The Future of Unconventional Oil and Gas in Egypt

Egypt Oil & Gas Newspaper hosted its third roundtable discussion on October 3, 2013. The   event was held at the Katameya Heights Clubhouse. The roundtable sought to promote dialogue between governmental officials and industry executives on the possibilities of developing Egypt’s unconventional resources. Twenty-two delegates participated in the discussion, which was attended by approximately 100 members of the sector as well as local and international media outlets. Esteemed experts on the panel included Jean-Pascal Clemencon Managing Director of Total E&P Egypt, Amr Essawi Vice President and General Manager of Schlumberger, Ahmed Abu Zeid General Manager at Weatherford Egypt, Jerome Jammal Vice President and Managing Director of Baker Hughes Egypt, Hesham Ishmail of Halliburton, Hany El Sharkawi CEO of Cheiron Holdings Ltd., Taher Abd El Reheem Chairman of EGAS, Atef Mohamed Hassan of EGAS, and Dia Kassen of EGPC, just to name a few. Dr. Ahmed Abdel-Fattah, Vice Chairman for Exploration at Egyptian General Petroleum Corporation (EGPC) moderated the discussion that covered the geophysical, technical, contractual, and economic aspects of exploring and developing unconventional resources.

Does Egypt have Unconventional Reserves?

Chairman of EGPC Tarek El Molla provided welcoming remarks for the roundtable, during which he identified shale gas as “a great prospect for our [Egypt’s] future energy supply,” noting shale as, “one of the most attractive investment opportunities.” Molla highlighted the potential role that shale could play in diversifying and securing Egypt’s energy future. He remained realistic, conceding that there will be enormous challenges in developing unconventional resources.

A 2010 evaluation by the US Energy Information Administration (EIA) and Advanced Resources International (ARI) reported that Egypt had negligible shale resources. However Mostafa Orabi, Halliburton’s North Africa Technology Manager, asserted that the EIA/ARI evaluations were inaccurate as they evaluated Egypt’s shale potential by geological ages where source rock is common in the Mediterranean region, even though Egypt’s source rock is in the Jurassic and Cretaceous. According to Orabi the methodology was flawed, as “Egypt does not fit in the same framework as the rest of the Mediterranean region.”

A team of geoscientists in Egypt, including Orabi, is carrying out a new evaluation of Egypt’s shale potential. Khatatba, Abu Rawash, and Alam El Bueib have been identified as potential shale source rock in Egypt, with the most notable being Khatatba. Khataba is considered to be of excellent quality based on it’s TOC, S1, and S2. According to Orabi, “Khatatba is on the border, as it can be liquid and it can be gas…which gives a lot of good value.” Within the Khatatba, tight sand is located in-between the shale, which indicates good potential, explained Orabi, as it allows you to produce tight gas and gas out of the shale. In addition to TOC, brittleness is a key factor in source rock, as it allows for effective fracturing. Orabi informed that a TOC of 2% and a brittleness of 40% should be used as cutoffs when assessing shale.

In 2013, the EIA re-evaluated Egypt’s potential and determined it to be 535 TCF of shale in place, 100 TCF of which was deemed technically recoverable, and over 114 BB of shale oil in-place. Orabi asserted that he believes the revised EIA figures are still underestimated, as they only examined the Western Desert. Similarly, Fattah expressed his belief that there is enormous potential across Egypt, from the Gulf of Suez to Upper Egypt and the Delta region. Dr. Patrick Allman, General Manager of Dana Gas, informed that studies in the Eastern Desert also indicate potential in the upper Cretaceous and lower Tertiary for kerogen in the region.

While much of the discussion focused on shale reserves, delegates highlighted the possibility of other unconventional resources. The First Undersecretary for Exploration at the Ministry of Petroleum Ismail Mohamed Ismail stated, “That while we are all concentrated on shale gas, I think there is a lot of potential in other unconventional resources here.” Vice President and Managing Director of IPR Egypt, James Work suggested that brown limestone in the Gulf of Suez region could be a potential source for unconventional reserves. Additionally, Rashed Mohamed, Senior Exploration Advisor for Total E&P Egypt asserted that there could be coalbed methane reservoirs in the Sinai. Fattah noted that an EGPC team was exploring potential tar sands reserves in one area.

Tapping Egypt’s Unconventional Reservoirs

Joe Versfelt, Exploration Manager for Apache Egypt spoke on the company’s current efforts to explore unconventional reservoirs in the Western Desert. Apache’s exploration forunconventional resources in Egypt fits into the company’s global strategy of “deploying technology to existing properties, primarily deploying horizontal and multi-stage fracking technology and commercializing oil and gas reserves in tight reservoirs.” Speaking on projects here in Egypt, Versfelt informed the panel that Apache, in collaboration with EGPC, plans to drill seven horizontal wells within the next six to eight months and already has completed one. According to Versfelt, “That is essentially the start of the deployment of horizontal drilling technology here.” Orabi added that there is also a multi-fracked well located in the upper Bahria that is producing at a rate comparable to five or six vertical wells.

