A new natural gas discovery may not in itself be overly impressive, but is priceless as an indication of more to come
As Egypt embarks on a series of mega national projects there is obviously a high demand for energy, the mainstay of any project. Yet energy is in short supply. To help overcome the problem Egypt has signed a number of agreements for oil and gas exploration and drilling in the last few years; in 2014 alone the government signed 65 agreements on that score. One year later, in 2015, Eni announced that it had discovered oil at Zohr field off Egypt’s Mediterranean coast; experts pronounced it the largest natural gas field in the Mediterranean.
Earlier this year, Royal Dutch Shell announced the discovery of a new natural gas field, preliminarily estimated at 500 billion cubic feet of gas, in the concession area of north Alam al-Shawish in the Western Desert. Shell was granted rights to explore the area for oil and natural gas in 2012, and by the end of 2013 the company had signed an agreement with the Ministry of Petroleum and the Egyptian General Petroleum Corporation (EGPC) after winning an international tender.
According to Aidan Murphy, Chairman and CEO of Shell Egypt, the initial quantity of gas is estimated at about500 billion cubic feet of gas with a possibility of greater reserves, thereby placing the new find among the largest natural gas discoveries in the Western Desert.
Huge gas reserves
Ibrahim Saleh, former head of EGPC, told Watani that the newly discovered gas field at Alam al-Shawish was definitely a beneficial addition to Egypt’s economic resources. It was highly important, however, to make a thorough estimate of the full magnitude of its reserves so as to set up a plan for its development and determine the production mechanism.
“This could take from six months to a year to complete, and another year to start production,” Mr Saleh said. He pointed out that since the discovery was made within a concession area that was allocated to Shell yearsago, it fell under agreements that were signed between Egypt and foreign contracting partners in the 1960s when production-sharing contracts were the model of choice for oil and gas deals.
Under a Production Sharing Contract, the State enters into a contractwith an independent operator in which the contracting company agrees to finance and carry out all operations for a specific project in return for a specified amount of oil or gas to compensate for their costs, as well as a proportion that represents a share of the profits.Companies pay corporate income tax and a royalty levy.Normally, if a company signs a Production Sharing Contract and does not discover a commercially viable field, the company not the government bears all the exploration costs.
Mr Saleh stressed that the size of the newly discovered Alam al-Shawish fieldhas yet to be accurately determined, pointing out that the Italian Eni’s Zohr field was initially estimated at 30 trillion cubic feet, constituting half of Egypt’s natural gas reserves.
“The size of the Alam al-Shawish field in no way compares to that of Zohr,” Mr Saleh said, “however, it opens vistas of huge gas reserves out there waiting to be discovered. International operators are usually eager to do so, but they are now rather reluctant and wary since Egypt has, in the wake of the Arab Spring uprising in 2011 and the subsequent turmoil, fallen back on paying its debts to its foreign oil and gas exploration partners. ”
He said the authorities should aim to pay Egypt’s debts to its foreign partners without delay so as to encourage them to resume exploration and drilling for oil and gas, and hence increase the supply and reduce Egypt’s imports of these materials.
Mr Saleh told Watani that Egypt itself was not interested in venturing into exploration and drilling, preferring to leave them to the international operators who possessed the capital and expertise needed to conduct these operations. “Exploration for oil and gas is a very costly process that needs very high capital outlay for an extended period of time. Egypt does not posses this sort of money, neither does it have the necessary expertise. So why take the risk?” he asked, pointing out that no expense was incurred by the Egyptian government until viable discoveries were made.
On the other hand, according to a report by the Oxford Business Group, exploration for and development of oil and gas fields in Egypt constitute attractive prospects for stakeholders, owing to low operational and development costs, and available infrastructure such as the liquefied natural gas trains in Dumyat (Damietta) which are currently underutilised.
Back to the Egyptian market
Tamer Abu-Bakr, head of the Chamber of Petroleum and Mining and of the energy committee of the Egyptian Industries Federation, told Watani that the new Western Desert discovery by Shell came after the drop in natural gas and oil production following the post-2011 political turmoil. This led foreign oil companies to reduce their exploration and production activities in Egypt; some withdrew from Egypt altogether. Natural gas production fell by half.
Economics expert and professor of economics at Mansoura University, Mukhtar al-Sharif, told Watani that oil exploration operations the world over are in the hands of 13 companies, no more. According to Dr Sharif, when it became obvious that no progress in the way of Egypt’s modernisation and development would come through without making energy available, President Sisi put exploration for natural gas high on the short-list of priorities in Egypt. The government drew up new contracts with a number of international companies that had already withdrawn from the market.
New finds, Dr Abu-Bakr said, would boost production in already existing fields, lead to new finds, and altogether help reduce Egypt’s gas and oil imports which are now estimated at an annual USD8 – 10 billion. This, he said, would move Egypt from an importer to an exporter of gas, and the abundance of power sources would draw foreign investors back to the market.
The bulk of the newly found gas will be directed towards generating electricity which is currently much needed to operate factories. Many factories now run at half capacity owing to limited available energy, Dr Sharif said; in some production was halted because of shortage in power supply. He pointed out that houses in some poor neighbourhoods in Egypt still had no electricity, and that new development projects will need huge amounts of power.
Economics expert Rashad Abdo, head of the Egyptian Forum for Economic Studies, congratulated Egypt and Shell on the new discovery in the Western Desert and pointed out that, together with the [much bigger] Zohr discovery, it confirmed expert speculations and studies that showed Egypt was “floating over huge quantities of natural gas”. Dr Abdo said that the 30 trillion cubic feet gas reserve that were initially found in Zohr field would cover Egypt’s needs for 10 years based on current consumption. The entire field, he said, was expected to boast some 67 trillion cubic feet of gas.
Dr Abu-Bakr explained that the Italian Eni had relied on new state-of-the-art technology in the field of exploration to discover and assess the Zohr gas field. Eni adopted three-dimensional search methods that reduced the risk of errors, he added, stressing that the company’s previous experience of carrying out similar operations in the area had driven it to continue its search operations in spite of adverse opinion.
Dr Abdo expects new natural gas discoveries to be made before the end of 2016 owing to Egypt’s position between Saudi Arabia, Libya, Sudan and the Mediterranean, all of which boast natural gas reserves.
Past and future
Egypt has a history of oil exploration and production that goes back to the early 20th century when Shell, followed by other international producers, began exploration in the Eastern Desert. Dr Abdo says that during the socialist years of President Gamal-Abdel Nasser (president from 1954 to 1970), Egypt drew up contracts for natural gas excavation with companies from the Communist Bloc. These companies did not have sufficient means to carry out long and deep drilling; and instead would dig 20 to 50 metres underground and end the operation if they did not strike gas or oil. At a later stage Egypt went back to working deals with international oil companies, and this was when major discoveries were made in various parts of Egypt.
According to the Egyptian Centre for Economic Studies (ECES), Egypt is conducting 13 natural gas field development projects at investments of USD33 billion. These projects are expected to increase natural gas production by 5.5 to 6 billion cubic feet and 28,500 barrels of condensates per day. By 2020, oil and gas experts expect natural gas production in Egypt to reach 9.5 to 10 billion cubic feet per day. ECES says Egypt has in place the infrastructure to develop the gas sector, and also a huge consumer market. This, according to the Stratfor report for analysing information on natural gas in the Mediterranean region, renders any project to develop natural gas production economically feasible.
ECES expects that by 2021 Egypt will have stopped importing liquefied natural gas, which would constitute a huge relief on the State Budget.
12 October 2016