By IBA Media

By  Joseph Krauss

This November an enormous ship is scheduled to set sail from the port at Damietta, bound for Spain with a precious cargo of nearly 150,000 cubic meters of natural gas, cooled to a liquid state at less than -160 degrees Celsius. The largest of its kind in the world, the tanker will cast off from the end of a nearly two-and-a-half kilometer jetty reaching out to where the ocean is deep enough to accommodate the giants berth. Destined for lucrative European markets, the vessel will chart a new course for the oil and gas industry in Egypt.

The plant at Damietta will allow Egypt for the first time to export gas to Europe, and in 2006 a similar plant in the West Delta port of Idku will load a tanker bound for the United States. At well over $1 billion each, these projects arent cheap, but investors believe that Egypts ample natural gas reserves and booming domestic market will make it a world-class gas producer for several years to come. The biggest story in Egypt is the story of permanent growth, and this growth pattern will continue for the next five, 10 or 20 years, says Oscar Prieto, president of BG Egypt.

Theres a lot more [gas] than the domestic market needs for many years. We know theres an outlet now, and an outlet that could be expanded and we keep finding more gas, which means the cycle continues, says Hesham Mekawi, chairman of BP Egypt.

The construction of the two liquefied natural gas (LNG) projects, the proposed extensions to existing pipelines, and the recent acceleration of the bidding process are part of a grand strategy put forth by the Ministry of Petroleum aimed at finding new gas and rushing it to the market. Insiders say the plan is working. With billions of dollars flowing in from entrenched players like BP, BG, Shell, Apache and muscular newcomers like Malaysias Petronas and Russias LUKOil, Egypt has a leg up on regional competitors even those, like Iran and Qatar, that have more reserves and is looking to consolidate its position as a major Mediterranean supplier. According to the US Department of Energy, Egypt produced 3.3 billion cubic feet per day in 2003; by 2007, production is estimated to hit 5 billion, with much of that being exported as LNG.

On the upstream side, exploration and production companies have reported major new discoveries, both in the deep waters off the north coast of the Mediterranean and in the arid vastness of the Western Desert. Recent finds have experts predicting that future exploration could more than double Egypts known reserves, which already stand at more than 62 trillion cubic feet (tcf). Downstream, the domestic market is expected to grow as homes, factories and power plants switch from oil to cleaner and more economical natural gas, while government initiatives in the area of compressed natural gas (CNG) and petrochemicals look to bolster domestic demand. (See Petroleums Biggest Customer, page 94)

The biggest story in Egypt is the story of permanent growth, and this growth pattern will continue for the next five, 10 or 20 years, says Oscar Prieto, president of BG Egypt.

All eyes are on the export sector, and the deployment of LNG is expected to accelerate the expansion already under way at every level of the industry. Theres a lot more [gas] than the domestic market needs for many years, says Hesham Mekawi, chairman of BP Egypt. We know theres an outlet now, and an outlet that could be expanded and we keep finding more gas, which means the cycle continues. By most indications Egypt is on the right track, but experts agree that, especially as regional competition heats up in the coming years, Egypt will have to keep the ball rolling.

LNG takes off

When Prieto moved to Cairo in mid-April to take over as president of BG from Stuart Fysh, he found himself at the head of a colossal endeavor to integrate the exploration, production and export of natural gas from the deep waters north of the Nile Delta. The company which is actively exploring and developing offshore wells in addition to partially funding and overseeing the LNG project at Idku is currently spending $4.5 million a day on its Egyptian operations alone. We are committed heavily to Egypt; this country has become a key part of the overall BG strategy in the world, Prieto says. So theres a lot going on here.

In 2001, BG Egypt signed on as a part shareholder with the state-owned Egyptian General Petroleum Company (EGPC), the Egyptian Natural Gas Holding Company (EGAS), Gaz de France and Edison International, which later sold its share to Petronas. Together they have invested well over $1 billion since the project began. Now they are hoping to cash in on new discoveries in the Mediterranean and growing gas markets in the United States and Europe.

The local market grew very fast over the last 10 years or so, but it has limitations, Prieto explains. It grew extremely fast by replacing other fuels, mainly liquids but that process of replacement has an end, and then you will see a natural growth of the market that is more or less tied to the GDP growth. That does not justify the massive exploration efforts and the investments we are making, so we are all banking on increasing exports.

So far, construction on the two LNG plants is ahead of schedule, with the Damietta plant slated to go on-stream this fall. The larger of the two production plants, Damietta at its peak will produce 593 tons of LNG an hour. Those close to the Idku project say they hope to complete Train 1, which will supply LNG to France, by next summer, and Train 2, which will supply both Italy and the United States, by 2006.

The high price of LNG comes from the complex and sophisticated process required to export gas overseas. The gas must be cleansed of all impurities before it can be cooled to its -162 degrees boiling point. From there it is pumped into large tankers bound for other LNG plants around the world, where it can be regassified and sold to consumers. Once on-stream, the first LNG train at Idku will be able to produce 3.6 million metric tons a year, all of which will be delivered to the Gaz de Frances Fos I import terminal, near the port of Marseilles.