Versfelt drew on the geological similarities between Egypt’s Western Desert and the Permian Basin in Texas, where Apache has been successful in tapping tight reservoirs utilizing horizontal wells and multi fractures. Versfelt explained that the Western Desert is target rich for horizontals in tight reservoirs and potentially unconventionals. Khalda, Apache’s joint venture with EGPC, is planning on assessing further shale potential in the Syrah and Amoun areas. Additional technical evaluations are underway, assessing the TOCs, S2 and RO elements in potential plays, according to Versfelt.

Versfelt explained the necessary steps to assessing and exploring for unconventionals, “The first steps are deploying this technology in existing fields and their surroundings and acquiring more data with regard to unconventionals which Apache has been doing. There is a range of steps that an industry or society must undertake and those are starting. But first it takes action and collaboration and listening and acting upon recognition of key fundamental commercial drivers that need to be addressed.” Versfelt highlighted some of the key technical drivers for Egypt’s unconventional such as geomechanics and petrophysics. Additionally commercial drivers including oil and gas prices, drilling and fracturing costs, land, time periods for unconventional exploration, contractual regime, economies of scale and infrastructure were discussed. Versfelt emphasized, “Land is key to every unconventional play worldwide.” Another challenge Apache has encountered thus far “is a learning curve at all levels” as training personnel on horizontal drilling and multi-stage fracturing takes time, informed Versfelt.

Lessons from Abroad

Many of the panel members drew from their past experiences on unconventional projects in other parts of the world, providing insight on challenges as well as strategies to overcome such hurdles. General Manager of Enap Sipetrol, Lisandro Rojas provided an informative presentation based on the company’s experience in tapping unconventional reservoirs in Chile. The country began looking at its potential in unconventional reservoirs when it experienced an energy crisis three years ago and began unconventional production this September with five tight gas wells. Rojas explained that Chile recognized it was impossible to replicate the success of the US or Canada so Sipetrol avoided that comparison, instead focusing on other countries such as Argentina, Mexico, China, and Poland.

Rojas explained that similar to Egypt, Chile also suffered from a lack of geological data as “unconventional reservoirs are usually overlooked” so data had not been collected. To overcome this information gap, Chile implemented  a data  collection campaign, which entailed resampling many of the old wells and drilling a new pilot program of new wells to collect. Sipetrol found that the distribution varied so they opted to focus on small projects that had supporting data.

Additionally, they  faced  challenges  with technology in terms of availability and costs. Rojas informed that due to the country’s location “when we jumped into unconventional and tried to bring large fracking crews into Chile it was very expensive as we had to import the fracking crew.” Rojas explained, “An unconventional project is a well factory where drilling and fracking costs define 80 to 90 percent of CAPEX. The well costs and fracking costs are crucial.” He went on to caution that initial costs will be very expensive and you have to work to lower the costs. Sipetrol managed some of the drilling costs by purchasing their own rigs which they utilize on conventional wells. However, for unconventional wells they continue to rely on more advanced rigs from service providers.

The price and contract also posed challenges to Chile. Again  Rojas stressed  the importance of not using the US or Canada as models due to the difficulties in replicating the infrastructure and technology, which led Sipetrol to use Argentinean wells as analogues. Unconventional reservoir production was uneconomic in Chile due to the market price of gas so Sipetrol negotiated with the Chilean government to increase gas prices in order to achieve a breakeven gas price. Despite the government’s increase in price, they have not yet been able to achieve commercially viable production but Rojas remains confident that they will be able to do so by reducing well costs and increasing production. Other contractual challenges also emerged, as Rojas noted, “In spite of having good commercial terms the contract was not good enough in terms of time frame, similarly with early relinquishment.”

Sipetrol has tight gas and shale gas fields in Chile that will be fracked soon. In Chile, shale gas is often deeper than tight fields therefore Sipetrol is exploring liquid rich shale gas, because condensates are more economic. As Rojas asserted, “Liquid can make much more money than gas, that must be taken into account.” Based on Chiles early success, Rojas recommended Egypt start with tight gas production rather than shale. Rojas cautioned that production declines very rapidly during the first month, advocating that first month averages are a more reliable indication than first day production rates. 

Egypt can certainly learn a lot from Chile’s experiences, particularly in terms of practicality. While many panelist praised the success of the US and Canada, Rojas’ cautioned against trying to replicate their models. In all likelihood Egypt would face difficulties in importing the technology and drilling rigs, as well as finding a breakeven gas price. Allman also raised a very pertinent question on infrastructure gaps. Throughout the discussion Orabi often drew on Algeria’s experiences as they seek to tap their unconventional reservoirs. Looking to countries such as Algeria and other neighboring countries facing similar challenges would likely prove more beneficial in developing models and strategies than comparing Egypt to the US or Canada.

