Still controlling the ups and downs of the gas industry

Although everything is usually subjected to alternating periods of good and bad fortune or even high and low spirits as well as smart and failure management, here in Egypt we tend to pause or suspend life temporarily for each mood. When we admire, we extremely praise while for objecting to something we totally turn off the light. That’s a quick summery for the Egyptian gas sector

Since the end of the sixties of the last century, specifically when the first Egyptian natural gas field was discovered which was called Abu Madi field in the Delta, the Egyptian government represented by the Egyptian Petroleum Ministry has been working on how to exploit the wealth of gas that God has blessed us by.

From year to year, the domestic production of natural gas increases in addition to the existence of multipliable reserves that prepared the strategy of distributing that gas. The equation was: one third of the gas production heads for domestic consumption and the other one third is devoted for exporting, while the last one is committed for the future generations to come.

In the past ten years, Egypt witnessed a steady growth in the gas industry at the local level as well as on the Arab and international levels. Hence, its status bolstered as one of the gas producers and exporters in the world, as confirmed by studies of the global institutions.

Moreover, most of the these institutions confirm that Egypt has become one of the most attractive countries for investments in exploration activities in the light of high percentage of the existence of gas in the areas of the Mediterranean Sea and the Delta, which contains more than 81% of the total reserves of Egypt. Besides, the Mediterranean region is considered one of the world top ten basin areas in terms of volume of reserves added and the discoveries made by of the new fields.

The role of Egypt became obvious after the formation of an independent entity for natural gas exporting and producing countries. A charter was also there to play the role of an organizer of the new entity’s work to develop and support the integrated coordination among its members in addition to the exchange of information in the various fields of research, exploration and development of natural gas fields. In fact, Egypt was one of the first countries that called for establishing that mechanism for producing and exporting natural gas countries in the Ministerial Conference of the Organization of Petroleum Exporting Countries “OPEC” at the end of 2000 in Cairo.

Meanwhile, the Egyptian Ministry of Petroleum’s plan aims to increase the number of natural gas discoveries to cope up with the increased demand of both domestic consumption as well as the commitment of exporting contracts, which Egypt signed with a number of foreign and Arab countries. Indeed, the Ministry has successfully managed to sign new investment deals and contracts; one of them was for Edison last year that witnessed the biggest signing bonus agreement, as reached to 1.4 billion dollars.

The Ministry wasn’t satisfied by the extent which it reached by the number of it has reached and as a result it has recently amended the two petroleum contracts between the Egyptian General Petroleum Corporation (EGPC) and BP from one hand in addition to RWE on the other hand, in the North Alexandria and West Mediterranean Deep Water concessions to develop the reserves which estimated by 5 trillion cubic feet of gas and 55 million barrels of condensate to contribute in securing supplies of natural gas daily production for the domestic market by October 2014. While the daily production of the two amended deals are estimated by an average of 900 million cubic feet of gas per day and 10 thousand barrels of condensate per day.

The two modified agreements include unique conditions and terms to ensure for Egypt major advantages, especially as the concession area is in the deep water of the Mediterranean Sea and it’s difficult to develop within high pressure and heat. Besides, the foreign partners will be responsible for all the investments needed for development which is approximately 9 billion dollars without any cost recovery. Most of the critics and viewers praised the ability of the negotiating of the Egyptian petroleum sector to reach balanced terms in the agreements, especially for the new economic model which was applied for the first time the oil sector in those two modified agreements with BP and RWE.

“First of all, this agreement is considered a unique one up till now in Egypt. It is deviating from the traditional PSA which in words means that we do not have cost any recovery scheme within the project,” Dr. Hans-Hermann Ecke, General Manager of RWE Egypt, exclusively told Egypt oil & gas.

Commenting on the newly-modified mechanism, Ecke said: “this agreement is a very balanced agreement which is between us and the Egyptian authority represented by EGPC.”
“We took our time in negotiating to reach this balanced agreement. I can easily answer that it is better than the production-share agreement as it was the case before. The former agreements were not able to cover this kind of challenging project to be realized.

“We have the offshore gas which is quite in a distance from shore and the project is technically very challenging. It was not possible to be realized in an economical frame to develop such reserves under the previous terms.”

Regarding the management and that there is no cost recovery, he said: “the governance of the project is mostly with the operator which has to do with the fact that there is no cost recovery. Hence, the project has to be realized in a certain time frame.”

