By Nataša Kubíková

Egypt is in a competition with itself. It is trying to expand incoming investments, and it is striving to win back trust of foreign oil companies. Attempts to open up investment environment for old and new oil majors keep stumbling across fiscal and monetary uncertainties that the Egyptian government is currently facing. The government is negotiating deals that would be attractive for oil investors and help them broaden their business operations in the country.

Despite striking incentives, these initiatives are met with a lack of interest from investors. While there are many reason behind this, one of them is the fact that the focus of the negotiations lies in boosting exploration and development of new wells. The development of mature oil fields and technological advances are less of a priority for the Egyptian government. Yet, foreign companies’ interest in alternative unconventional development of matured oil fields is increasing. The incoming investments in the oil industry remain focused on exploration of new fields due to the existing structural conditions in Egypt. The development and enhancement technology investments in the existing fields appear to be limited.

Investments and Incentives

Egypt has managed to ensure stable oil production at the level of around 510,000b/d, according to the US Energy Information Administration’s (EIA) statistics, while consumption has seen a rising curve, exceeding production output. The use of enhanced oil recovery (EOR) techniques at mature fields has helped to ease production decline from the peak level of 900,000b/d in the mid 1990s. In the first decade of 2000s, oil production from the Western Desert fields and offshore areas, as well as from other relatively small fields in the Gulf of Suez, Eastern Desert, Sinai, Mediterranean Sea, Nile Delta, and Upper Egypt. These fields also contributed to keeping oil output afloat. Nevertheless, further oil investments are needed, given the rising demand from the Egyptian market. The flow of investment appears to be difficult to sustain in the current global oil environment.

Offshore licensing rounds had so far failed to sparkle as established oil players saw no reason to deepen their involvement in Egypt, a country plagued by financial and economic problems, according to Upstream, the international oil & gas newspaper. The Egyptian government therefore sought to amend the investment environment in the oil sector. While some reforms were launched by Sherif Ismail, the then Oil Minister, currently Egypt’s Prime Minister, his priorities included reducing mounting debts to international oil companies (IOCs) and offering attractive prices for the development of offshore areas.

As a result, Eni, one of the sector’s major players, boosted offshore exploration that resulted in the discovery of the super-giant Zohr field in August 2015. BP stepped up investment on its flagship, the $12b West Nile Delta project. Shell made five new hydrocarbon discoveries in the Obaiyed area, West Sitra, and Alam El-Shawish concessions, in 2014, all located in the Western Desert. And last year, Shell made a number of additional discoveries. As shelved projects were revived and offshore exploration resumed, the strategy has proved itself efficient. The investment offerings, according to the oil ministry, were intended to secure local demand at reasonable price, the financial commitment of which remains unclear until now.

Currently, on the side of incentives, Egypt is struggling to find ways in which to boost its payment capacities and straighten its debts to IOCs. Financial aid packages from the Gulf countries, having previously covered most urgent dues have come to an end, which has proved that their treasuries are not there to overtake Egypt’s external financial obligations fully. While the loans from Saudi Arabia, Kuwait, and the UAE helped to re-pay more than $2b to international players in 2015, the plummeting oil prices are restraining funds from the Gulf to help Cairo fulfill its plan to clear its debt by the start of 2016. The debt remains at the current level of $3.8b. The authorities are still in turmoil striving to overcome burdensome deficiencies in investments.

Oil Production Rise as a Strategic Plan

At the beginning of 2016, the government has been able to bring forward a five-year comprehensive plan of the Petroleum Ministry for the oil recovery industry, as published by the Daily News Egypt. In this way, the ministry seeks to tackle increasing oil and gas demand. It focuses on strategies to encounter the demand-supply gap and reduce the shortage rate from 9m tons in the current fiscal year to merely 3m tons of shortage by 2021. According to ministerial estimates, demand will surge by 22% to over 100m tones of oil and gas in the next five years. The real challenge is amplified by the fact that a majority of oil and gas fields are beginning to decline in yield, or have been exploited reaching maturity. As Oil Minister, Tarek El Molla, told Daily News Egypt, exploration efforts to discover new reservoirs, that would substitute matured fields, usually take three to five years, with an additional period of one to two years needed to develop a new well. The peak of production comes first after altogether between six to eight years from the point the well is drilled.

