An atmosphere of political perplexity has deepened in Egypt since the vote on constitution referendum, with many Egyptians rushing to take out cash from banks and hoarding hard currency savings at home. Egypt’s Oil and Gas sector is not immune from the latest controversial political developments. Investors and local companies operating in the field are waiting to see if the transitional period will end any soon.
The recent months of political turbulence have undermined Egypt’s policy as it relates to the country’s most significant economic sector. Now that President Mohamed Morsy has assumed his position one thing is apparently clear with regards to Egypt’s gas sector. It is evident that domestic needs will take priority over exports. This comes as the decision to end gas supplies to Israel is confirmed. This will inevitably impact the pricing climate for international oil companies operating in Egypt’s gas sector, potentially making it more of a struggle to secure internationally competitive rates when selling gas.
According to the latest 2012 report of research and markets concerning the Egyptian oil and gas sector, it is expected that Egyptian oil production will decline from 637,000 barrels per day (b/d) in 2012 to 578,500b/d in 2021. At the same time, consumption is expected to rise significantly from 814,000b/d to 1.09mn b/d over the same period, essentially quadrupling the cost of oil importation in Egypt.
The report adds that despite several proposals to increase capacity refineries are not keeping pace. With refining capacity set to remain flat, imports of refined products are set to rise from 83,000b/d in 2011 to over 370,000b/d by 2021. Gas production is expected to grow from 64.4bn cubic metres (bcm) to 86.5bcm in the 2012-2021 periods. However, consumption will rise at a faster pace, from 47.6bcm to 70.3bcm. It is also expected that gas exports will rise modestly in the period up to 2015 but then gradually fall to below 14bcm by the end of the forecast period.
The report states that the cessation of Egypt’s gas sales agreement with Israel in April 2012 will end a significant portion of Egyptian exports. Though flows to Jordan, the main Arab Gas Pipeline customer will likely persist albeit at lower levels than compared to the period prior to the Arab Spring.
President Morsy is expected to offer much when it comes to the oil and gas sector in the country. “The Egyptian General Petroleum Corporation (EGPC) and the other state companies will continue to push their own licensing rounds, hoping that the political challenges will not ensnare investment in upstream hydrocarbons projects” reads the report.
National contracts with international oil companies (IOCs) are managed by the state hydrocarbon ministry and licenses also require legislative ratification before they can be approved. According to Revenue Watch Institute, despite these measures there is no requirement to publicize details of contracts while they are moving through the approval process. Contracts with IOCs are reached through open bidding as well as negotiated deals, the latter providing more opportunities for corruption.
Egypt does, however, publish NOC contracts and license. The interim Egyptian government has taken steps to review the oil and natural gas activities of the Mubarak regime. But the challenges are made worse by energy shortages, which bring further attention to the value of such energy contracts. Dissatisfaction over the terms of one controversial Israeli deal has led to multiple bombings of the natural gas pipeline between Israel and Jordan.
A report published jointly by Transparency International and the Revenue Watch Institute notes that of the major IOCs operating in Egypt, including BP, BG, Eni, INPEX, KPC, Lukoil and Petronas, none provide country-specific information on payments to governments for oil- and gas-related activities.
However, according to the 2012 British Petroleum Statistical Energy Survey, “Egypt had proved oil reserves of 4.3 billion barrels at the end of 2011, equivalent to 16 years of current production and 0.26 % of the world’s reserves while the country produced an average of 735 thousand barrels of crude oil per day in 2011, 0.87% of the world and a change of 0.3 % compared to 2010.”
It adds that Egypt has consumed an average of 709.46 thousand barrels a day of oil in 2011, 0.82% of the world and a change from 2010 of -7.16%.
The survey also reports that in 2011 “Egypt had proved natural gas reserves of 2.19 trillion cubic metres, 1.05% of the world and equivalent to 35.7 years of current production; had 2011 natural gas production of 61.26 billion cubic metres, a change of 0% versus 2010 and equivalent to 1.86% of the world total; and had 2011 natural gas consumption of 49.62 billion cubic metres, 1.53% of the world total.”
Egypt’s overall oil production has been declining more slowly than in the Gulf of Suez fields due to new output from independent producers like Apache and Seagull Energy at smaller fields, especially in the Western Desert and Upper Egypt.
Crude oil production in the Qarun block in southern Egypt reached around 60,000 bbl/d by early 2000, but has since fallen to 34,000 bbl/d. Apache and Seagull have developed the Beni Suef IX field in the East Beni Suef concession in Upper Egypt, which produces over 5,000 bbl/d.
“The field is said to contain around 100 million barrels of crude oil. Apache and Seagull also have developed the Wadi El-Sahl field in the South Hurghada block, which is producing around 20,000 bbl/d,” reads the report. A joint venture between EGPC and Agip is producing about 40,000 bbl/d from an area in the Qattara Depression in the Western Desert, in the Meleiha and West Razzaq blocks. Khalda Petroleum, a joint venture between Apache and EGPC, produces around 50,000 bbl/d in the Western Desert in the Khalda and East Bahariyya areas.
Recent media reports state that Egypt has changed from a gas exporting to a gas importing country after a decision was made by the Petroleum Minister and has gone into effect on 17 December.
According to the ministerial order, “ the Egyptian Natural Gas Holding Company would either import the gas itself from international markets or via contracting companies. The gas would be transferred via national networks with necessary approvals.”
Petroleum expert Medhat Youssef told Al-Masry Al-Youm newspaper that the decision was “unprecedented,” especially as Egypt would import gas from international companies in Qatar, not the Qatari government.
According to Al-Masry Al-Youm, the import price is expected to reach US$14 per 1 million thermal units, whereas the government sells gas to factories for no more than $4. The Egyptian government exports gas to Jordan at $5.50 per one million units, while Qatar exports it at more than $9, Youssef said, arguing that Egypt administers its petroleum supply poorly and should reconsider prices.
In his last interview on Egyptian TV, the Minister of Petroleum affirmed that the coming state will focus on gas. “Gas is the solution,” the minister said. He repeatedly stated that the dire economic situation would soon fade away, especially after the new constitution is passed.
Importing gas at international prices would affect industries such as cement and fertilizer production.
Meanwhile, Hany Suleiman, former Petroleum Ministry deputy for gas affairs, also told Al-Masry Al-Youm newspaper that gas production in Egypt does not meet demands, referring to expectations that the deficit would reach 3.7 billion cubic feet by 2018.
It is expected that the daily consumption, according to Suleiman, will double by the fiscal year 2014/2015 reaching 25 million cubic feet, compared to around 12 million cubic feet in 2011/2012. Importing gas requires infrastructure and facilities that would cost around $600 million to develop.
Looking forward and in an effort to attract future investors Ganoub El Wadi Petroleum Holding company, which is an Egyptian state-owned energy company, is now offering 20 concessions for oil and gas exploration from December 30, 2012. The company said that the deadline for bids is May 30, where as the blocks are located in the Gulf of Suez, Eastern and Western Deserts and the Red Sea. The news might push one to think that, or hope, the next few months will induce more production and investment within the energy sector.
By Ethar ShalabyDownload