are becoming less,” he said. Egypt’s stance on the energy market is particularly precarious given the rising demand the country faces from its population growth. If Egypt wants to come out of the energy crunch unscathed, the oil industry must develop additional energy resources, including unconventional resources. “The task is becoming more challenging and more difficult when you associate technological challenges, oil prices, frontier areas, unconventional concerns, and environmental concerns,” he finished.
The impact of contractual and commercial terms on production optimization:
After El-Molla´s speech, the discussion shifted towards concession agreements in light of production optimization. Many IOCs seized the opportunity to discuss the setbacks inherent in the current concession agreement framework.
Cost recovery is of crucial importance to investors, especially at a time of low oil prices and tight budgets. “Investors need fast return on their investment,” said Baker Hughes Director of Sales and Marketing Mahmoud Shawkat. “To make it happen while they [investors] are meeting the need of the country, you need to make them rest assure that by the end of the agreement they can still spend more money.”
The last five years of the concession agreements pose a challenge for IOCs regarding protection and production. Protection is severely curtailed in the last five years of an agreement, making investors reluctant to spend money on top of cost recovery roadblocks. The climate of uncertainty and slow bureaucratic procedures that characterize the contract´s extension has a negative impact on production.
“Agreements is the core issue of optimizing production at this stage,” urged Ahmed Moaz Country Manager at Sea Dragon Energy. “In the last five years of the agreement, if the contractor does not recover, he will not spend,” he continued. “The more difficult you make it on the contractor, the less likely the IOC will bend down and lose money.” As a solution, Moaz suggests that EGPC makes a general amendment to all existing agreements instead of addressing this issue on a one-by-one basis.
“I [contractors] can’t wait until 30 out of the 35 agreements that are currently running to expire before I can start discussing this on the new bid round. It is important to address existing agreements now,” Moaz added. In regards to the idea of switching to a performance base contract, Moaz is skeptical. “The current structure of agreements does not tailor for these performance contracts. They make it almost impossible for IOCs to take the risk for new technologies alone.” He finished by adding that “changing agreements need to be tailored to the current market.”
“I believe that currently the most important thing to consider is increasing production, without affecting the cost,” added Mostafa el Bahr, Former Chairman of Agiba Petroleum Company.
GUPCO Chairman Abed Ezz El-Regal agreed that “it is in the best interest of EGPC and the contractor to start negotiations for the extension of the existing contract early, at least a year early, and to agree on additional terms of activities.” He added that “we should urge contractors to exercise the right of the optional five years in the last six months of the contract.”
Many companies and executives shared El-Regal and Shawkat’s views about the importance of reforming contracts, especially as it relates to cost recovery.
“This is not just a technology issue,” said Dr. Hany El-Sharkawi, CEO of Cheiron Petroleum. “It includes price, it includes the fiscal terms of an agreement. There should be some modifications to the fiscal terms. This is something that must happen today, not in the future. There are points of view from the contractors side that must be taken into consideration. We have to look at why these extensions are being requested.”
Sharkawi continued, “There will be investment if the company sees that they will recover their cost in a timely manner. They will not be happy if they double production and lose money. This cannot just focus on the technical and ignore the fiscal. Brownfields are coming to Egypt.”
“In today’s environment we focus on getting the lowest possible price for the gas, and as a result we delay the entire project by six months, delaying production,” said Arshad Sufi, President of BG Egypt. “Think about how much gas we are importing at a higher price. Fundamentally change the way you look at things, because speed is of the essence.”
In response to the IOC´s list of grievances, El-Molla assured the participants that EGPC´s aim is to insure a sustainable investment environment and support Egypt´s energy goals. Ultimately, El-Molla asked for patience, as changes are underway. “The implementation of legal changes has to meet the following criteria,” he said, “they have to be justified, economically reliable and in accordance to the law: “We have the assets, the technology, and the investments,” added El-Molla. “We have to sit together and share ideas.” The main drive of the discussion is to increase production, “and nothing is going to stop us from implementing changes,” he finished.
Samir Abd El Moaty, General Manager of Beach Energy, responded to El-Molla, saying that for Egypt to be a viable destination for investment, the agreement model simply must change. “There is something not going well with these concession agreements, so we need to change it. I know there are some processes that need to happen in order to change these, but why not do them?” “If amending concession agreements will help, why not do it?” El-Moaty continued to speak about the government role, focusing heavily on bureaucracy that holds the sector back. “Bid rounds take too long, at least three years, why not think about allowing extensions?”
Despite the challenges Egypt faces from four years of political instability, Eng. Diaa Kassem, General Manager Follow-up of Reservoir Behavior at EGPC, is confident that production optimization in Egypt is successful. “There has been an increase in production by 2% in the last five years. We have an increase in activities, and an increase in production optimization,” he said.
