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Waiting on Egypt for Oil & Gas Investment

Whither Egypt and its nearly 4.4 billion barrels of proven oil reserves and 77 trillion cubic feet of natural gas? Well, it’s never been a cakewalk, getting energy-starved Egypt’s development projects off the ground and its hydrocarbons out of the ground. We think it’s actually going to get easier now, courtesy of a military coup that any Egypt-watcher had to know was coming sooner rather than later. It certainly wasn’t going to happen under President Mohamed Morsi and the Muslim Brotherhood who took power last year, post-revolution, and lost it in a 3 July military coup.

Beyond these reserves, if you don’t think what happens in Egypt is that important on the energy scene—think again.

As much as 12% of all international trade goes through Egypt’s Suez Canal—10% on average—and 22% of the world’s total container traffic. As Juan Cole points out in a recent article, if the Suez Canal were to be closed, it would affect the many commodities. Cole also notes that while Egypt is not a major fuel exporter, the Suez Canal and Egyptian pipelines handle a lot of oil and gas (over 2 million barrels a day of petroleum destined for Western markets). The Suez Canal also handles a lot of LNG shipments, with the UK, Belgium and Italy receiving over 80% of their LNG from here in recent years, while other countries, including the US, Turkey and France receive about 25% of the LNG from this transit point. Further afield, those entrepreneurial spirits looking to export US natural gas eventually to gas-starved Asia will need the Suez Canal to make it work.

Suez Canal

Egypt’s Energy Woes

Egypt’s energy woes are serious. There is a long list of grievances, and we’re not entirely sure where to even start here.

Long lines at fuel stations for short-supply subsidized gas that sells for about $0.26 a liter (all told, a whopping one-fifth of the state budget is spent on subsidies of one kind or another)

Domestic demand for energy continue to rise along with the population. At present, demand is higher than oil and gas production in the Nile Delta and the Western Desert.

The Gulf States have been gifting Egypt oil and gas, but only in small amounts, and the country isn’t even logistically capable of handling liquefied natural gas (LNG) imports. The story of the LNG import terminal itself is illustrative of the larger problem. Amid the chaos that was post-revolutionary Muslim Brotherhood government of Mohamed Morsi, a $250-million LNG import terminal project was contracted out—twice, flipping back and forth between the apparently dueling state-run oil and gas firms. Right now, the state-run oil company, EGPC, has control of the project, but who knows for how long and it doesn’t seem to have gotten anywhere in the tender process.

In the meantime, Egypt desperately needs this terminal, without which will have to continue to pay a higher price for fuel with cash reserves that it doesn’t have.

In short, it’s an energy mess that cannot be resolved as long as the government keeps changing hands—and then failing.

Foreign Operations in Egypt

Egypt owes about $5 billion to foreign oil companies operating on its territory. Foreign companies are now selling Egypt oil and gas on credit because the country doesn’t have the cash reserves to pay for it. So why invest in new exploration and drilling? Again, we remind you of the 4.4 billion barrels of proven oil reserves and more recent natural gas findings of 77 trillion cubic feet—enough to make it possibly worth the hassle.

Aside from the Egyptian people themselves--who have certainly grown weary from the false hope and economic failure ushered in with the Muslim Brotherhood after the high optimism surrounding the revolution—there is a great amount at stake here for oil and gas companies.

There seems to be a general feeling of optimism, once the dust settles. (The dust had never settled after Morsi took the reins of power post-revolution). But in the meantime, companies like BP and Dana have evacuated their foreign staff for security reasons.

There is reason for optimism beyond the simple fact that things could not be worse than they were under the Morsi government. The military is highly entrenched in the Egyptian public and controls a large part of the economy. There is also a geopolitical element to Egypt’s military coup that has Gulf States like Saudi Arabia, the United Arab Emirates (UAE) and Kuwait immediately coming to Egypt’s rescue with billions in aid (to the slight of Qatar, the Muslim Brotherhood’s benefactor).

But the bottom line is that while the political uncertainty has kept newcomers from hitting the Egyptian scene and stymied growth and development, this has benefited the mainstays like BP, Italy’s Eni, Apache Corp., BG, the UAE’s Dana Gas and the UK’s Sea Dragon, this latter a small-cap company that’s managed some great deals amid the chaos.  (Amid all the political chaos of the past year, Sea Dragon managed to buy Egypt’s Shukheir producing concession for about 80 cents per barrel in the ground, while the typical market value for similar concessions would be at least $4 and up to $10.)

