The Energy Crisis in Egypt and the Repercussions of Oil Prices

The Energy Crisis in Egypt  and the Repercussions of  Oil Prices

By Dr. Shawky Abdeen, PICO General Manager

Oil is found mostly in sedimentary rocks (whether sand, shale, clay, or limestone) deposited by rivers and seas in prehistoric times. Besides water, they also carry fine organisms, plants, and organic matter which when buried, eventually becomes petroleum (oil or gas) under specific conditions of temperature and pressure. Oil does occasionally exist in non-sedimentary rocks but this is rare, which is why exploration tends to focus on sedimentary areas.

About 90% of Egypt’s territory is covered by such sediment—with the thickness increasing the further north one goes—sometimes becoming more than 10 km thick, as in the North Delta region and under the waters of the Mediterranean. (Deltas are particularly rich in such organic debris). The thicker this sediment, the more likely oil will emerge. In Egypt, the further south one goes the thinner the sedimentary layer becomes, eventually becoming less than one km thick in the south of the country.

Oil exploration in Egypt began nearly 130 years ago. The Egyptian government began exploratory drilling for oil in the Gamasah area in the Gulf of Suez in the 1880s, while production followed in the early 1910s, more than a century ago.

Egypt’s petroleum reserves can be divided into several areas, the most important being the Gulf of Suez (onshore and offshore), which has produced more than 10 billion barrels of crude oil and more than 50 billion cubic feet of associated gas.

The Western Desert saw its first oil discoveries in the 1960s with the exploration of the El-Alamein field, quickly followed by more fields and discoveries. Although ten times the area of the Gulf of Suez, the production map of the Western Desert is not nearly as prolific as they belong to completely different basins and reservoirs. (This is a common geological phenomenon, as the Ghawar field in Saudi Arabia, Sirte in Libya, and Kirkuk of Iraq are all very much richer in their reserves than the oilfields in their neighboring areas). With advances in technology, however, prospects are becoming increasingly promising for further discoveries of oil and gas fields.

As for Egypt’s third area, this is the onshore North Delta area, a zone where gas was first found in 1967 in the Abu Madi field. Several more gas finds were made successively in the onshore area, and then in the 1980s exploration extended north into the marine area of the delta and the Mediterranean (the so-called economic zone) that has become a promising region for both gas and oil discoveries. This is especially true in the deep-water areas, but development is expected to be very expensive.

Upper Egypt and the Northern Sinai, on and offshore, have yet to experience much active exploration despite encouraging finds in the numerous wells so far drilled. This is due to the rugged nature of the first, and the security and political conditions of the second.

Note that Egyptian law explicitly states that all petroleum produced, as well as all natural mineral wealth, are all the exclusive property of the State. No other bodies or any company or individual has the right to own wells or oilfields, contrary to what some mistakenly think. Instead they only have the right to profit from this natural wealth for a fixed number of years. There are several frameworks for cooperation between oil companies and governments that meet the differing requirements of changing periods in history and the laws of the country in question.

Egypt has generally adopted the Production Sharing Agreement (PSA) framework for oil exploration, whereby oil companies (the partner) take upon themselves the responsibility and risk of exploration, carrying the full financial expense of the endeavor. If results are negative they alone bear all costs, if positive then a joint venture company is established between the existing partner and EGPC, which represents the Egyptian government. This joint company has the exclusive right to production. An agreed portion of production is allocated to recover costs incurred by the partner, in addition to another portion meant to insure a small profit for the partner. All these terms and clauses are defined in the concession agreement, presented to parliament, and approved by the government before they can be executed.

Egypt began implementing this type of agreement in the early 1970s with the Open Door Policy under President Sadat to encourage oil companies to carry out exploratory work. The first Minister of Petroleum, Ahmed Helal, engineered this policy in 1974. The goal set at the time was to reach a million barrels of production a day, an objective Egypt accomplished in less than twenty years. This in turn necessitated a change in the clauses to reduce risk and encourage even more companies to explore and produce. After several years the stipulation concerning gas discovered was changed to receive the same treatment as oil. Previously the partner was not allowed a share of newly discovered gas.