Finally, as Moaz thoroughly explained, “agreements are the issue.” Solutions will only succeed when “red tape and bureaucracy are alleviated,” he added, “otherwise investors will lose faith in the system and will leave.” Tarek El-Molla responded to these comments by reiterating that the government is making progress, while highlighting some of EGPC’s commitments to its IOC partners; including refining upstream agreements and gas prices to encourage oil and gas activity, expanding and upgrading refining, transmission and distribution construction, developing a petrochemical industry to customize added value, continuing the implementation of the energy subsidies reform program, diversifying Egypt’s energy mix to be more sustainable and economical, and promoting Egypt as a regional energy hub.
Sharing Risks, Rewards, and Technology:
Chris Avant, the EEG Marketing Manager at Schlumberger, touched upon the wide range of optimization opportunities as it pertains to technology. The role contractors play in providing IOCs with the best, most suitable technologies is a driving force for production optimization. Without the best technology—customized, safe and affordable— oil companies would not be able to operate efficiently and meet their production targets. Optimization is multifaceted and starts with “conceptualization, implementation processes, such as where you place the oil well originally, designing well profile, placing it properly, making sure your well is where you want it to be, how you complete the well, and how you manage the reservoir,” said Avant. However, under a tough economic climate, it is in the contractors´ best interest to find ways of making implementation as feasible as possible. “We have to raise our awareness for what the basic cost is for these technologies and look at cost benefit of the implementation of these technologies,” he added. “There has to be an appreciation for the value of cost benefit.”
Emad Hamdy—Chairman of Bapetco—responded to Avant’s comments, adding that his company sees service companies as very useful in the field. “We in Bapetco have started to produce quite a lot in our wells. But my concern is how we will be able to continue this production.” Hamdy went on to elaborate on how advanced technology from service companies are being used in Bapetco adding, “now we drill our horizontal wells for 600 meters so that we can improve and optimize production. I think that the technology service companies can provide is very helpful and very useful.”
Mr. Shawkat raised an important question regarding the role service companies play in the risk and reward formula characteristic of the oil industry. “Service providers and technology leaders in the market should be included in the risk-reward equation,” he said. “To optimize your production, you need the technology and the brains,” said Shawkat. Service companies should be allowed to reap rewards, to work closely with IOCs and optimize production. Contractors should not be confined to the risk component of contractual agreements and penalties alone.
Eng. Sayed Rezk—General Manager at Enap Sipetrol— added to Shawkat’s argument by evincing Enap Sipetrol’s experience with performance contract. “We have already applied the performance based model of sharing risk between JVs, IOCs, and service companies,” he said. Rezk also suggests EGPC to revisit the tender and the performance based contracts for artificial lifts, service contracts and reservoir management contracts, to guarantee a fair risk sharing between all parties involved.
Service providers are the main pioneers of technology in the industry, which directly translates to more successes in exploration and production. “Unconventional sources of energy oil are more expensive,” stated Former Minister of Petroleum Abdullah Ghorab, “but it is more expensive not to produce.” According to Ghorab, it is more efficient and cost-productive for Egypt to develop its own unconventional sources than to buy it from international markets. The participants agreed that for the country to enter the unconventional arena, EGPC—along with higher education institutions and IOCs—should provide research and technology centers to support operators in applying EOR and IOR techniques.
Khaled Kacem, Managing Director General Manager of Rashpetco, had much to say about the second topic of risk sharing and reward. “How can we accelerate gas that is needed for Egypt?” Kacem asked. “One of the questions I’d like to raise is how can the decision making terms be changed to increase the speed?” He continued, “How can we as JVs work with service providers to be more flexible to allow competitive pricing play a bigger role?”
“There are things we can do now that can help us focus on using the technology that we have now,” said Apache Egypt Regional Operations Manager Mike Mason. He explained the importance for IOCs for having access to new equipment, which leads to maximizing production. “We should set a target for ourselves in light of this convention to increase our production,” he finished. As fields mature and production becomes more challenging, both stakeholders need to learn how to share risks as they move forward.
Partnership among IOCs is an important component of success on the field, but can only be successful through a long-term partnership between the IOCs and the government. “IOCs take the risk in the exploration phase, while the government takes the risk in the development phase. There needs to be equal sharing,” said Shamir Salahudin, Technical Manager at Shell Egypt.
Collaboration between public and private sectors can take must be based on transparency and information sharing. Abed Ezz El-Regal asked for the creation of a database for all facilities in the Gulf of Suez and the Western Desert. “EGPC has taken the lead in producing regional studies in the Western desert facilities to identify all future expansions,” he said. “Data exchange from special reservoirs between EGPC and other companies” would facilitate and increase production. “EGPC has the obligation to try new technologies and launch pilot projects. There is available technology to improve, there are assets ready to receive the technology,” he finished.
