Oil & gas in numbers

25 per cent: Projected rise in Egypt’s power consumption in the next five years

$15 a million BTU: Spot gas prices during 2008

$4-6 a million BTU: Current spot gas prices

Source: MEED

After a decade of incredible growth, the expansion of Egypt’s gas production has begun to slow. Between 1999 and 2004, output doubled from 16.8 billion cubic metres to 33 billion cubic metres, and in the next five years it came close to doubling again, reaching 62.7 billion cubic metres in 2009. But since 2007, the average increase in output has been a comparably modest 2 billion cubic metres a year.

The price is not reasonable for producers and now we are starting to produce expensive gas

Sameh Fahmy, Petroleum minister

Over the past 11 years, the gap between production and consumption has increased significantly, from just 0.4 billion cubic metres in 1999 and 1.3 billion cubic metres in 2004 to more than 20 billion cubic metres in 2009.

In turn, this has given the country an ever-increasing capacity to sell gas on the export market, made possible by the construction of liquefied natural gas (LNG) production facilities at Idku and Damietta on the Mediterranean coast. By the middle of the last decade, the consistent year-on-year production increases had stimulated plans for the addition of new liquefaction trains at both of Egypt’s LNG terminals in the hope of boosting export revenues and taking advantage of rising gas prices on the international market.

Gas prices fall

But just as production growth has begun to slow, the expansion of exports has stagnated. In late 2008, the government announced a moratorium on new export deals until the end of 2010. According to petroleum minister, Sameh Fahmy, speaking at the Gas Exporting Countries Forum (GECF) in early December, Egypt was expected to export 21 billion cubic metres of gas in 2010, the same as in 2009. The market price for gas has also dropped since 2008, when spot gas sales of $15 a million BTU were not uncommon, and today spot deals command somewhere in the region of $4-6 a million BTU.

Gas prices have been raised for heavy industry through the phasing out of subsidies

Samuel Ciszuk, IHS Energy

The combination of weak international gas prices and a tighter relationship between supply and domestic demand means that the export moratorium is unlikely to be lifted in 2010. “This is not a time to expand,” said Fahmy at the GECF meeting. “The price is not reasonable for producers and now we are starting to produce expensive gas.”

Even if market conditions were more favourable, it is unlikely that Egypt would have spare capacity to sell overseas. Domestic demand is growing strongly, substantial new production is unlikely to come on stream in the short term, and new gas output coming online is being taken up by rising demand in the power sector. “There are unlikely to be any new export deals for the foreseeable future,” says Angus Blair, head of research at local investment bank Beltone Financial.

Keeping pace with rising domestic consumption is an ever-steepening challenge for Egypt’s government. Generation capacity has increased nearly threefold in the past two decades, from 43 kilowatt hours (kWh) in 1990 to 138 kWh in 2010, but still capacity is struggling to match demand. In September, increased air-conditioning use in the face of exceptionally high temperatures led to widespread power cuts.

In response, LNG sales on the spot market are falling, with the Damietta LNG terminal reportedly operating at less than 50 per cent of its 6.9 billion cubic metres a year capacity. The plans to expand Idku and Damietta have been on hold for a number of years, and are likely to remain so for the time being.

Gas supply challenge in Egypt

The challenge of supplying the domestic market is unlikely to ease in the years ahead. Local power consumption is expected to increase by more than 25 per cent in the next five years, a combination of rising demand in the consumer, commercial and industrial sectors.

“The government is trying to meet very strong domestic demand growth,” says Simon Kitchen, senior economist at Egypt-based EFG Hermes. “New steel and cement plants will need additional energy, and rising per capita income among consumers means that a lot of air-conditioning units have been installed in the past 10 years, which puts a strain on the electricity sector. There is a general call on power that means the government will need to build out new generating capacity as much as possible in the next few years.”

“Unless the government can rein in domestic consumption, the supply/demand balance will be tight for a few more years,” says Samuel Ciszuk, senior Middle East and North Africa analyst at US consultant IHS Energy.

The government is keenly aware of the increasing squeeze on its gas production and in recent years has introduced a range of policies designed to regulate consumption, from increased petrol prices for local consumers to the removal of government hand-outs for industrial energy users.

