By Stephen Fullerton, Research Analyst Middle East and North Africa Upstream Research, Wood Mackenzie
On the 16th of December Eni alongside partners BP and Rosneft began production from Egypt’s giant Zohr field. This milestone was reached on schedule, a mere 22 months after FID was taken. Phase One is expected to add 800 mmcfd to Egypt’s surging gas supply next year.
Zohr is the largest discovery in the Eastern Mediterranean and is vital to Egypt achieving energy independence. The pace at which Eni has delivered first gas is impressive; just two and a half years from discovery, making Zohr the fastest deepwater gas development of such a scale ever. Fast-tracking has been achieved due to government pragmatism and space in the supply chain. Government pressure to bring Zohr onstream rapidly stems from the desire to replace costlier LNG imports.
The discovery of Zohr in August 2015 signalled a U-turn in Egypt’s gas supply fortunes. The country swung from being the eighth largest LNG exporter in 2009 to the eighth largest importer in 2016 due to upstream underinvestment and burgeoning demand. New developments such as Nooros and West Nile Delta have helped redress gas shortfalls. But Zohr will ensure that gas demand is fully met in the short term. We believe that Zohr will once again make Egypt a net LNG exporter come 2019.
Zohr is a play opener for the region. It is the first Cretaceous reef play in the Eastern Mediterranean and has resulted in increased exploration interest. To date one ‘Zohr like’ prospect has been drilled, Onisiforos West offshore Cyprus which disappointed. However, there are many prospects to go after and active drilling campaigns are planned on both sides of the Egyptian/Cypriot maritime boundary.
Moreover, the start-up of Zohr is a major milestone for Eni and its partners. The field is one of Eni’s largest ever discoveries, and the scale and attractive economics (Total PV,10 US$5.1 billion and IRR 16%) were enough to attract BP and Rosneft. It is the final project Eni (fourth) and BP (seventh) planned to bring onstream in 2017, either on or ahead of schedule. Improved project delivery and capital discipline from the Majors has proven to be the ‘silver lining’ to the oil price crash.
Zohr is Eni’s largest ongoing operated project, vital to its growth outlook, and an important source of long-life cash generation into the 2020s. The second phase of development will increase entitlement production to a peak of 1.3 bcf/d by 2024, with the field contributing over 10% of Eni’s total production. Eni has already realised value from the discovery, reducing its interest and expenditure in development phases following exploration success. A combined 40% stake was sold to Rosneft (30%) and BP (10%) for a total consideration of US$2.1 billion in 2016.
Egyptian gas is an important growth area for BP, and Zohr will propel Egypt to the biggest source of production outside of Russia next decade. Zohr is a natural fit for BP’s deepwater Nile Delta portfolio, which includes the major West Nile Delta and Atoll projects. Outside of Russia, Zohr is Rosneft’s most important asset. But perhaps more importantly, it provides a platform for other moves into Egypt’s energy sector. Increasing LNG exposure is a strategic priority, and while we expect gas production from Zohr to be sold domestically, subsequent phases could open up new LNG opportunities.