It is common knowledge that oil wealth is non-renewable, so production rates of oil or gas suffer a natural decline over time. The peak period of oil discoveries and highest production were in the mid-eighties during the Mubarak regime. During the 1990s crude production in Egypt began a gradual decline that was only offset by a modest increase in the discovery of gas fields. The Egyptian petroleum sector has been successful in promoting and intensifying the search for gas, opening up new areas to exploration in the North Delta and Mediterranean. In early 2014 Egypt’s production reached about 700,000 b/d of oil and about 5.5 bcf/d of gas. The real problem, however, is increased domestic consumption and increased reliance on natural gas instead of fuel oil for electricity. Combined with other factors, Egypt has been rapidly transformed from its original status as an exporter in the 1980s into a net importer of both oil and gas.

Another one of the core reasons behind the current energy crisis the petroleum sector is suffering is the absence of an elected legislature (the People’s Assembly) in Egypt for nearly five years, thanks to political unrest. We know that the clauses of any agreement entered into by the petroleum sector are required to be discussed and approved by parliament. Consequently, no new exploration agreements have taken place since 2010. We could say that on average about 20 agreements can be made each year; meaning that we have lost the chance to make 80 possible agreements over the last four years. If we assume further that an agreement succeeds in discovering several fields, the total number of lost opportunities could have contributed to filling any projected deficit as well as compensating for the natural decline in productivity of fields, helping us realize our full economic potential. However, not having a proper parliament has instead led to a dearth in new agreements.

There is also the sector’s inability to meet its financial obligations to foreign partners who are—at the end of the day—bearing all expenses. Not being able to recover their costs also explains their reluctance to expand investments and engage in further exploration in promising areas that could meet the production shortfall.

The Egyptian state has remedied this situation finally by endowing the President of Egypt with the powers of the People’s Assembly, endorsing these agreements on behalf of the parliament as an economic damage control measure.

From here and in the light of the global deterioration of oil prices, it is clear now that we must: Firstly, reconsider our petroleum policy of past years with an aim to intensify exploration. Secondly, reconsider clauses in our petroleum agreements in order to increase production. Thirdly, give serious consideration towards national rationalization of consumption and work diligently to find new ways to generate alternative energy, the most important being nuclear power and solar energy.

All efforts should be directed immediately to work on:

  1. Reconsidering clauses in our petroleum agreements to be more attractive in order to increase exploration and thereby production.
  2. Rationalizing consumption.
  3. Finding alternative sources of energy.

In order to attract investments in exploration we should be aware that:

(A) The era of giant field discoveries (million barrel reserve fields) such as Al-Morgan or Al- Belaym in the Gulf of Suez or El-Alamein in the Western Desert is gone and past. We are now looking for hard-to-find marginal fields. (Either with tens of thousands or even fewer; fields like October, Helal, and Gabal El-Zeit with only hundreds of barrels).

(B) Exploration costs have increased significantly—especially for gas. Drilling costs per well in the Mediterranean deep-water have exceeded $300 million, which necessitates making clauses in the agreements more attractive for the companies operating in these areas. This includes measures such as increasing their share of profits or decreasing the period for recovering costs and making special allowances for high-risk regions.

  1. We must also keep up to speed with the latest advances in exploration and production to be able to benefit from them. The petroleum sector must organize industry roundtables conferences and that have—unfortunately—largely ceased in the last decade. Previously they were held annually to exchange experience and learn the latest methods available, being particularly beneficial for young engineers and for our experts to follow up with the latest technologies.

Finally, we must observe with pride and gratitude the tributes paid to our experts by the state, like those who served their nation by regaining Taba, and those workers, judges, artists, and journalists that Egypt has honored. We must ask, do not petroleum experts deserve their fair share in such honors, figures who have dedicated their work and their lives in the service of their country?

Article and supplementary clarifications translated by Emad El-Din Aysha, PhD.


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