The political events of the last few months have left Egypt’s economy in a battered state. The country’s once lucrative tourism industry suffers and the stock market continues to struggle as financiers scale back their investments. The oil and gas industry however, has largely been able to maintain its successes and continues to see investments despite the need for some reforms. Indeed if the correct steps are taken to resolve some of the industry’s grievances, it could very well be this industry that saves the country from the brink of economic meltdown. And while controversy surrounds deepwater drilling, it is likely to be the way forward for Egypt’s oil and gas production. As with so many aspects of the industry however, there are several measures that need to be addressed.
Offshore drilling is a controversial aspect of the oil and gas industry because of its high cost and risk factor, and the public opinion of subsea oil and gas production has become a heated debate with many arguing that the financial and environmental risks are not worth the payout. It is up to the industry as a whole to change the reputation of offshore drilling and this must be achieved, above all else, through increased safety standards. These necessary adjustments will not only ameliorate concerns from the public, but will make offshore drilling a more sound investment and ultimately, a more lucrative endeavor.
Last summer’s Red Sea spill is a topic of concern for those wary about the safety of offshore drilling in Egypt. The government came under heavy criticism for initially keeping silent about the incident and never fully disclosing the details of the spill to the public. However, praise is due to the Egyptian government for their speedy and thorough cleanup process in which millions of dollars were spent to ensure that the Red Sea and its popular beaches were fully restored.
The incident had potential to be much worse. The highly publicized Macondo blowout in the Gulf of Mexico last April has had far reaching effects. The explosion of the Deepwater Horizon caused 11 deaths and 17 additional injuries. Over the three months that the well remained uncapped, an estimated 4.9 million barrels were lost into the Gulf of Mexico, crippling the region’s tourism and fishing industries. Well owner BP has since established a $20 billion dollar relief fund for those affected by the disaster and have received an estimated 800,000 claims for compensation. Although BP, the rig operator Transocean and the United States government were instrumental in capping the well and cleaning the oil, initial attempts to do so failed, prolonging the process thus increasing damages and losses.
These incidents and other recents mishaps in the industry show that while pouring immense amounts of money into cleanup is essential, more needs to be done to prevent disasters in the first place.
The majority of Egypt’s offshore producing wells are currently in the Gulf of Suez, yet the fields are mature and there have not been substantial discoveries in this area recently. According to recent assessments, 81% of Egypt’s remaining recoverable natural gas reserves are in the Mediterranean (compared to the Gulf of Suez’s 6%.) 2010 figures claim 57.84 tcf of proven gas reserves are in the Mediterranean and with exploratory concessions lining the North Coast of Egypt, the proven natural gas reserves in this area will likely increase. BP, who has recently signed agreements with the government to invest billions of dollars, and RWE dea Egypt lead the pack of exploration projects in the Mediterranean. While operations in the Mediterranean currently only account for about 9% of Egypt’s rigs, the next few years should witness a marked increase in applications for development leases as there is a growing call to exploit Egypt’s natural gas reserves.
The main reason for the disparity between the vast amount of natural gas available in the Mediterranean and the relatively low number of rigs working to extract these resources, is the high cost of offshore drilling. The average cost of well exploration in the Mediterranean Sea is currently around $111.3 million, though some individual wells have had a much higher associated cost. So while the Western Dessert, for example, counts for roughly 60% of drilling in Egypt, activity in the Mediterranean Sea account for 82% of the country’s total exploration costs, and 59% of development costs, with the average Mediterranean drilling well costing $26.2 million.
With these high costs in mind, the government should be welcoming any prospective investors to the region. The government would do well to expedite contracts with investors seeking to produce these wells as natural gas plays an increasingly important role in Egypt’s energy sector. The opportunity to attract offshore drilling investments is ideal now, especially during this time when approval of offshore oil drilling in the United States is lagging due to trepidation over last year’s disaster and investment in UK offshore drilling now falls behind recent investments in Africa. The government should incentivize investments to make projects even more attractive to companies whose sights are set on the promising discoveries in the Mediterranean. However, as important as incentives and speedy contracts are, it is imperative that the government focuses on safety regulations surrounding the production of Mediterranean gas reserves.
Egypt currently operates with prescriptive regulations, a system which has been questioned since the Deepwater Horizon spill. Enacting risk-based regulations would allow the government to identify possible risks according to each project and ensure that a high standard of safety is always in place. Even more important than the nature of these regulations, is the need to monitor their implementation. Safety regulations are useless if not enforced and Egypt simply cannot afford another hit to the tourism industry that would result from an offshore catastrophe.
The Ministry of Petroleum and the Ministry of Environment need to increase communications with each other as well. The oil and gas industry’s natural resources are necessarily tied to the environment, so cooperation between the two entities is advised, not only for disaster prevention or relief, but for developing strategy for concessions and other applicable matters.
The responsibility to enforce high standards of safety cannot fall solely on the government of course; the onus is equally on the companies who explore and produce the wells, assemble and operate drilling equipment, and transport Egypt’s subsea natural gas. Employees must undergo extensive training in safety practices with employers regularly monitoring operations to ensure that these practices are being upheld. Equipment should be thoroughly tested and rigorously maintained to prevent devastating malfunctions. While the debate continues in the United States over who was ultimately accountable for the Deepwater Horizon explosion, experts agree that the oil spill was not the result of any single error from any one company, rather multiple errors from a number of parties involved have been documented.
In regards to drilling equipment, it is essential to rely on the most up-to-date technologies and models available. Opting for equipment and services that are older and lower in quality in attempt to save money is not advisable in the realm of offshore drilling. Rashid’s Mediterranean operations set an example for the region, as the company is in the practice of renting newly advanced rigs, such as the Saffron DOST 1. With a reported drilling cost of $29.325 million, the rig has reached depths of 7,812 feet. These new rigs have additional safety measures to prevent spills from happening and should set the standard for operations in the Mediterranean.
Utilizing subsea compression technology is another attractive option on which operations in the Mediterranean Sea should rely. Gas compression, a technology that is receiving much attention from companies such as Statoil, is a cost-effective substitute for platform-based facilities recommended for deep waters, which permits gas to be pumped longer distances. This will allow for safer operations in fields that are farther off Egypt’s North Coast. The technology is still relatively new with manufacturers working to improve design for easier maintenance once the compressor is operating, but subsea compression will likely be an important aspect in the future of deepwater offshore drilling in Egypt.
Egypt’s offshore drilling future has the potential to be extremely profitable for investors. Increasing production rates in the Mediterranean would certainly boost Egypt’s economy. However, the companies and government entities involved in this industry need to have a serious talk about expectations of safety standards and utilization of high quality services before it is viable to push forward with such costly endeavors.
By: Melissa Howell