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Fri 11 Sep 2015 01:08 AM

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Egypt's field of dreams

The discovery of the mammoth Zohr gas field in the Mediterranean could spark an Egyptian revolution of a different kind

Egypt's field of dreams

The gas exploration business can be expensive and frustrating.

Despite reams of data, ten years of searching and millions of dollars, Royal Dutch Shell decided to exit the Shorouk Block concession in 2011 and concentrate on the Egypt’s Western Region. In January 2014, Italian firm Eni took up the full concession rights to the block, and in just over a year, it discovered one of the world’s largest natural gas fields.

The Zohr (Arabic for midday) field, located in the Shorouk Block under 1,450 metres of water, covers 100 sq km and could hold as much as 30 trillion cubic feet (tcf) of lean gas (or 5.5 billion barrels of oil equivalent), according to Eni.

Experts estimate the field’s value at somewhere between $60-$90bn.

The largest ever found in the Mediterranean, eclipsing Israel’s Leviathan field by 40 percent in size, the field is relatively close to existing infrastructure about 200km off the coast of Egypt, making it easier to get into production.

It’s little wonder that Claudio Descalzi, chief executive of Eni, described the discovery as “historic”. For Rome-based Eni, the biggest foreign energy firm in Africa, it’s the latest in a series of impressive worldwide discoveries over the last decade. It is also the main hydrocarbon producer in the North African nation.

For Egypt, it’s life changing.

At one time, Egypt was an exporter of gas, but a booming level of consumption, fuelled by subsidies, and a depleted natural gas output have seen the country become a net importer.

Once in full production, the Zohr field is expected to produce between 2.5 and 3 billion cubic feet of gas per day, and when added to Egypt’s current production of 4.3 billion cubic feet of gas per day, it will go some way towards meeting the daily demand of 7.8 billion cubic feet.

Energy consultancy Wood Mackenzie says the new field will meet the country’s domestic gas demand for at least a decade.

Angus Blair, CEO of Signet, a regional consultancy based in Cairo, says the new find will help reverse the import-export trend. Economically, he says, it changes the medium-term future of the country, reviving an economy and energy crisis that has tormented previous presidents.

“The benefits would come on the trade deficit which grew by 50 percent year on year [in May],” says Blair. “So it will firstly help cut the trade deficit and help the fact that you don’t need to import gas. That’s a major benefit because it then means that it helps to transform Egypt’s trade balance. It’s a very significant issue because a lot of us were getting quite worried about the rise in the deficit and what it meant for the currency and other issues,” he says.

Mohamed Abu Basha, an economist with EFG Hermes, says it’s significant for Egypt in two ways.

“The find itself is obviously significant in terms of size. It adds around 46 percent to Egypt’s gas reserves. It should help change the dynamics in the energy sector, probably more quickly than initially thought. Obviously, therefore, it’s a relief to the balance of payments as well, more so probably in the medium term than the short term.

“Currently, there will be probably an annual bill of $2.5bn for the gas imports, so if you can close the import gap in, say, 2018 instead of 2020, then you’re saving $2.5bn to $3bn a year. It ensures that your industrial production, which has been negatively impacted by the unavailability of the gas, will start to improve. You’ll see higher utilisation rates and higher economic growth and the ability to attract more investments effectively.”

Blair says one of the big issues is dealing with how rapidly the economy is growing, leading to an even greater demand for energy supply.

“For me the overriding number in Egypt, over and above everything, is the fact that the population is growing by 2.8 percent per annum and it means in the next 15 years there’s going to be an extra 30 to 40 million Egyptians and that has significant implications for water, food, housing and so on. And obviously in terms of energy demand, clearly there’s a multiplier effect for electricity,” he says.

Blair says there are concerns about whether the windfall might delay necessary economic changes needed to bring down the budget deficit — like cutting the fuel subsidy and the possible introduction of VAT — but in a speech last week at the Euromoney Egypt Conference, the Minister of Finance, Hany Kadry Dimian, emphasised that the Eni gas find will not slow or stop economic reforms.

The country’s minister of Petroleum and Mineral Resources, Sherif Ismail, says Eni is expected to deliver a development plan by the end of October, detailing the number of wells it will dig, with production likely to begin at the start of 2018.

Eni, which has been active in Egypt since 1954 through its IEOC subsidiary, will hold a 35 percent share of Zohr’s reserves, with the remainder belonging to the state, the ministry has said.

While a price still needs to be agreed between Eni and the Egyptian government — the latter had increased the price to encourage more investment in energy — negotiations are ongoing.

“We have not yet agreed with Eni over the price of the gas... but the important thing is it’s a number appropriate for both parties... It’s not a condition that it be the same number agreed upon in other deals,” Ismail says.

What appears to be very clear is that the gas from the field will be used for domestic consumption, at least in the initial period, but in the meantime, Egypt will continue to import in order to satisfy demand.

With the help of trade houses, Qatar has been supplying liquefied natural gas (LNG) to Egypt, while the likes of Shell and BP have also been fulfilling supply contracts, but the longer-term plan — particularly prior to the discovery of Zohr — was to import from the Leviathan field, although various issues have complicated that approach.

Leviathan was discovered five years ago and it looked similar to how Zohr is being viewed now – capable of providing Israel with an economic boom.

