For more than a decade, Dana Gas has achieved remarkable results during its journey in Egypt. Now, with the company’s management planning to focus on Iraq’s massive reserves, the fifth largest natural gas producers in Egypt are about to enter into a new stage. In an interview with Dana Gas CEO, Patrick Allman-Ward, the strategic review of Dana Gas’s assets in Egypt and the awaited sale transaction were discussed.
Dana Gas recently announced that it is undertaking a strategic review and considers selling its assets in Egypt. Could you please explain the main reasons behind this decision?
Dana Gas aims to maximize returns to shareholders as the strategic review of our Egyptian assets is part of a process to optimize our portfolio. The quality of our assets in Egypt are excellent and offer both existing production onshore the Nile Delta and exciting exploration growth potential both onshore and offshore. However, we need to compare our investment opportunities in Egypt against our assets in the Kurdistan Region of Iraq (KRI). Since we negotiated the Settlement Agreement with the Kurdistan Regional Government in August 2017, we are now once again in full growth and development mode. We believe that our two fields, Khor Mor and Chemchemal, are world-class assets with in place gas resources of 75 trillion cubic feet (tcf) and in place oil resources of 7 billion barrels. Dana Gas’ share of the externally audited 2P reserves amounts to over 1 billion barrel of oil equivalent (boe). This is over 10 times the size of our 2P reserves in Egypt.
The Board has therefore decided, in light of the company’s size and resource availability, that we need to evaluate whether we can best focus our attention on developing these massive resources in the KRI and whether the company can best realize value from its assets in Egypt through a sales process rather than continuing to hold them to maturity. In this context, it should also be recognized that the Egyptian government has done an incredible job under difficult circumstances to improve the country’s overall macro-economic performance and outlook. Egypt is, once again, a favored investment destination, particularly for the oil and gas industry with significant recent exploration success, the enactment of liberalizing policies, and the potential for Egypt to become a regional gas hub.
When do you expect a deal to take place?
In keeping with the heightened industry interest in Egypt, we have been very pleased with both the number and quality of the companies that have expressed interest in our assets. They are now going through an evaluation and due diligence process and we hope to have bids on the table by the middle of November.
Egypt is clearly an important market for Dana Gas, as evident by investments exceeding $2 billion over a dozen years. Will you be looking for any future presence in Egypt, especially as the Egyptian petroleum sector is flourishing?
Since Dana Gas bought Centurion’s assets in 2007, we have drilled 48 exploratory wells with a commercial success rate of over 60%. This has resulted in 30 new pool discoveries in the Nile Delta. We have more than doubled our 2P reserves over this period and increased production by 50%. We have not yet left Egypt, and in the meantime we are committed to continuing our operations in Egypt to maximize production and value for our existing shareholders, our stakeholders and of course, any future potential buyer. At the end of the day, Dana Gas may choose not to sell its Egyptian assets if it believes that the highest bid in an auction of the assets is less than what we believe the asset can generate for its shareholders in the long run.
Could you tell our readers more about the recent developments across your portfolio in the Egyptian market?
The most recent developments in our Egypt developments have centered on Block 6, our North El Arish offshore concession. We drilled our first well, Merak-1 earlier this year which encountered over 36 meters of sand in its Miocene objective, although unfortunately they were not hydrocarbon bearing. Block 6, however, remains highly prospective as it contains three other material prospects, independent of the results of the first well which collectively have potential resources of 15 tcf. For example, there is the deeper, as yet untested Oligocene reservoir section in Merak, as well as the Galina and Thuraya prospects. Thuraya is a Zohr “look-alike” prospect containing a potential carbonate build-up, which has a very large closure area within Block 6. We, therefore, see a compelling case for continued exploration.
We also have plans for more onshore work during H2 2019, which would involve further work over activities on some of our existing development wells to optimize production and in drilling an additional exploration well in Block 3, with plans for further activities in 2020.
What is the current rate of production in your Egypt’s assets? How much do you estimate the collective reserves to be?
In the H1 2019, Egypt production averaged 34,100 boe/d. An independent survey carried out by Gaffney, Cline & Associates (GCA) showed that Dana Gas Egypt’s proved plus probable reserves as of 31 December 2018 was estimated at 90 million barrels of oil equivalent (mmboe).
Do you intend to sell your sole offshore Mediterranean prospect separately from the Nile Delta onshore assets?
The aim of our strategic review is to deliver maximum return to shareholders by optimizing our portfolio. The Board has decided that if it goes through with a sale, it will do so through an auction process and such decisions will only be taken after offers are received.
As part of a broader strategy, the Ministry of Petroleum has repaid a big part of the company’s arrears. How did that reflect on the company’s financial position in the Egyptian market?
We are pleased that the investment climate in Egypt has improved so markedly and that the Egyptian government is paying overdue receivables to oil and gas companies. Egypt’s Ministry of Petroleum and Mineral Resources has made good progress in repaying Dana Gas’s arrears. In H1 2019, we billed $58 million and collected $81 million payments, reducing our receivables to $117 million.
The reduction in receivables represents a 38% drop from year-end 2018 and is the lowest position we have been at since 2011. To give you an idea of how far we have come, in 2013 the company’s receivables position reached over $300 million, which was equal to 30% of the market capitalization at the time. The repayment of arrears has helped us to accelerate our plans to exploit fully the remaining exploration potential in our onshore assets.
What would you say are the main accomplishments that Dana Gas has achieved in Egypt over the past years?
In the past 12 years, we have made tremendous progress in Egypt, most notable of which has been the fact that our 2P reserves have increased by over 120% and our production has increased by 50%. That has made us the fifth-largest gas producer in Egypt. Just as importantly, our activities and investments in Egypt’s hydrocarbon sector has boosted this vital sector, aiding in the creation of thousands of jobs and generating billions of dollars of value for the Egyptian government. We are also very proud of our long history of Corporate Social Responsibility (CSR) initiatives that we have carried out in the areas in which we operate in the Nile Delta. We have particularly concentrated on enhancing medical facilities and services, provided educational support, local employment, and business development initiatives.
How likely is it that we will soon see a merger between Dana Gas and another company? Do you think an acquisition could pave the way for a new company to enter the Egyptian market for the first time?
Dana Gas is always considering opportunities to improve shareholder returns and we will carefully consider all our options should a value enhancing proposal be put on the table. Dana Gas’s Egyptian assets would be an excellent opportunity for a new investor seeking to enter into Egypt as they have the benefit of providing significant existing production with excellent exploration growth potential, managed by an existing team of highly dedicated and competent staff of whom I am very proud.