The sharks did their best to disrupt Shell Egypt’s prospecting work in the North East Mediterranean Deepwater concession by chewing up the streamers towed by the survey vessel to carry out the 3-D seismic tests.

Reading around the teethmarks, Shell geophysical specialists were able to detect sufficient evidence that the block contained very substantial quantities of hydrocarbons. Just how much will become clear once actual drilling work begins in early 2001.

The positive results of Shell’s surveys have come on top of a series of major gas discoveries by BP, Agip and BG International off the Nile Delta coast over the past 10 years, confirming that the future of the Egyptian energy industry lies in this region.

The emergence of the Nile basin as a major hydrocarbons province has been timely. The Gulf of Suez, where oil was first discovered at the end of the 19th century, still accounts for some 80 per cent of Egyptian crude output, but the major fields there are now going into decline. Egypt’s crude oil production, which reached a peak of just over 900,000 barrels a day (b/d) in the early 1990s, is now hovering around 700,000 b/d. The petroleum sector in 1999 showed its first deficit since the early 1970s.

The Egyptian government sees gas exports as the only way to restore the sector ‘s payments surplus, in the medium term. In the short term, the government is seeking to improve things by revising its gas sales agreements with foreign companies, increasing output of products that are imported, extending the piped gas distribution network, and converting more vehicles to run on compressed natural gas (CNG).

The new gas sales formula is aimed at protecting both sides to the contracts from the effects of oil market volatility. The existing agreements commit the Egyptian General Petroleum Corporation (EGPC) to buying contracted volumes of gas from the operating companies at a price related to Suez blend crude oil prices. As gas production has risen, the financial burden on EGPC has increased accordingly. Petroleum Minister Sameh Fahmy is now seeking to reduce that burden.

Fahmy announced in mid-September that revised gas sales terms had been agreed with several oil companies, and the resultant saving to EGPC would be at least $250 million a year. The main companies affected are BP, Shell and Agip, which now account for most of Egypt’s gas production of about 2,300 million cubic feet a day (cf/d). Discussions are also expected to be held with Repsol of Spain, which has just brought on stream its first gas field, and BG International of the UK, which is starting up its offshore Rosetta field. Industry sources say the new formula will link the price of gas to Brent, rather than Suez blend, and will set a ceiling and a floor for the gas price. The range is reported to be $1.50-2.65 a million British thermal units (BTU). The changes will have to be incorporated into revised individual concession agreements, which must be approved by parliament.

No new gas sales agreements have been signed with EGPC since September 1999, when BP (then BP Amoco) agreed an amendment for the Ha’py field, which will produce 400 million cf/d of gas from 2002 plus unspecified quantities of condensates, and BP Amoco and Burlington Resources agreed terms for the development of the Tao, Kamose and Seti Plio fields off the North Sinai coast.

The government has now made clear that operators of newly discovered gas fields will have to find export markets, as EGPC reckons gas it contracted to buy according to the existing gas sales agreements will be sufficient to meet domestic demand well past 2005.

The big players in the gas sector have responded to this challenge by putting together a series of export proposals:

BG International and Italy’s Edison International have agreed to form Egypt LNG, with EGPC taking a small stake, to build a liquefaction plant at Idku, on the Mediterranean coast. The gas for the plant will come from the West Delta Deep Marine concession, where BG has made nine gas discoveries, the most recent one also involving significant quantities of condensate. The first field – Scarab/Saffron – is being developed for the domestic market at a cost of some $500 million. Major contracts for work on the field are due to be let in the next few months, and production is due to start in 2003, reaching a level of 530 million cf/d. BG and its equity partner Edison have indicated that they want to devote the output of the next field, Simian, for the export scheme. In September, BG announced its latest find in the block, in the Sapphire-1 well, which was drilled in a new geological feature and yielded 35 million cf/d of gas as well as 1,100 b/d of condensate. The next step for Egypt LNG is to identify a buyer for the exported gas.

BPsaid in June that it plans to build a twintrain liquefaction and natural gas liquids (NGL) plant on the Mediterranean coast to process gas and condensates from offshore fields. The NGL would be used to make liquid products needed on the local market, while the LNG would be exported. BP says it regards Spain as one of its prime export targets for the LNG.

Shell has said that it aimed to build a combined gas-to-liquids (GTL) and LNG plant to process gas it expects to produce from the North East Mediterranean Deepwater block.

Shell said on 6 October that it had agreed with EGPC the terms of a development protocol for a 75,000-b/d GTL plant using the Shell Middle Distillate Synthesis process and at least one LNG plant. The project would be carried out by a Shell/EGPC joint venture.

The GTL plant could be in operation by late 2005 and an LNG plant by mid-2004, Shell says.

In addition to these three proposals from oil companies working in the Nile basin, Egypt has also signed an initial agreement with Union Fenosa of Spain for the long-term supply of 4,000 million cubic metres a year (roughly equivalent to 400 million cf/d) of gas to fuel power stations operated by the company in Spain. The gas would come via an LNG plant on the Mediterranean coast. It is not yet clear if there is any link between this proposal and the other LNG projects.

Finally, EGPC has committed gas supplies to the East Mediterranean Gas consortium, involving local businessman Hussain Salem and the Israeli Merhav Group, for a pipeline that would run off the East Mediterranean coast from Port Said to Ceyhan, in Turkey. The pipeline would have spurs that could be used to supply Israeli power stations.

Since the Egyptian government made an unequivocal commitment to the gas export programme at the end of 1999, a great deal of progress has been made. However, there is still a lot of work to be done, in particular tying up sales contracts with importers of Egyptian gas and securing the finance for the new projects.

These issues need to be sorted out by the end of 2001 if Egypt is to stand a chance of becoming a gas exporter by mid-decade.