To address the increase in demand and the paucity of maturing wells, the ministry also launched new exploration and discovery initiatives by issuing international auctions to attract more investments in 2016. The government expects to sign around 25 new petroleum agreements worth $4.5b to expand development and production projects at a fast pace. This would mean that a production map for drilling in new reserves areas will be outlined to better meet local market needs. Having proposed the moves, the government is still well aware of the drawbacks.

Oil Minister, El Molla, said in January that sharp decline of oil prices had had negative impact on IOCs working in Egypt, as the Kuwait News Agency wrote. “This decline is a major challenge for the foreign oil companies working in Egypt in financing investments in fields of research, exploration and speed in which oil fields are developed, with the objective of maintaining and increasing reserve, as well as the country’s oil and gas production,” El Molla explained. He then stressed that in the given setting the importance is to help cut costs of production and explorations for IOCs to lure them in the country. This has become the government’s policy.

The Chairman of the Egyptian General Petroleum Corporation (EGPC), Mohamed Al Masry, confirms the importance of cutting expenses for oil investors. In the current state, the only ICO that did not withdraw its capital from Egypt was Shell. “Shell pledged investments of 113% in 2016, while other investors reduced their funds by 20%-25%, said Al Masry. Egypt is therefore trying to find ways to boost IOCs’ interest in exploration in the country offering incentives. Al Masry told Egypt Oil & Gas that the government is “encouraging exploration by amending drilling restrictions and cutting the costs of drilling by up to 45%.” This allows for IOCs to drill two wells instead of one and reduce their investments in five-year periods to help them get their cash back and improve oil fields exploration capacities, as Al Masry elaborated.

Following this strategy, IOCs’ investments in Egypt’s oil sector in the next fiscal year are likely to amount to around $7.5b in addition to infrastructure projects worth EGP 548m. The Ministry of Petroleum expects overall energy investments in the fields of research, exploration, development, refinement, petrochemicals, infrastructure, pipeline extensions, and delivering natural gas to households to amount to $16b during this year.

In addition, the Ministry of Petroleum has recently taken further measures to strengthen the investment climate and build confidence of foreign partners. It has announced to hold international tenders for 11 oil and gas exploration blocks in the Mediterranean and Nile Delta in 2016. It has also called for three new international bids for petroleum and gas research to the Egyptian General Petroleum Corporation (EGPC), Egyptian Natural Gas Holding Company (EGAS), and the South Valley Holding Company for Petroleum in both land and marine areas, according to ministry’s officials quoted by Daily News Egypt.

In spite of these positive outcomes, Egypt will unlikely see crude and condensate production boosting above the current daily levels in the near future, unless the country adopts a more comprehensive strategy.

One of the reasons for this is that there is a massive discrepancy between the levels of investments in new explorations, and the volumes of investments directed to the development of the existing fields. The adopted strategy has so far been unable to account for the differences. What emerges resembles a desperate call for new players in Egypt to come to rescue, whereas strategic planning as for alternative methods that would allow relying on domestic resources is lagging behind. An active approach is needed to implement technologies and methods such as enhanced oil recovery (EOR) that would contribute to the expansion of oil output. While on average, conventional production extracts some 30% of the initial oil in a reservoir, EOR targets an overall 70% of recovery.

Enhanced Oil Recovery

The EOR refers to the process of producing hydrocarbons in an oil field in unconventional methods and reservoir re-pressurizing schemes such as displacement of oil by miscible gas injections or waterflooding with soluble chemicals, explains Corex, world’s leading Core Analysis provider for solutions reducing drilling costs, optimizing recovery and increasing the length of the production life of a field. EOR promises more than just reservoir optimization.

The interest in application of EOR has increased globally due to the fact that most of mature oilfields cannot maintain their production unless EOR treatment is deployed, Corex website elaborates. Similarly, some of so called ‘un-easy’ oil reserves require EOR from early stages to meet production level. However, the complication that EOR presents stem from complex approaches that are needed. For designing a suitable EOR scheme to maximize optimization of an oil field, it is essential to understand the oil trapping mechanisms, reservoir rock properties and to undertake relevant laboratory studies on micro and macro levels.

