By Neil Halligan
Years of frustration appear to be ending for Dana Gas, who look set to capitalise on investments in both Kurdistan and Egypt to spur its next cycle of growth.
Dana Gas should have made more headlines than it has.
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 AED4.71 ($1.28) in December 2005 to 55 fils (15 cents).
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 in terms of 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 acreage 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.”
Dana Gas has also partnered in a joint-venture with oil giant BP to drill an exploration well in the 960 square kilometre El Matariya onshore concession area (Oligocene), in the north-east of the Nile Delta cone, approximately 57km to the west of Port Said city.
The JV allows Dana Gas to drill double the usual depth of its existing fields and production operations.
“It [digging deeper] has a huge cost implication,” says Allman-Ward. “We usually drill our wells into our conventional portfolio at $7m per well. The exploration well to the Oligocene is going to be over $70m.
“That additional 3,000 metres is very technically challenging and that’s the reason why we’re very pleased to go into business with BP, because they have a track record in delivery in drilling these very, very challenging wells in Egypt.”
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.
“We think that this potential in the Oligocene is a 5 TCF potential. We’re talking about the equivalent of a billion barrels of oil, which is a very large find,” he says.
While it is not on the same scale as the enormous 30 TCF discovery by Eni at Zohr Field, off the northern coast of Egypt, Allman-Ward says Dana Gas also has deep water potential in North El Arish, located only 50-60km from Zohr Field.
“One of the prospects that we’ve identified in our deepwater block is very similar in its nature to the ENI discovery,” he reveals.
“We’ve got other things which are also very exciting in the block, which are actually more similar to discoveries made by Noble Energy in the east Levant Basin [a 40 TCF discovery]. We have both an ENI-type prospect as well as the Leviathan-type prospects within this deep water acreage.”
Dana Gas is currently in the process of investing in a “new development phase”, and has signed a gas production and enhancement agreement with the Egyptian government.
“We began an investment cycle of $350m, which is a large sum of money for a $1bn market cap company like ourselves,” Allman-Ward says.
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.
“There’s a misconception that investors in Egypt, particularly in the petroleum sector, are not getting paid That’s not the case. Since 2011 when these issues became really acute, we’ve been paid over the last three years anything between 85 and 120 percent of the invoices that we’ve invoiced.”
Dana Gas’ dealings in Kurdistan, where it has had a 30-year agreement with the regional government in northern Iraq to develop its substantial gas resources since 2007, have not been as positive, despite the outstanding potential.
Dana Gas, along with its parent Crescent Petroleum, leads the Pearl Petroleum consortium to develop the gas operations, and other downstream industries.
The agreement turned sour and required the consortium to go to court in London to establish the rights under the contract and to secure a judgement forcing the Kurdistan Regional Government to pay $1.96bn to the consortium for products they had not paid for in full.
“The Kurdish government has the obligation to buy our products,” says Allman-Ward. “They have done that but not paid in full. They have paid on average about 70 percent of what they should have paid.”
The deal, though exciting for a gas company to undertake, has been littered with disappointment, he says.
“For us it’s a constant source of regret because this is an example of a real lose-lose [situation],” says Allman-Ward.
“We had our two fields Khor Mor and Chemchemal evaluated by external reserves auditors last year and Dana Gas’s share of those fields, which is currently now 35 percent, is close to a billion barrels of oil equivalent.
“We calculate, based on the same data set, that the in-place volumes of these two fields is 75 trillion cubic feet of gas, and 7 billion barrels of oil.”
He says it is also sweet gas, which means that it’s much cheaper to process.
“This huge resource that we have been prevented from developing for the last eight years could have provided all of the power requirements for the Kurdistan region. Instead, they have had to import $15bn worth of diesel,” he says.
“Secondly, there would have been more than enough to export a significant surplus externally, to Turkey for example, which would have generated equivalent sorts of gas revenues to the Kurdistan government. They have lost massively in terms of forgone gas production for their own power generation and revenues.”
Those losses are surely being acutely felt in Kurdistan, where the government’s total debt has surpassed $30bn.
The consortium has invested $1.2bn in field development to date, which also has not been recovered.
To boost its cash flow into the region, Pearl Petroleum has been able to sell its products into the local market to local traders at local prices, which has yielded better than expected collections.
At the heart of the dispute, Allman-Ward says, is the decision of the original consortium of Dana Gas and Crescent Consortium to 10 percent each to MOL and OMV.
He explains that they were two partners in the Nabucco pipeline project, which was planned to connect Europe to Turkey, and to major resources of gas in the immediate east of Turkey, including the Kurdistan region, and Azerbaijan.
“It was a strategic link-up between ourselves, as upstream producers, and two companies that were involved in the midstream in the pipeline project, and in the sale of gas into Europe.
“It was an entirely logical sale to take place and was supported by the Kurdish Regional Government.
The issue arose when the Kurdish Regional Government became aware of the amount of money that MOL and OMV were prepared to pay for their share in the venture.”
He says there was also a failure in the senior leadership in the Kurdistan region to understand that the sale of the right to develop was not and is not the same thing as sale of the asset.
“I think there was confusion in the senior leadership. There was therefore a feeling that if Dana Gas and Crescent sold something, that the Kurdish Regional Government should benefit in some way,” he says.
“It was very difficult to explain that the terms of our contract meant that we had the rights to develop those assets and could sell the rights without selling the assets themselves. It has been part of the clarification process that the arbitration has at least helped to bring about.”
He remains hopeful that the potential of the region will be realised, underling the ultimate benefit that the Kurdish Regional Government and its people will receive.
“On the terms of our contract, ultimately, once we’ve recovered our investment and a return on that investment, 90 percent of the revenues go to the Kurdistan region, and that can only be good. We genuinely hope that this dispute will be resolved,” he says.
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 in excess of 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 a world between $40 and $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.