However, political and bureaucratic infighting have delayed the start of any development work on a field said to hold 22 tcf of gas. The delays have cost the country $26.5bn in revenue, according to Israeli Infrastructure and Energy Minister Yuval Steinitz. One of the biggest hurdles, according to Blair, is antitrust legislation that has delayed the project for months.

“The discussions with Israel were taking place with private-sector companies using facilities in Egypt for liquefaction and discussions to export from there, but also to help supply Egypt as well,” says Blair.

“But Israel has been its own problems with antitrust legislation and permissions to be able to start developing the field. In fact, that programme has been delayed for about seven to nine months since last December. So Israel is a bit behind where it should have been in terms of offering that gas to Egypt or other parties.”

With the Eni discovery, Blair says it’s unlikely that Egypt will need imports on a long-term basis, but suggests that individual supply contracts might be permitted.

“Given the growth in population and the potential for growth in the economy, and new businesses around the Suez Canal, it might look to allow local players to supply gas directly to the some of the larger users, for example, to help ease the flow of energy into Egypt,” he says.

The Mediterranean is a proven hot bed for gas. Aside from the Leviathan and Zohr fields, Lebanon is believed to hold as much as 100 tcf of offshore gas reserves. For a country that imports 96 percent of its energy needs, those finds could again revitalise the economy. As in Israel’s case, however, political issues have mired progress and the fields off its coast lie undeveloped.

“I had discussions with oil companies who were worried about the size of blocks still being offered in Lebanon and the problem there is you have to deal with the politics,” Blair says. “Quite frankly, no-one at the minute is making a decision on anything. Never mind the rubbish, really there’s nothing being decided. There is gas there in Lebanon but it won’t be finding any way of being explored or developed for quite a number of years now.”

Given Egypt’s impressive recent record of delivering infrastructure projects quickly — the New Suez Canal was completed in under a year — the government will be keen to get going on the Zohr gas field in the coming months.

“The urgency in Egypt is one thing, the other is that it just came at a time when the government has been focusing on trying to give all the right incentives to oil companies to go ahead and explore and try to get the gas out of the ground. It will definitely have an impact,” Abu Basha says.

In addition to the new supply of gas from Zohr, Abu Basha says Egypt will be able to offer ready-made export facilities and become a regional industry hub to supply the Asian market.

“I think Egypt still remains interesting for these countries because of the LNG export terminals that it has. It has these facilities and it’s very expensive to build these trains these days, so other countries can use these to export their own gas,” Abu Basha says. “They just have to worry about the capex of a pipeline, which is definitely minimal compared to having to build their own energy terminals. Whether we’re talking about Cyprus, Israel or Lebanon, if they don’t have the neighbouring countries that they can offload some of the gas to, if they want to export, they can still depend on Egypt’s infrastructure to export the gas.”

Abu Basha adds that the Zohr gas find further fosters the idea that there is a great potential in the Nile Delta and the Mediterranean as a whole for more finds, which will further strengthen the country’s economic recovery.

“Just talking about Egypt, we’ve seen BP for example over the last 12 months finding some decent-sized finds, it’s obviously not near the 30 tcf of Eni but generally they have been good ones which should have good yields. That’s why the government was expecting to reach production consumption balance by 2020, based on the production of some of the wells that are going to commence in the two to three years. As they ramp up, in five years they were expecting not to import any more gas.”

That confidence is backed up by Eni, which is eyeing further finds in the region. In June this year, it signed an energy exploration deal with Egypt’s oil ministry worth $2bn to explore in in Sinai, Gulf of Suez, Mediterranean and the Nile Delta. Other companies too, like BP and Total, are looking to make their own discoveries in the region.

The Zohr find could be the start of an Egyptian revolution of an altogether different kind.

How big is Egypt’s new Zohr natural gas find?

Egypt’s Zohr natural gas field discovered by Italy’s Eni is the largest found in the Mediterranean and with a potential 30 trillion cubic feet (tcf) of gas, it eclipses Israel’s Leviathan field. Its discovery, announced earlier this month, could help meet energy-starved Egypt’s gas needs for decades and poses a challenge to gas projects in Israel and Cyprus.

Globally, Egypt remains outside the top ten countries in gas reserves, with Russia, Iran and Qatar holding by far the largest.

Below are the three largest fields in the world, followed by the biggest ones around the Mediterranean:

— South Pars (Iran/Qatar); size: 1,800 tcf; year discovered: 1971; status: producing since 1989.

— Urengoy (Russia); size: 275 tcf; year discovered: 1966; status: producing since 1978.

— Yamburg (Russia); size: 200 tcf; year discovered: 1969; status: producing since 1986.

— Hassi R’Mel (Algeria); size: 85 tcf; year discovered: 1956; status: producing since 1961.

— Zohr (Egypt); size: 30 tcf; year discovered: 2015; status: undeveloped.

— Leviathan (Israel); size: 17 tcf; year discovered: 2010; status: undeveloped.

— Tahaddi (Libya); size: 9-10 tcf; year discovered: 1999; status: producing since 2006. 

— Tamar (Israel); size: 7.9 tcf; discovered: 2009 ; status: producing since 2013.

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