“Conversely, we have a single buyer which is the Egyptian General Petroleum Corporation (EGPC). They buy the gas, the whole amount of gas produced,” Ecke explained.
“This project is one of the biggest in our local and international portfolio. Exactly in figures, within the next five years, we are going to spend $3 billion and later additional investments during the lifetime of the project which is covering a minimum of twenty years of production and it has the potential to be extended.”

On the other hand, BP former Chief Executive Tony Hayward said: “This agreement unlocks a new phase in realizing the huge potential of the Nile Delta basin, which will play an important role in meeting regional energy security needs in the coming decades.’’

‘’BP and EGPC have a long-standing and successful partnership, and the agreement we signed today takes that to a new level in developing these deepwater resources, as well as creating an important source of future growth for BP,’’ Hayward added.

Hesham Mekawi, President of BP Egypt, commented: ‘’This is a very important project that is set to unlock a strategic gas resource in the West Nile Delta area, which is significant for Egypt’s energy supply today and the future. The investment in this project, estimated to be $9 billion gross, will reinforce Egypt’s importance as a major source of future oil and gas production.’’

Whilst, the Egyptian gas industry faces many challenges both in terms of the cost of huge investments which is reflected in the investments pumped by companies interested in exploring for gas in Egypt. Besides, it also faces other obstacles in terms of the risks faced by these companies to operate in deep water which is predicted by indicators of natural gas at high rates.

Perhaps the problem of oil spill of BP in the Gulf of Mexico has put a heavy burden on companies’ shoulders which operate in deepwater in the Mediterranean Sea and the Delta to ensure the risks that could occur in the future.

Moreover, from the other challenges which also face the gas industry are the fluctuations in the price of gas since it is not linked to the rise in the price of crude oil. Thus, the current decline is of great concern to producing and exporting countries in sales to the oversupply in the market.

Frankly speaking, gas industry requires advanced technologies that would reduce the total cost of expenses as well as increased production volumes which offset the companies operating in the field of gas investments when sold production volumes extracted.

Ministry of Petroleum was able to step down obstacles facing the gas industry aside after linking production facilities for companies to each other, which would increase the quantities extracted and placed on the production map in the fastest time. Not only at this point but also the terms and conditions altered by the Ministry in the agreements would encourage investment and increase appetite for foreign investors to increase investments in the gas industry.

For its part, the joint-venture companies became ready to develop of natural gas wells located in the areas of gas and mobilized its forces to boost the production, especially in the Mediterranean and the Western Desert.

For instance, North Sinai Company (Nospco) announced that it prepares itself to implement the second phase of the new drilling plan in the middle of this year and to finalize it by the end of 2016.

Egypt Oil & Gas newspaper (EOG) learned that the company’s plan include drilling six new wells in its acquisition area in the Mediterranean. EOG also learned that the volume of the investments of the six exploratory wells reached up to $200 million. Nospco will be drilling two exploratory wells in Tao block, and the other four in Kamose and Wastany blocks.

Nospco seeks to maintain the current production rate at 180 million cubic feet, applying the latest technologies in drilling operations, represented in the 3D seismic survey for the detected wells.

Additionally, Abu Qir Petroleum Company is aiming to boost its current production rate through adding more wells to these fields. Moreover, Abu Qir is targeting a 400 billion cubic feet of gas from the North Delta fields.

The current production rate of Abu Qir, the EGPC and Italian Edison joint-venture company is 175 billion cubic feet of gas. Edison which signed the highest bounce signature that reached $1 billion and $400 million last year. Besides, it initiated its first steps towards the drilling of two new wells, exploratory and development wells in North Abu Qir-10 and Center of Abu Qir respectively.

EOG learned that the total value of the current wells drilling counts for $41 million. The company targets a production boost from the North Abu Qir field by raising its current production from 175 billion cubic feet of gas per day to reach up to 300 billion cubic feet from the new marine platforms. As well, the company intends to conduct well’s treatment over its exploratory wells, in order to be able to accommodate more new wells, whether exploratory or development ones, especially after the successful 3D seismic surveys that help boosting the North Abu Qir field reserve.

The drilling in the Mediterranean Sea is one of the very expensive since the drilling in deep water and shallow need special types and techniques of drilling rigs in the depths and thus it requires huge investments. Hence, the extra-high costs of drilling in the Mediterranean region is a major impediment to oil companies interested in working in production facilities as a result of the high cost of extracting oil and gas.