Challenges and Solutions

One of the most recurring topics throughout the roundtable was the need for a database. Orabi explained how the Algerian government tackled the issue of data by requesting all operators drilling below the source rock to log the data, regardless if the data was necessary for the company. Versfelt asserted, “the data model distribution and availability should be one that is compatible with the contractual regime for unconventional and the bid round structure.” Brian Twaddle the Country Manager & Director of TransGlobe Energy suggested that the government take the responsibility for gathering data and operating the database.

The importance of fiscal terms and contractual models are imperative in building Egypt’s unconventional resources. At present EGPC appears to be handling unconventional exploration on a case-by-case basis. Throughout the panel’s discussion, Fattah repeatedly told companies to bring their proposals for unconventional exploration to EGPC for consideration. Twaddle questioned if production-sharing agreements are the right format for unconventionals in Egypt, given government tendencies to shy away from risks. Other delegates mentioned models implemented in countries such as India and China. According to Fattah, these models for production sharing of unconventional resources are currently being studied. 

Refaat Zaki, General Manager of Wasco pointed out, “One of the main obstacles to investment is delayed payment, so why does the government not find solutions to this?” Fattah declined to discuss the matter, responding, “I do not like to hear about the payments.” Another key fiscal factor that delegates discussed was commercial viability and gas prices. Given that unconventional exploration is in its early infancy here in Egypt it is impossible to know the exact drilling costs but as Versfelt explained, “the horizontal reach will depend on the objective and depth which will dictate the economics… there is ultimately an economical floor which the current gas prices are a key driver of…and that will be a fundamental constraint.” Thus in Egypt gas subsidies will likely be a factor in the economic feasibility of developing unconventional resources. Moharem El Gamal, Technical Advisor to Kuwait Energy Egypt’s President bluntly stated, “As long as we have price controls on gas [here in Egypt], shale gas will not be developed.”

Another challenge that was discussed was the issue of water resources, given that hydraulic fracturing is a water intense process and wells will require multiple fracks. Versfelt noted that the US has the same concerns and the industry responded by “recycling and reconditioning waste water and various other unconventional solutions” to mitigate water usage. Rojas proposed publishing the chemicals utilized in fracturing to the public and if concerns over a specific chemical are raised then an alternative can be used. Rojas also recommended implementing an educational campaign for environmental authorities, as they lack knowledge and experience in unconventional drilling. Twaddle advocated that more consideration be given to the regulation of unconventional explaining, “the EEAA is struggling to understand what we do and they need help understanding unconventionals.”

Moving Forward

Fattah’s plan for moving forward consists of monthly meetings  and reviewing case-by-case proposals. Harry Saul, President of Kuwait  Energy  Egypt  suggested the formation of a steering committee comprised of representatives from EGPC and the industry to set the agenda and targets for unconventional exploration and development. Saul added that “the risks and costs are not insignificant” and this must be taken into consideration when determining a fiscal regime. Samir Abdelmoaty the General Manager of Technical Petroleum Services Egypt, emphasized collaboration in going forward, explaining, “we need to involve every stakeholder in this… as it will ultimately reduce dispute in the end.” He proposed a series of three workshops to cover the geoscience, challenges and lessons learned, and the agreements model.

Twaddle, on the other hand, cautioned against committees as they are often more time consuming. Twaddle suggested the government put forward a fiscal model and bid opportunities then review the industry’s response and make modifications if necessary.  Versfelt raised the issue of program level approvals, arguing, “if we approach this on a well-by-well basis the pace will not be sufficient to achieve materiality.” Which was also echoed by an audience member who brought up the cumbersome process of attaining all the necessary permissions.

Ashraf Zeid, Baker Hughes’ Vice President of Middle East Region Reservoir Development proposed a session on Egypt’s unconventional development that would not only include industry representatives but also “other industries who would benefit from the success of unconventional resources” to garner “support, funding, and capital which will allow us to expedite” the development of Egypt’s unconventional resources. Zeid noted that the success of unconventional resources would have a direct impact on Egypt’s fiscal regime.

Egypt holds unconventional resources and ‘new laws’ will certainly serve as a starting place for Egypt’s journey into this frontier. However, we must remain realistic as we go forward. If operators overcome the technical challenges and manage to tap these reserves, the economics will be a true determinate of success. As Egypt’s appetite for energy continues to grow, unconventional reservoirs could play a major role in the country’s energy future but serious considerations must be given to energy prices, as they will ultimately dictate the commercial viability.

By Maya Moseley & Salma Selim


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