Egypt Is Frantic For New Gas - Africa’s premier report on the oil, gas and energy landscape.

Egypt Is Frantic For New Gas

Dreams of new LNGs may be deferred as Africa’s largest domestic gas market fails to make new discoveries

EGYPT’s GAS RESERVES NEARLY TRIPLED from 23Trillion cubic feet (Tcf) in 1995, to 67 Tcf by the end of 2005, allowing the country to commission two LNG trains of 3.6Tcf in the same year. The government hopes the reserves will almost double to 120 Tcf by 2011, so that Egypt could host three new LNG trains, exporting 3 billion cubic feet per day.

But that may be far fetched. None of the handful of discoveries in the past year has been huge enough to support the addition of another LNG train — let alone the government’s wild hopes for a doubling of exports.

Of the 15 discoveries in 2006 (by early November figures), only four tested up to 20Million cubic feet per day. 2005 was slightly better, with 38 discoveries.

These don’t match the sort of discoveries that helped boost Egypt’s reserves in the last 11 years.

It is not just the lack of new big finds that worries companies wishing to export LNG. Domestic gas demand has accelerated in the last few years, putting pressure on the scant reserves that have been found. The government places a high premium on domestic gas use, often saying that two-thirds of gas discoveries to be set aside for domestic use and as a strategic reserve, explorers must find three times as much gas to support their export plans.

That would not bother producers if it were not for the second problem: the low price of domestic gas in Egypt, which sells for just $2.65/MMBtu. At that price, more and more of the expensive offshore work is beginning to look uneconomic, in the view of international oil companies (IOCs), especially in the wake of rising rig and production costs in the sector.

Low domestic prices are a deliberate government policy in Egypt; it’s a policy that has made it Africa’s biggest consumer of own gas and it would be a politically difficult decision to adjust domestic prices to international prices. Still, some operators argue that such subsidies are a huge disincentive to exploration. There’s a middle of the road solution: While Egypt may not cut the subsidy on domestic prices, the authorities seem ready to allow operators to develop whatever new discoveries they find for export purposes.

That’s part of the reason why there was so much enthusiasm, for the 2006 bid round by state gas company, EGAS.

Still a key challenge is that companies are impatient about long term exploration in frontier basins when the price doesn’t look right. Apache sold its deepwater acreage in mid 2006, citing increasing costs of rigs. Late in the same year, Shell withdrew from the West Manzala and West Qantara exploration blocks, and an LNG cooperation agreement with Centurion was also terminated.

BG has maintained a relatively good record as an oil finder, it only recently encountered new gas in deepwater; the commerciality of Mina I and Silva 1 are currently being evaluated.

Shell, on the other hand has had far less than it forecast, to report on its North East

Mediterranean (NEMED) Concession. Appraisals of the discoveries have suffered delays, and the company’s initial claims of up to 15Tcf in the acreage is not holding up.

Sources have suggested that the NEMED may not prove up to 2tcf, which is less than enough to support an LNG train.

Apache is relatively on the roll. The small pockets exploration in Egypt in the last two years have of discoveries that have been the rewards of been mostly Apache’s. “They are like local champions”, says an earth scientist at EGPC. Apache is strong in the Western Desert, holding the turf away from the Nile Delta and the Mediterranean deepwater, which it sold to Amerada Hess earlier in 2006. Apache spent $700millionto drill l70wells in 2006. The company has drilled more than 700 wells in the last decade in the western desert, with 50% success rates and 90% in delivering to the market. Out of 38 discoveries in 2005, 16 were Apache’s.


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