Oil & Gas: Limbering up for LNG exports

04 October 2002

The first steel plates are now in place on the pair of storage tanks that will each hold 150,000 cubic metres of liquefied natural gas (LNG) destined for Spanish power stations. Stretching inland from the tanks are clusters of 2,500 deep-driven piles that will support the main elements of the plant, including the cryogenic heat exchanger that is scheduled to be unloaded at the neighbouring Damietta port towards the end of the year. The project, being carried out by Spain's Union Fenosa, is now 25 per cent complete, compared with a target of 16.8 per cent.

In two years' time, if the project continues to make the swift progress that it has done in its early stages, the company's two specially ordered LNG tankers will be drawing alongside the purpose-built jetty to take on their first cargoes of Egyptian gas. A few months later, deliveries are scheduled to start at Idku, east of Alexandria, where another developer, Egyptian LNG (ELNG), has also just started on the first train of its gas export complex.

The two schemes are of vital importance to Egypt's economic future. Gas exports are expected to bring in at least $1,000 million in gross revenues in 2006, going some way to compensating for the wind-down of oil exports. The new projects will also entail major inward capital flows, substantial opportunities for local contractors and the creation of more than 5,000 jobs during the construction phase.

Union Fenosa and ELNG have taken contrasting approaches to their respective projects. The Spanish company has no previous experience of LNG projects, and conceived its Egyptian investment as a means to support its core business of building and operating power stations in Spain. For the lead investors in ELNG - the UK's BG Group and Italy's Edison International - the Idku venture is fundamentally about monetising the gas reserves they have found in Egyptian waters in the Mediterranean. In executing the project, BG has also been able to draw on its experience as a partner in the Atlantic LNG project in Trinidad.

Having no upstream interests in Egypt, Union Fenosa has been obliged to conclude an agreement with the government to buy the natural gas it requires for the LNG project from the national grid. Precise details of this arrangement have not been disclosed, but bankers looking at financing the project have sought assurances that sufficient gas is guaranteed to allow the first train to operate at its capacity of 5 million tonnes a year (t/y). As such, the plant is the biggest of its kind in the world.

Having committed to the Damietta project, as well as to regassification and gas distribution schemes in Spain and an LNG plant in Oman, Union Fenosa has now decided to enlist a strategic partner for its gas division. 'We are not just looking for cash, we want a partner with a strong record in downstream marketing,' Juan Varela, deputy general manager of the company's gas division, told MEED in early September. Six companies, including four with major upstream assets in Egypt, have expressed interest in taking on this role. 'We are talking about selling 20 per cent of the gas company, but it could be as much as 50 per cent,' said Varela. 'Whatever is agreed, we want to retain management control.' A decision is expected to be announced by the end of November.

Union Fenosa appointed Citibank to act as its financial adviser at a relatively early stage in the project. However, bankers say it has been difficult to envisage a project finance deal being concluded until all the loose ends are tied up.

ELNG, by contrast, has been able to go to banks with an ambitious project finance package because of the relatively seamless nature of the scheme. The 5 trillion cubic feet (tcf) of gas required for the first train is available in the Simian/Sienna field in the West Delta Deep Marine concession held by BG and Edison. Contracts for the development of the field and the construction of a pipeline system to bring the gas onshore are scheduled to be awarded in the first half of 2003.

There are three distinct parties to the scheme: the owner and developer of the gas; the LNG train company that holds the land and facilities at Idku; and the operating company that will be responsible for tolling the gas. The Egyptian state will benefit materially from the project both through the 50 per cent stake it controls in the upstream company and through the 24 per cent interest it has in ELNG.

ELNG has taken steps to ensure that a significant portion of the project work is carried out by affiliates of the Egyptian General Petroleum Corporation. ELNG executives maintain they have no worries about the capabilities of the companies in question - notably civil works and mechanical specialist Petrojet. 'Their performance is good and getting better,' says ELNG managing director John Earl. 'Productivity is much improved.'

International banks looking at taking part in the ELNG financing have been encouraged by the positive response of the European Investment Bank (EIB), which is likely to put up $450 million of the total $1,150 million package. An EIB team performed a detailed appraisal of the project in early September, including an environmental impact assessment. Some banks have expressed concern about the risk of withholding tax being applied to loan payments, but the project sponsors have sought to allay these worries. Nevertheless, some participating banks are understood to be looking at ways to make sure that the tax cannot apply, for example by routing funds through local affiliates.

The structure of the ELNG project also has important implications for future gas export schemes. The Idku site has space for up to six LNG trains, and the model used for the first train allows for the possibility for new partners to come in as gas suppliers. 'Idku shows other producers that there is a a channel for monetising their upstream gas, because the partners have been far-sighted enough to acquire sufficient land for multiple trains,' says Earl. 'The model also means that none of the original partners can block development of future trains.' A number of offshore operators in Egypt have identified promising reserves of gas in the 2-3 tcf range, for which exporting via Idku could be an attractive option, analysts say. These operators include BP of the UK, Apache Corporation of the US and RWE-Dea of Germany.

With the existing two trains, Egypt is set to become the world's 13th LNG exporter in 2005 and will rank the seventh largest. With more trains to come at both locations, Egypt could quite soon find itself moving into the top five.

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