The Middle East’s largest private sector natural gas company has the potential to become one of the major regional players in the energy industry. But its less-than-expected real growth has little to do with the fall in oil prices, and more to do with government frustrations and a lack of opportunities.
When the Sharjah-based firm listed in 2005, investors clamoured for the opportunity to take part in the initial public offering. The interest saw the share price skyrocket five-fold within a week, but it has since crashed from US$1.28 in December 2005 to US$0.15. But prospects are brightening.
The most recent results saw the billion-dollar firm report a $13m profit for the third quarter of 2016, a swing from a $9m loss in the same period a year earlier. The better figures reflect efforts to cut administrative costs by 50 percent over 12 months, a plan that started in 2015.
“We are making sure that the organisation is as efficient as possible and that … we use capital wisely. That includes reducing operating costs,” CEO Dr Patrick Allman-Ward says. “Making sure that our current operation is a smooth-running, humming machine has been a major focus of our business going forward.” While the overall business environment “remains challenging”, he says the cutbacks have had little to do with the oil price.
“The average price over the year to date is still over $40 a barrel. That is a price level which many businesses find difficult to operate at profitably. We are fortunate at Dana Gas that we have onshore operations, which are intrinsically lower in costs than offshore,” he explains. “Being a small and lean company, we can survive in this oil price environment.”
It has also meant that the company can focus on development. In recent years, Egypt has been where much of the priority lies. Investments in new concession areas “are now yielding very existing results regarding overall prospects”, Allman-Ward says. The prospects in North Africa and the Mediterranean provide Dana Gas with “amazing growth potential for a company of its size”.
“I’m a geologist by background and have been an explorer in the industry for many, many years. This is some of the most exciting exploration acreages that I have seen for a very long time,” he says.
“We’re continuing to explore for and develop the kinds of resources that we’ve done extremely successfully to date in Egypt. Since 2007, we’ve had 60 percent exploration success rate; we’ve doubled reserves and doubled production.”
If the operation is as successful as the data suggests, Allman-Ward says Dana Gas is looking at multiple trillion cubic feet (TCF) prospects and “hopefully a gas field when the time comes”.
Each TCF is worth the equivalent of an oil field that could produce about 200 million barrels of oil and Allman-Ward believes they could be on the brink of a large find, the results of which should be imminently confirmed.
Dana Gas is producing 40,000 barrels of oil equivalent per day in Egypt and is looking to increase its production from 200 million standard cubic feet of gas per day to 260 million. The potential discoveries won’t come into full production until the mid-2020s at the earliest, he says. Government contracts have proven difficult to execute since the 2011 revolution, with Dana Gas currently owed at least $260m in unpaid receivables, although it was as high as $300m at the end of 2014.
Allman-Ward says communication with Egyptian officials has been “very positive” and the prospects of future payments should be enhanced following Egypt’s recent International Monetary Fund $12bn loan deal. “What I have always taken as being extremely encouraging is that at no time has the Egyptian government said ‘your contract’s invalid, we’re going to try and renegotiate’,” he says. “At all times they have said they completely honour the contract, and acknowledge that ‘we owe this amount of money - we’re not disputing that all we’re saying is we can’t pay you right now, can we look at ways of finding solutions to pay you over time’. The gas production and enhancement agreement is part of that.
Closer to its Sharjah headquarters, Dana Gas is also working on Zora gas field off the coast of the emirate. The field was discovered in the 1990s but has been developed only recently, with an offshore platform, 35km pipeline and an onshore gas processing plant put in place. Although the oil price has not significantly affected Dana Gas’ operations, Allman-Ward says the growth of shale oil will have a greater influence. He says North American shale oil has become the global swing producer and ultimately the determiner of the global oil price. Conventional oil or gas fields, which require a huge investment up front, differ greatly from US shale, which requires scalability. “Each induvial [shale] well is an investment decision in itself, and it’s much more like a manufacturing process than a conventional oil and gas field development process,” he explains. “The question is can you get total production out of that well with a value more than costs. It’s a very simple equation that you can make well by well.”
As the price of oil increases to a level where the shale industry can make good returns, Allman-Ward believes that the volume of shale will ramp up “relatively quickly, in the timescale of 18 to 24 months”, with the additional supply creating a cap on oil prices.
“There will continue to be oil price volatility, and the maximum will be set by what price level does the volume of shale oil coming onto the market dampen demand and therefore the oil price,” he says. “We’ll see a floor and ceiling developed over the next two years, which is going to be determined by the North American shale oil market.
“For the next few years, we’re looking at the world between US$40 and US$60 [per barrel of oil].”
But while the rest of the world adjusts to a new norm for oil prices, Dana Gas will be busy contending with governments to realise its potential.
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