“Gas prices have been raised for heavy industry through the phasing out of subsidies, and there has been a lot of talk about phasing them out for the rest of the commercial sector and the residential sector,” says Ciszuk.

Cutting gas subsidies in Egypt

Deals are also being agreed under which industrial producers purchase gas directly from producers. “The companies building new steel and cement plants will be asked to source their own energy, with the implication being that it will be at market prices,” says Kitchen.

There is still scope for a further reduction of domestic subsidies, say local analysts. “The current level of subsidies is unsustainable and over time it will have to be diminished,” says Blair. “At the moment the government’s petroleum subsidies budget is greater than the entire budget for education.”

After a period of relatively sluggish upstream activity, Cairo has also recognised the need to incentivise international oil companies (IOCs) to intensify their exploration efforts. Having campaigned for several years for more competitive gas prices, IOCs enjoyed a breakthrough last year when the UK’s BP signed an improved deal for the exploitation of gas resources on its deep offshore West Mediterranean and North Alexandria blocks.

BP and its partner on the concession, Germany’s RWE Dea, signed a post-production agreement with the state oil body, Egyptian General Petroleum Corporation (EGPC), under which the international consortium has been granted full production rights over output from the block, which has estimated recoverable reserves of 5 trillion cubic feet of gas. The 20-year contract enables BP to sell gas to the government at a price linked to the international oil price. The range stipulated for the sales, between $3-4.10 a million BTU, is a marked improvement on the previous price ceiling of $2.65 a million BTU.

While the previous production sharing agreement yielded just 300 million cubic feet a day of gas for EGPC, the new deal will facilitate the implementation of a $9bn investment programme that is expected to at least triple production. In late November 2010, the UK company announced a “significant” discovery on the West Mediterranean concession.

The deal is expected to pave the way for similar deals with other IOCs that the government hopes will kick-start a new phase of exploration in the country.

“The price band agreed with BP has set a precedent,” says Ciszuk. “Companies will negotiate their own deals, but this will be treated as a benchmark. The government is making sure that IOCs now have the chance to commercially develop reserves that in the past they have been reluctant to develop.”

Any deals signed under the improved terms on offer will take time to filter through into increased production. “Egypt is in the slightly uncomfortable situation of having to wait it out a bit,” says Ciszuk. “There has been a breakthrough on the pricing structure for extracting gas from deep water, and several companies are likely to start investing. But these things take time, and we are still a while away from seeing the results of the deepwater pricing agreements. Realistically we won’t see anything for another four to seven years.”

Other exploration work is already under way. The UK’s BG, which is responsible for more than a third of Egypt’s gas production, has embarked on a $4bn programme to develop a number of offshore prospects and producing assets.

In late 2009, the company brought on stream the deepwater Sequoia field, part of its West Delta Deep Marine (WDDM) concession, and in early 2010 signed a concession agreement for the North Gamasa field, a 281-square-kilometre area located in shallow waters off the Mediterranean coast.

Ongoing gas schemes in Egypt

BG is also continuing with the implementation of the multiphase WDDM project, which currently has production capacity of 900 million cubic feet a day. Execution of phase 7 began in early 2010, involving the addition of a third pipeline and a compression project, and is expected to be complete by the end of 2011.

The first part of phase 8 was sanctioned in 2010, comprising the drilling completion and tie-back of an additional nine sub-sea wells, also planned for completion in 2011. A programme was agreed in 2010 for the workover of three wells on the Scarab Saffron field, the country’s first deepwater development, and further drilling and workover programmes are under evaluation.

But it will be some time before even these developments will have a significant impact on Egypt’s output, and still less its capacity to increase gas exports. “BG and others are moving forward with new projects, but we won’t see noticeable results in 2011,” says Ciszuk.

In the meantime, Egypt will have to take solace from the fact that although its capacity to expand its exports has dwindled in recent years, it has at least taken firm action to address both rising domestic demand and the declining rate of incremental supply growth.

“The slowdown in development work has not done Egypt any favours, but it isn’t in the worst position,” says Ciszuk. “Other countries in the region have not even begun to think about these issues.”