Egypt sits at a strategic crossroads, positioned between Africa, the Middle East, and Europe. From the Roman era right up through the 20th century, control for Egypt has been the objective of outsiders to gain a geopolitical, economic, and strategic advantage in international affairs.
Where East Meets West
The construction of the Suez Canal in the 19th century paved the way for Egypt to act as vital transit hub in the modern era, and as a result, a major thoroughfare for the trade of energy. The Suez Canal sees large volumes of oil and liquefied natural gas (LNG) travel through its narrow waterways. There is also the Suez-Mediterranean (SUMED) pipeline that connects the Mediterranean to the Red Sea, bypassing the canal. Together, the pipeline and the canal account for 8% of global maritime oil trade.
Struggling Oil And Gas Producer - with Big Potential?
That role as a transit country has long overshadowed Egypt's status as an oil and gas producer, which, to be honest, has been middling at best. Still, Egypt produces about 700,000 barrels of oil per day, enough to make it the largest non-OPEC African oil producer. It is also produces 2.0 trillion cubic feet of natural gas, the third highest rate of production on the continent.
Yet, Egypt has seen its production decline by an average of 3% over last six years. The culprit is pricing - the Egyptian government caps the level at which it is willing to pay producers of natural gas. Private natural gas…
Egypt sits at a strategic crossroads, positioned between Africa, the Middle East, and Europe. From the Roman era right up through the 20th century, control for Egypt has been the objective of outsiders to gain a geopolitical, economic, and strategic advantage in international affairs.
Where East Meets West
The construction of the Suez Canal in the 19th century paved the way for Egypt to act as vital transit hub in the modern era, and as a result, a major thoroughfare for the trade of energy. The Suez Canal sees large volumes of oil and liquefied natural gas (LNG) travel through its narrow waterways. There is also the Suez-Mediterranean (SUMED) pipeline that connects the Mediterranean to the Red Sea, bypassing the canal. Together, the pipeline and the canal account for 8% of global maritime oil trade.
Struggling Oil And Gas Producer - with Big Potential?
That role as a transit country has long overshadowed Egypt's status as an oil and gas producer, which, to be honest, has been middling at best. Still, Egypt produces about 700,000 barrels of oil per day, enough to make it the largest non-OPEC African oil producer. It is also produces 2.0 trillion cubic feet of natural gas, the third highest rate of production on the continent.
Yet, Egypt has seen its production decline by an average of 3% over last six years. The culprit is pricing - the Egyptian government caps the level at which it is willing to pay producers of natural gas. Private natural gas companies are required to sell their production to the domestic Egyptian market, so the prices that the government pays is the ultimate arbiter of how much revenue companies will earn by operating in Egypt. And for years now, prices have been capped at just $2.65 per million Btu (MMBtu). Such low levels scares off investment as many projects are not profitable.
Despite the pricing environment, Egypt remains a promising place for natural gas production. It is sitting on an estimated 77 trillion cubic feet of natural gas. Even better, its reserve estimate has significantly increased in just a few short years, up from 59 tcf in 2010, owing to multiple new discoveries.
Subsidized fuel prices cost the country tens of billions of dollars per year, leading to a debt burden for the state-owned oil company Egyptian General Petroleum Corporation (EGPC). As of June 2014 EGPC had $7.5 billion in outstanding debt owed to private foreign companies.
To stem the decline in Egypt's oil and gas production, the government has signaled its determination to right the ship by paying down debt that it owes to producers operating in country. On January 4, 2015, the Egyptian government paid $60 million to Dana Gas, a leading Middle East natural gas producer from the U.A.E. That move came a few days after the government sent $350 million to BG Group (LON: BG), which is the top natural gas player in Egypt. Finally, Circle Oil (LON: COP), a small North African oil producer, received a $15 million payment.
The payments suggest the government is serious about kick starting its hydrocarbon industry, but Egypt is not out of the woods yet. It still owes billions. BG group in particular is owed at least $5.7 billion. But it is making amends to the international business community and the improved standing is already paying dividends. The Egyptian government announced in January 2015 that it inked six major natural gas deals with private companies.
Eni SpA (BIT: ENI), the Italian oil giant, signed a concession with the Egyptian government to develop natural gas in the western part of the country. The South-West Melehia block covers 2,058 square kilometers of desert, and exploration will be run by Eni's subsidiary IEOC. It is also located just south of a separate joint venture between IEOC and EGPC.
Eni has been operating in Egypt since 1954 and currently produces about 210,000 barrels of oil equivalent.
Eni's prospects were no doubt buoyed in December when Royal Dutch Shell (NYSE: RDS.A) announced that it had started production on several natural gas wells in the Western Desert. The Assil and Karam fields will produce 120 mscf/d of treated gas, according to a Shell press release. Shell works in conjunction with EGPC in a joint venture dubbed the Badr El-din Petroleum Company, which owns a 40% stake in the projects. Its partners, North Petroleum International Company, a company based in Hong Kong, and GDF Suez (EPA: GSZ) own 35% and 25% respectively. Shell has some existing production in the Western Desert - about 110,000 barrels of oil equivalent.
One small company, TransGlobe Energy (TSE: TGL) is conducting seismic work on four concessions in both eastern and western Egypt - North West Gharib, South West Gharib, South East Gharib and South Ghazalat (see map). TransGlobe also has three new oil discoveries that it plans on bringing into production in 2015. The company has a market cap of just $250 million and has 14,000 barrels of oil per day under production, almost entirely from Egypt. It has put forth more modest drilling plans for the year considering low oil prices, but says it could adjust and ramp up if prices rise once again.
Egypt is also hoping to bring about an American-style shale boom to the North African desert. It signed a deal at the end of 2014 with Apache Corporation (NYSE: APA) and Shell, marking it the first unconventional contract signed in Egypt. The deal calls for relatively minor investments of $30 to $40 million to fracture wells in the Western Desert. Still, with projected depths of 14,000 feet and oil prices in the $50 per barrel range, an Egyptian shale revolution is not on the cards just yet.
Unfortunately for Egypt, it will not be able to boost natural gas production fast enough. Falling production means that the land of the Nile will need to import gas to meet its domestic needs. But one man's loss is another gain. A small LNG supplier from Norway, Hoegh LNG Partners (NYSE: HMLP), seized on the opportunity, signing a deal with Egypt in November 2014 that will allow Egypt to use one of Hoegh's floating storage and regasification units (FSRU), a floating LNG terminal. This will allow Egypt to begin importing LNG. For Hoegh, the rising trend of Middle Eastern countries importing LNG for electricity - mainly motivated by a desire to free up oil for exports - presents an enormous business opportunity.
Once Hoegh's FSRU is up and running - expected in second or third quarter of 2015 - Egypt will become a sizable market for LNG imports. Shell is poised to sell 1 million tonnes of LNG per year (mtpa) to Egypt beginning this year. Algeria is expected to send another six cargoes. A deal with Russia's Gazprom (OTCMKTS: OGZPY) is expected to be completed within weeks for seven LNG trains.
Outlook
Egypt remains a very risky place to do business. The overwhelming obstacle to major profitability for companies operating there is the pricing environment. Heavy government intervention into fuel markets keeps EGPC in debt, and minimizes returns to private companies operating there. The collapse in oil prices will make it even more difficult for the Egyptian government to square away its debts, according to the head of Dana Gas.
Yet the resource base is sufficiently attractive that few companies are packing up and moving out. And the recent improvement in the investment climate - the government's efforts to pay down debt - has many of the oil players doubling down.