Optimum Utilization of Existing and Future Infrastructure
“Production optimization has three areas, well management and optimization, reservoir management, and improved recovery techniques to increase reserves,” said Dr. Helmy Sayyouh, professor of Petroleum Engineer at Cairo University. Increasing reserves increases production. All participants agreed upon the urgency to increase reserves through secondary and tertiary recovery. The oil fields of Egypt are getting old and the number of green fields in the country is decreasing, for this reason, the participants discussed how to optimize existing infrastructure to maximize reserves. “So far there are no new discoveries so we should think out of the box, to think about the marginal field,” said El-Regal.
Egypt only produces about 30-35% of oil in place. Production optimization will require applying new and unconventional technologies, especially in brownfields. Mahmoud Dabbous President and CEO of IPR pressed the matter further by reiterating that Egypt needs to enter a new era of recovery techniques. “It should be a national project because it requires serious commitment from the part of the government and operators,” he said, “and these commitments require a vision.” He also added that Egypt needs to ender a “new era in production development through the application of recovery techniques.” A shift in focus to finding more oil from producing oil fields will result more production from increased reserves.
“Production optimization is no longer an option, it’s a necessity,” said Kamel El Sawy from Kuwait Energy. “For the time being we lack big discoveries and Egypt is producing 70% of its production from fields that were discovered 15 years ago.” For production optimization to kick off, “EGPC must screen the performance of all IOC companies and not wait until the IOCs approach them,” he finished.
Mohamed Baydoon, Chairman of SUCO, reminded participants that production optimization is a comprehensive term saying, “We have to think differently, and change agreements if necessary. When we talk about production optimization, it does not apply only to wells. It applies to reservoirs as well.”
Nabil Salah, Operations Manager of GUPCO agreed with Baydoon, stating, “We need to talk about production optimization specifically in regards to well and reservoirs.”
An air of camaraderie formed among the industry’s key players. Optimization is an integral process that requires collaboration and transparency between public and private parties. To optimize production you need to take into account technology, legislation, business models, and people development. “When it comes to production, we are not competing against anybody except ourselves,” said Mason. “If our competitors around the table do very well it is good for them, it is good for Apache, and it is good for the region.” Mason invited his counterparts and other players to optimize production. “It makes the country a more stable place,” he concluded.
People Development within Production Optimization:
The roundtable discussion ended with the topic of people development. The most sophisticated technology goes hand in hand with a competent team of engineers, geologists, and professionals, and IOCs are making an effort to prepare young talent for the rigors of a high risk, fast paced industry. “Egypt needs to learn how to take risks,” said Deputy Exploration Manager at Petrosilah James Pendergrass. “Many of our young people do not understand how to take risks and how to succeed,” he continued. For this reason, “we need to teach middle management people to do this because until we do that, all this technology will sit on the shelf.”
Dr. Mark Fenton, General Manager of Dana Gas also spoke about the need for people to learn and take risks. “As experienced managers we need to push our people to ask why not? And to encourage innovation. Push boundaries.” “Do not take anything for granted, push everywhere you can,” Fenton finished.
People development is the key enabler to maximizing reserves, said Salahudin, for it is young professionals who will tackle the weaknesses of the current framework and find ways to improve the industry. Young professionals must be pushed to think outside the box, take risks or shift paradigms. “Technology, people development and the economic framework need to go hand-in-hand,” he finished.
“Without a doubt, Egypt has some great Engineers. We have only got to give them the space and the time to develop” added Craig Robertson, General Manager of Mansoura Petroleum.
The production optimization conference was a great opportunity to encourage further collaboration between JVs and IOCs, said Mr. Jeff Edelman, New Ventures Manager at TransGlobe Energy. “The future is extremely bright but we need the industry to come together. We need to make sure our JVs are talking to other JVs,” he continued. “There are a lot of opportunities and it is all about communication.” Mr. Edelman also suggested building stronger ties with universities to guarantee that students have access to more meaningful internships.
Mason added that Qarun would not have been able to improve their initial performance without a team of “exceptionally good Egyptian nationals.” He warned that the industry needs to “try to develop those people to think about the well and the entire system.” Ways in which the industry can guarantee better opportunities for young talent and continuous development of their staff is by legal enforcement of the budget outlined for people development stipulated in contracts, said Shawkat. Another way is for industry leaders to take full responsibility and “push things forward,” creating a trickledown effect into different areas of the company. And finally, the participants called upon each other to share technology information, both within and between companies, to upend archaic mindsets that are slowing the industry down.
The roundtable revealed the public and private sector’s impetus for change and collaboration. Even though the road ahead is long and full of uncertainty, the industry agrees that optimizing production is a priority for Egypt’s future. As an industry, both the private and public sector must advocate for knowledge exchange, collaboration, technology innovation, and communication among all stakeholders in the industry.