Recently conducted studies that were examining the most appropriate EOR methods for oil fields in Egypt suggest best EOR solutions for the country. According to the study ‘An Integrated Approach for the Application of the Enhanced Oil Recovery Projects’ published by the Cairo University’s Petroleum Engineering Department in an academic journal in 2014, it appears that the CO2 injection (miscible flooding), immiscible gas injection, and Alkali Surfactant-Polymer injection may be most suitable for the Egyptian oil fields. The study further shows that CO2EOR could help Egypt to increase the recovery factor by 5% to 15 % and reduce the emissions of CO2 simultaneously.

Given the global trend, there is no reason to believe that IOCs’ investments would be opting for targeting solely new fields rather than further developing present ones. Some oil majors such as BP or Shell have been developing and deploying EOR schemes worldwide. And EOR would be undoubtedly a promising approach in Egypt as well.

As Royal Dutch Shell’s reports indicate, the known basins in the Eastern Desert, the Delta, and the Gulf of Suez are gradually being depleted. Although there are potential oil and gas deposits yet to be found, the interest in further enhancing oil output from present fields is immense. Shell’s Country Chair and Managing Director, Jeroen Regtien, told Daily News Egypt in an exclusive interview that the conventional, so called ‘easy’ oil and gas fields are declining or are more difficult to be found. Even though there are reportedly many unexplored areas, the conundrum over conventional sources extraction may suggest that investing solely in new massive exploration projects could backfire.

Instead, as Shell notes, deploying new technology and drilling expensive wells are needed to unlock more difficult – ‘un-easy’ – oil and gas resources. According to Regtien, “one technology that will contribute to extracting more oil out of a reservoir is enhanced oil recovery, as for a variety of reasons conventional methods still leave well over 50% of the oil in place.” Shell, with its increased investment plan, is keen to introduce EOR in its Egyptian operations, which “require new technology, new ways of working, large investments and agreements which accommodate long development and production periods,” Shell Head added.

While EOR implementation may inflict higher costs and be more time-consuming, as BP explains on its website, there are valuable advantages to promote this technological approach for Egypt. In doing so, BP is developing cost-effective EOR schemes that may in complex economic calculations deliver better results than the above mentioned framework of establishing new oil wells in the course of up to eight years.

Therefore, sidelining EOR to a non-priority policy position Egypt may be missing out on a proven opportunity that could generate considerable benefits in years to come. Therefore, given the current market conditions, in which foreign investors’ interest in the EOR technology application is large, could be exploited better. The fact that the EOR does not hinge upon high or low oil prices, may encourage the government to better assess positive implications of the EOR to be included in an overall strategy for the oil sector. As BP analysis clarifies, in a time of lower oil prices, resource holders look to international oil companies to bring technologies that sustain or even increase production rates to maintain national incomes. EOR technologies can help achieve this, even though they incur additional costs at present and may increase operational complexity. If Egypt is to adopt a comprehensive strategic approach, EOR may provide viable solutions and a sustainable path for enhancing its oil outputs from the mature fields.

According to EGPC Chairman, Mohamed Al Masry, “all IOCs working in Egypt have already applied the EOR technologies and they are successfully extracting some 65% of oil reservoirs. The target for Egypt is to increase the level to 70%, which is a maximum to be achieved through EOR technologies”, Al Masry added. The Egyptian oil sector authorities are looking into the implementation of the enhanced oil recovery. The processes are ongoing presently regardless of the declining oil prices, the Chairman concluded. Nonetheless, currently, there are no specific strategies as to how to promote EOR technological approaches to the top ranks of Egypt’s Oil Ministry’s plan.

For this to take place, the government would need to address the remaining structural obstacles such as the current investment climate in Egypt, in particular the applied model of production sharing contract (PSC). While PSC is suitable for investors in conventional oil extraction, it is difficult for the companies “to make reasonable returns on their investments” when it comes to exploring and developing more difficult resources that “have higher costs, are associated with higher uncertainty, and take longer period to develop using more expensive technology,” Shell’s Head Regtien also told Daily News Egypt.

Amendments to the current legislation controlling the IOCs’ investment schemes in the country may open new doors for a more sustainable oil recovery and promise better prospects for Egypt’s increasing oil demand. It may also allow for circumventing processes that are contingent upon the oil price slump and generate economic prospect for the country in a long run.


Welcome! Login in to your account

Remember me Lost your password?

Don't have account. Register

Lost Password