Some of the companies called the competent authorities for facilitating the procedures for the entry of foreign partner in the new bidding of the Mediterranean Sea to play a key role in the local market needs for the production of oil and natural gas and to increase the surplus for export abroad. In addition, they also asked for compensation of the foreign partner for the high costs which are disbursed in the exploration and extraction of oil and gas to increase the percentage profit contracts for drilling operations in deep waters.

For them, the price formula is regarded as the only way for joint—venture companies in order to get their material rights from the foreign partner in addition to setting the price, which is sold under the terms of the contract between the Egyptian company and a foreign partner.

They believe that the government should support the oil companies hoping to extract oil from the Mediterranean Sea to ensure the escalating of creating new joint-venture companies with the foreign partner side by side with the increase in production of oil and natural gas in Egypt.

They further explained that this support will increase employment opportunities on the extraction of gas from the Mediterranean Sea and the conversion from operating “onshore “to the deep water through the provision of good information base for deep water.

As a result, that should grab the attention to the areas of new concession located in the Mediterranean because of its important role in increasing the production of gas and oil, especially after the vital technological developments occurred in the Egyptian gas industry in Egypt. It consequently made Egypt in the ranks of the first countries in the production of gas in the world in addition to meeting the needs of Egypt’s commitments for foreign joint-agreements, for example, the Arab gas pipeline, as well as the needs of matching domestic demand for energy, which has grown in the last period due to increased growth rates.

All of a sudden, however, this comes at a time upon which the crisis of cutting electricity from the Egyptian citizens and residential apartments as well as factories. The chaos of the need for electricity had caused wide controversy over the past couple months as there were mutual accusations for the crisis between the Electricity and Petroleum Ministries.

The Ministry of Petroleum strived to provide the quantities of gas needed by the power plants, at a time which is committed to the ministry’s export contracts and the delivery of natural gas to households as well as meet the needs of manufacturers of gas in implementation of the electoral program of President Mubarak.

Some news and rumours said that the Egyptian government is seeking to re-buy approximately 1.5 billion cubic meters of natural gas it sold to Israel as the country faces a gas crisis. Also, unnamed sources told the Egyptian daily Ash-Sha’b that the Ministry of Petroleum and Mineral Resources said at least half of the natural gas sold to Israel would have to be repurchased for $14 billion, although it was originally sold for $2 billion. However, the Ministry of Petroleum later cancelled the information and totally declined it.

The independent daily Shorouk reported Saturday that the power outages and recriminations between the oil and electricity ministries over who is responsible for them have embarrassed the ruling party, AFP reported.

In January, the petroleum minister announced that Egypt would need to import natural gas to cover huge shortfalls in domestic-use gas and industrial diesel. He retracted his statement shortly after over concerns of a backlash from those opposed to exporting natural gas to Israel.

There is also renewed protest against a gas deal that supplies Israel with an estimated third of its natural gas consumption, with some linking the power cuts to gas shortages, the newspaper reported.

Despite concerns, the electricity minister said Egyptians would need to lower the electricity load during Ramadan, which began in the second of week of August.
However, Mohammd Awad, head of the Electricity Holding Company, said lowering loads was a normal procedure during the summer period, given the increased consumption of electricity from air conditioners and refrigerators.

Nevertheless, perhaps what happened in the editing and altering the price of the old and current agreements of exporting natural gas the is one of the most important steps taken by the Ministry of Petroleum for the advancement of the gas industry.  It managed to provide approximately 20 billion dollars by the modified agreements with foreign partners. The move has come while the Ministry of Petroleum is facing criticism because of high number of exporting deals concluded during the past years.

The Ministry of Petroleum has been able to open a large market for exporting gas. It started first when it initially inaugurated giant complexes to export liquefied natural gas in the city of EDCO with a total investment of 4.6 billion dollars. It consists of two manufacturers around 7.2 million tons annually. Its exports accounted for 60% of Egypt’s exports of liquefied natural gas; it also produces 40% of the total Egypt’s production of natural gas. The complex plant includes two warehouses for storage can each 140 thousand cubic meters, also boasts the largest port dedicated to export liquefied natural gas loading dock length of 2.4 km.

The process of exporting is performed through the gas liquefaction complex for natural in Damietta city, which is the largest production unit for the liquefaction of gas in the world.
It has a capacity of 7.5 billion cubic meters of natural gas and produces 4.8 million tons of liquefied gas, which ensures Egypt’s membership in the club of countries exporting gas. Damietta’s plant is supplied by gas from fields in the Mediterranean Sea. Besides, it was established by joint investments with companies of Spain and Italy up to 1.3 billion dollars and Egypt contributes in it by 20%.


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