For Apache, things haven’t been so great. A lot of its assets are in Egypt and its ability to turn this into profit has led to market underperformance despite the value of its reserves. For Apache, we think a turnaround will be in order soon enough, thanks to an improved climate in Egypt.

Snapshot of Egyptian Oil and Gas

So far, the unrest hasn’t really affected production in Egypt, which was at about 728,000 barrels of oil per day and 60.9 billion cubic meters of natural gas per day as of last year.

BP is the big name in Egypt; it’s been braving this market for half a century and currently is responsible for close to 15% of Egypt’s total oil production and over 30% of its natural gas production. BP has interests in 13 offshore concessions in the Nile Delta, with operatorship of six, including North Alexandria; West Mediterranean Deepwater.

The Nile Delta Basin Province

The Nile Delta Basin Province is about 250,000 square kilometers off the eastern Mediterranean area, bounded to the west by the edge of the Nile Cone, to the north by the Strabo, Pytheus, and Cyprus Trenches, to the east by the Levant Basin Province boundary, and to the south by the edge of compressional structures in northern Egypt.

According to the US Geological Survey from 2010, oil and gas are generated from multiple Mesozoic and Cenozoic sources including: (1) hypothesized Jurassic marine and terrigenous shale; (2) Cretaceous argillaceous shales and limestones; (3) Oligocene and Miocene terrigenous source rocks; and (4) possibly biogenic sources. Source rocks are thermally mature in deeper parts of the province.

In 2010, the USGS estimated untapped means of 1.8 billion barrels of recoverable oil, 223 trillion cubic feet of recoverable gas, and 6 billion barrels of natural gas liquids in this region.

The West Nile Delta project is a BP operation, in partnership with RWE, which will see in excess of $13 billion in investment for the first phase. It’s pretty much stalled for now (as have been all major projects here), but we think there is a good chance it will get back on track soon.

In November 2010, BP Egypt announced a significant discovery in the Deepwater West Nile Delta area. The Hodoa discovery, in the deep waters of the West Mediterranean in BP’s Nile Delta concession some 80 kilometers northwest of Alexandria was the first Oligocene deep-water discovery in the area.

Then we have the UAE’s Dana Gas—the 6th largest gas producer in Egypt--which made a significant discovery in the Nile Delta just three days before the military coup on 3 July. Dana Gas’s Begonia-1 well produced 9.4 million cubic feet per day of gas, along with light oil condensate. The Begonia-1 well is in the Lower Abu Madi Formation. Total evaluated resources for the Lower Abu Madi zone are between 7 billion and 15 billion cubic feet, along with around 100,000 barrels of condensate. The company has invested more than $1.8 billion in Egypt to date, and achieved record production this year in Egypt of 39,000 boepd. The new find could add around 1,600 boepd.

The company’s take on things: operations continue to perform well despite the difficult fiscal environment oil and gas companies have faced over the last two years.

What We Think Will Happen Now

•    Serious decision-making on key energy issues (and less of the fear surrounding decision-making following the conviction of the long-time oil minister under Hosni Mubarak and other senior officials for having sold gas to Israel cheaply)
•    The re-launch of massive energy projects that have been stalled
•    Lots of non-Qatari Gulf aid (much of it in the form of fuel, buys the new government some time)

Last week, Sherif Ismail, head of an Egyptian state-owned oil holding company, was sworn in as the country’s interim oil minister. Ismail is chairman of the Ganoub El-Wadi Petroleum Holding Company (GANOPE) which manages exploration and production concessions, establishes joint ventures with private companies and constructs oil infrastructure. This is a far cry from the Muslim Brotherhood days.

The dust certainly hasn’t settled yet, but the military and the interim president are moving swiftly to put the pieces into place, swearing in an interim cabinet and already beginning work on an amended constitution. Morsi and his supporters are still rallying, trying to find something to grab onto, and more violence could still surface, but the military has the power to handle it, if it does so carefully. But the key here is that the military has the support—however quietly—of major powers from Washington to Riyadh, and the significance of this should not be underestimated.

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