As Egypt’s struggle for a democratic political framework continues into 2012, oil and gas remain crucial to its substantial domestic energy needs and export market, reports Glenn Freeman
THE national unrest that took hold from February 2011, leading to the ouster of former Egyptian President Hosni Mubarak, saw an interim military council put in place until the country’s first round of democratic parliamentary elections could be held at the end of the year.
Falling against the backdrop of continuing clashes between forces of the ruling military council and pro-reform activists demanding an immediate transfer of power to a civilian government, at time of printing, the third round of voting had just concluded. Presidential bids are tipped to begin from April 2012, before a new president is elected in July.
On the question of whether the political situation has significantly impacted Egypt’s energy sector, Femi Oso, senior analyst, Wood Mackenzie says the answer is yes.
“The revolution has had an impact on the industry. Shortly after the revolution and during, drilling dropped off; there wasn’t a lot of work being done as all expatriates were evacuated. Now they’ve been back in since June 2011, this has begun to pick up again, but activity is still not at level we expected it to be,” he says.
Oso believes the political uncertainty has led to much of the larger investment in oil and gas production being placed on hold.
“They’ve been able to maintain production output with day to day workover services, and in the Western Desert, the likes of Apache Energy have continued drilling – the major issue is larger expenditure,” says Oso.
As examples, he points to Apache’s delayed US$300 million gas train and to BP’s planned onshore gas processing facility in North Alexandria.
“The minimum work activity required to sustain the industry is ongoing, but any investment to grow it further is…in a wait and see approach. There hasn’t been any deep offshore drilling in the Mediterranean [since February],” he says, largely because of the cost and the risk this represents, “well over US$200m – those areas have been affected.”
There have also been substantial delays to the approval of licensing rounds, with this requiring ratification by both a parliament and president, along with the risk of nonpayment for IOCs working in Egypt.
According to Oso, such payment delays have long been an issue, though it is much worse now. “In 2009 -2010, we saw delays of six to 12 weeks and now it is much worse, with the Egyptian Government struggling to meet financial commitments.
“The bigger IOCs such as BP and ENI can cope, but for independents and much smaller companies who live on revenues from day to day, this puts a strain on their resources.”
The vital statistics
Egyptian oil production comes from five main areas, with the Gulf of Suez and the Nile Delta primary production areas, along with the Western Desert, Eastern Desert and the Mediterranean Sea.
In total, it holds proven oil reserves of around 4.5 billion barrels, equivalent to 16.7 years of current production, and approximately one-third of the world’s reserves, according to the 2011 BP Statistical Energy Survey.
The same study found Egypt produced an average of 736,000 bpd of crude oil in 2010, just under 1 per cent of the world average and a change of -0.6 per cent compared to 2009. Indeed, total oil production in Egypt has declined since its 1996 peak of 935,000 bpd, with the US Energy Information Agency (EIA) estimating current production levels as low as 660,000 bpd.
Reductions in Egypt’s oil production have been offset by increases in gas production, which quadrupled between 1998 and 2009. Its gas reserves for 2011 were estimated at around 77 trillion tcf, up from 58.5 tcf in 2010.
Some of the biggest discoveries in recent years have been within the West Mediterranean, with BP turning up a commercially viable gas find in the deepwater Nile Delta concession. At a depth of 6,350 metres, the Hodoa was successfully drilled in November 2010, the first Oligocene deep water discovery.
Italian super-major ENI has also been active in Egypt for many years, being the first international operator on the ground. It produces around 500,000 boe per day, from various sites including the Western Desert, the Mediterranean and Sinai.
According to Wood Mackenzie’s Oso, there are several sites in the Western Desert, where there is “a lot of fields, though not giant discoveries like in Libya or in the Gulf of Suez.”
“Discovery sizes are in the range of 5 million to 10 million barrels, but several are made, so these add up to a lot of production,” he adds.
Exploration rounds have also been held in the Red Sea area offshore Egypt, which is regarded as a frontier for gas deposits, though there have been no discoveries yet. One of the most recent was a partnership between Britain’s Hess and US company, Premier, though this failed to find commercially viable quantities of gas.
Exploration challenges
As Oso explains, most of the more readily accessible Pliocene gas has been found, with most now in the pre-Pliocene layers, which are more technically challenging and more expensive to drill due to higher pressures and temperatures. “BP’s well [in the West Mediterranean] took more than a year to drill, only the IOCs that have the kind of investment to risk,” he says.
