01 May 2016 Egypt impact on Cyprus and Israel (Part I) by Charles Ellinas

This week and next I will analyze the rapid developments in Egypt’s gas projects, and its progress to self-sufficiency, and the impact this has on Cyprus and Israel gas.

 

Egypt in context

Current demand for natural gas in Egypt is 52bcm/y and may reach 65-70bcm/y over the coming 10 years.

A combination of a switch to renewables, reduction of subsidies, higher gas prices and an awareness campaign by the Egyptian government on ways to rationalize energy consumption should help stem the rampant increase in demand.

But even with these, without new gas coming online the gas deficit of 7bcm/y in 2015 will carry on increasing.

The challenge is that gas production has already declined this year to 42bcm/y, due to past-government misguided policies, requiring expensive LNG imports.

And if this decline continues unchecked gas production may go down to 15bcm/y in 10 years, as most of Egypt’s existing gas-wells are either at maturity or beginning to decline in yield.

The oil minister said recently that Egypt is expected to spend an estimated $8billion on LNG imports this fiscal year – a drain on the country’s finances. Without new gas production this will increase.

However, Zohr and a number of new gas-field developments, spurned-on by the new gas prices are coming to the rescue, with BP and ENI leading the way.

Egypt has revamped its energy sector strategy and is on a drive to increase gas production. It is signing new exploration contracts, and has renegotiated new and higher gas prices, between $4 and $5.88 per mmBTU, that have prompted gas companies to speed-up project development.

BP, ENI and other oil&gas companies operating in Egypt stand to gain from this new pricing regime, which has become a massive incentive to develop new projects. And with a gas-hungry domestic market, they do not have to look far or hard to find end-consumers.

Through its unused LNG plants, Egypt also has the capability to export excess production. Provided also security and the fiscal situation improve, there is a huge growth potential ahead for oil & gas companies operating in Egypt.

 

New gas projects

Last year, Eni announced the discovery of a giant 100-sq-km gasfield, Zohr, about 190km offshore and close to Egypt’s EEZ border with Cyprus. It is estimated to hold about 850bcm gas.

This was confirmed recently by the first appraisal well, which showed there may even be an upside. Zohr was discovered in a carbonate formation with excellent reservoir characteristics.

ENI plans to drill another three appraisal wells and a dedicated well to test-out a deeper gas reservoir prospect. Based on evaluation of seismic data, ENI indicated that this may hold another 280bcm gas.

Spurned-on by the attractive gas price of $5.88/mmBTU, ENI and the Egyptian government agreed a fast-track development plan that will bring Zohr online by the end of 2017 with an initial production of 10bcm/y, to reach a plateau of 27bcm/y when full production is achieved by 2019.

ENI’s CEO Claudio Descalzi said Zohr gas will be “mainly sold on the Egyptian market.” But he noted that Egypt’s two LNG export terminals have enough spare capacity to enable some Zohr gas to be liquefied for export.

ENI and BP are also expanding development of Abu Madi West block in the Nile Delta where they plan to increase output this year.

The $12 billion West Nile Delta (WND) Project involves the development of gas-fields located offshore Alexandria. BP has started work on phase 1 to produce over 140bcm of gas.

First production is expected to start in 2017, with peak production expected to reach 12.5bcm/y of gas, which is approximately 30% of Egypt’s current gas production.

WND also includes other discoveries that will be explored and developed in later phases. These are expected to produce another 140bcm-200bcm gas, potentially adding another 12bcm/y-16bcm/y to the Egyptian gas-grid.

BP is also accelerating development of the 42bcm Atoll gas-field in the East Nile Delta, with production of another 2.5bcm/y expected to start in 2017.

With a market for its gas assured, at attractive prices, BP plans to also step-up investment in its existing operations and to progress its exploration program in the Nile Delta.

BP with its partners currently produce 30% of Egypt’s gas and expect to more than double this over the next four years.

Another successful operator in Egypt, Apache, with major presence in the oil & gas rich area of the Western Desert, increased gas production in 2015 close to 9bcm/y.

Apache has allocated close to $1billion investments in the fiscal year 2015-2016 budget to drill 94 development and exploratory wells.

Apache has also embarked on a shale gas exploration programme in the Western Desert through a JV with Shell as the operator. Three wells will be drilled by June when Shell and Apache will discuss the full-scale development of the project with the Egyptian government. Initial indications are good.

Dana Gas and its partner BP discovered new gas reservoirs onshore Nile Delta. Dana plans to spend $400m in Egypt over the next three years on an ambitious E&P programme that includes drilling at least 20 development wells and up to 6 exploration wells.

In the meanwhile BG Egypt, now fully owned by Shell, and EGPC have agreed to drill 15 wells in West Delta Deep Marine, with production scheduled in 2017 and estimated to be over 4bcm/y.

EGPC has also just agreed with Edison to develop the second phase of the offshore Abu-Qir gas-field, expected to add another 1.5bcm/y to the Egyptian gas-grid, possibly in 2017.

 

Potential for new discoveries

Zohr is encouraging oil&gas companies to look more carefully at carbonate formations in the East Med. The region has produced some significant discoveries in recent years and it is believed that the Med still has massive hydrocarbon deposits to be discovered.

Initial indications from 3D seismic surveys completed by Edison in the North Thekah block have been reported to be good.

BG, now part of Shell, has three offshore concessions, where two discoveries were made with an estimated 170bcm gas. It remains to be seen how Shell progresses these.

Having awarded four offshore licenses last year, and 56 concessions in total between 2014-2015, Egypt plans to announce a new international tender in 2016 for eleven new exploration blocks in the Mediterranean and Nile Delta.

Dr Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council

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