As a result, many of the smaller players prefer to focus mainly onshore, in areas such as the Western Desert, Gulf of Suez onshore, (Eastern Desert) and the onshore Nile Delta. According to Oso, in places like this: “Exploration is not expensive…typically US$2-5million investment is required. They can manage that kind of risk.”
One of the key onshore operators in Egypt is the Texas-based independent exploration and production company, Apache Energy. Responsible for more than half the discoveries that have been made in the country in recent times, it is the second-biggest IOC in Egypt.
Apache’s gross production includes around 225,000 boe per day and 900 million cfd of associated of gas. According to Tom Voytovich, vice president, Apache Egypt, this places them in an enviable position: “We are the second or third-largest producer in Egypt, we make one-third of all the oil produced here, and are the largest US investor in Egypt – we run with the likes of ENI, BG, BP and Shell.”
He agrees that the nation’s ongoing political uncertainty is complicating certain areas of operation: “Decision-making is a little more difficult right now, because there’s been so many…look-backs on decisions that had been made, which makes it more difficult to get final decisions.”
However, he says it is largely business as usual for Apache, which has had a presence in Egypt since 1995. “We’re working through it …we see no difference in terms of results at the end of 2011 as we did at the end of 2010. It takes longer to get things done, but they do still get done and we’re comfortable with our relationship with EGPC.”
Egyptian General Petroleum Corporation (EGPC) is the state-owned oil company that oversees all exploration and production within the country, with more than 93 joint venture affiliations. It recently opened a bidding round for 15 blocks in the Gulf of Suez, Eastern Desert, Western Desert and Sinai Basins, closing at the end of January.
Despite analysts’ suggestions that foreign investment in Egypt has been hampered by political uncertainty over the last 12 months, Voytovich says Apache has continued to spend. “We’ve been investing at a pace of around US$1 billion per year, that’s the way it was in 2011 and barring any kind of major disruption or change in direction of the country, we would expect to maintain that pace…I see our posture going forward as being unchanged.”
Looking ahead, he says the Faghur Basin and Abu Ghair areas of the Western Desert will continue to be its key areas of focus for 2012 and beyond.
“We’ve met with a great deal of drilling success, with roughly 30 wells drilled in the last 18 months and out of those, just one dry hole.”
Domestic consumption
With some 82 million people living in Egypt, it ranks among the most populated nations in the Middle East North Africa region. This places considerable emphasis on its energy supplies, with Egypt’s Minister of Electricity, Hassan Younis, estimating that national energy usage reached some 22,700MW in June 2010.
“Consumption grew by 2600MW – a 13.5 per cent increase from the 2009 rate,” he told local reporters.
According to the 2011 BP Statistical Energy Survey, Egypt consumed an average of 757 thousand bpd of oil in 2010, 0.9 per cent of the world average, 5.43 per cent from 2009.
The gas conundrum
In terms of power generation, natural gas accounts for over 70 per cent of its total mix. Recognising the importance of its valuable gas resources in powering the nation, the Egyptian government has for some time ruled that all gas discovered within its concessions must be sold domestically.
Given the highly subsidised nature of fuel sold within Egypt, with subsidies expected to cost the government an estimated US$19 billion in 2012, up from US$13 billion in 2011, “the Egyptian government isn’t willing to pay a high gas price, because they subsidise the market,” says Wood Mackenzie’s Oso.
With the relatively high costs of extracting gas, this lower pay-off makes gas exploration less appealing for operators such as Apache, which prefers to focus on oil. This situation may change if subsidies are wound back, as the government has been planning to do for some time, though as Oso explains, the political sensitivity of subsidies makes this unlikely any time soon.
“We know that the removal of subsidies is hugely unpopular, making it unlikely they will tamper with them in the short term…. though maybe after elections, once things have stabilised,” he says. However, Oso explains it is looking to remove or reduce subsidies for industry, without directly impacting individual consumers.
The widespread protests in another African nation, Nigeria, after its removal of fuel subsidies, adds further weight to such expectations. For Egypt, as its people continue to push for a peaceful handover of power to a civilian government, IOCs will also wait in earnest for the outcome of its presidential elections.
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