The major advantage of LNG is the flexibility it offers to both suppliers and buyers. Unlike stationary pipelines, LNG tankers on the high seas can change course at a moments notice, allowing exporters to fine-tune their operations according to international supply and changing prices. The vessels also have the advantage of long-distance travel, a factor that will soon allow Egypt to supply markets as far away as North America. With the addition of a second LNG train in 2006, Egypt looks to become the sixth-largest LNG exporter in the world, with the petroleum ministry hoping to export 30 million tons of natural gas by 2010.

The sooner the better, experts say. As rapidly expanding economies in Asia demand growing amounts of energy, and as Europe and the United States increasingly turn to cleaner-burning natural gas for everything from hybrid cars to gas-turbine power plants, the demand for gas will intensify, with the US Department of Energy predicting that world consumption of natural gas will grow 67 percent by 2025, when gas will surpass coal as the second most widely used fossil fuel in the world.

The most important market for Egypt may well be the United States, where energy experts are already warning of an imminent supply crunch. Although the United States has the sixth-largest natural gas reserves in the world, at 177 tcf, the reserves are nowhere close to keeping up with the countrys demand.

According to Cambridge Energy Research Associates (CIRA), in the last two years, the United States has emerged as a key indeed the key future growth market for LNG. It alone accounts for a fourth of the natural gas consumed in the world each day. CERA predicts that in the next five years, the United States will become a major importer, and within 10 years it will overtake Japan as the worlds largest.

It was in part because of such predictions that petroleum giant Petronas offered to buy into the Idku project last spring. The $1.76 billion investment, which also included upstream activities in the West Delta Deep Marine (WDDM) concession, made some heads turn last year, but Azhar Noordin, Petronas general manager, says Egypt is a vital part of his companys global strategy. In two years, Egypt will be producing 12 million tons of LNG per annum, and that makes Egypt one of the key LNG producers in the Atlantic Basin, Noordin says. We see this investment as a stepping stone into that energy market.

Pipelines and politics

Last July, President Hosni Mubarak and Jordans King Abdullah II were on hand to celebrate the initiation of a pipeline stretching from Taba to Aqaba, where Jordan operates a large thermal power station. The pipeline, expected to generate $70 million in its first year of operation, will allow Egypt to supply natural gas to Aqaba, and an Egyptian consortium made up of EGAS, Enppi, Petrojet and GASCO have already secured a tender to expand the pipeline through Amman and on to towns further north. From there the government is discussing expanding the pipeline into Syria, Lebanon, and possibly even Turkey.

The one country conspicuously missing from the picture is, of course, Israel, which relies on imports for most of its energy needs. Back in the mid-90s when optimism over the Oslo peace accords ran high, the plan was to run the so-called peace pipeline up the Mediterranean coast from the northern Sinai town of Al-Arish to southern Turkey, supplying gas-hungry Israel and Lebanon along the way. But that deal foundered with the derailment of the peace process in 2000, and attempts since then to sell gas to Israel have stalled, proof that although pipelines are cheaper than LNG, they are also more vulnerable to regional political disputes.

The end goal of the pipeline was always heavily industrialized southern Turkey, but in the last 10 years, as Egypt has squabbled with its neighbors and adjusted the pipeline to bypass Israel, it may have let that window of opportunity pass, allowing new pipelines from central Asia to capture what could have been an important market. Certainly when you come into southern Turkey there is a big industrial demand there, but at the same time there are also pipelines that can come in there from other parts of the Middle East and Southwest Asia, says Rodney Eichler, vice president and general manager of Apache in Egypt. There could be a lot of gas-on-gas competition, with bigger players than Egypt.

Egypt may have missed the boat with Turkey, but Eichler says there are other directions to send pipelines. Assuming that Libya continues on its path of reconciliation with the international community it could offer yet another avenue to European markets. If you have the same companies on both sides of the border then you have the chance to do things across that border, Eichler says. One possibility is that you could access European markets through Libya by pipelining gas across the Libyan border and [accessing] the pipelines Libya already has in order to cross the Mediterranean. So there are all kinds of potential opportunities.

In 2002, Egypt and Libya signed a preliminary agreement to construct pipelines for the exchange of gas and oil, and Libya is currently working on a 370-mile pipeline to Sicily and Italy. The project, which Libyan leader Mummar Qadafi has called the Green Stream, is set to be complete by 2006.

Plumbing the depths

More than anything else, Egypts ability to export depends on the discovery of new reserves and the expansion of existing fields. Egypts roughly 60 tcf of known reserves, while substantial, are nowhere near as large as those of some of its regional competitors (Iran has over 900), but experts say there is plenty of gas yet to be discovered.

Hesham Mekawi, the chairman of BP Egypt, is optimistic. Judging by his companys recent discoveries in the deep waters off the Nile Delta, he believes there may be an additional 100 tcf in the Mediterranean alone. We believe the Nile Delta is a world-class basin, and the discoveries weve had over the last few months have proved this and given us the confidence now to continue in our exploration in the Nile Delta, Mekawi says. We have always said there is a lot of gas to be discovered.

Earlier this year Shell Egypt made history when it drilled three ultra-deep wells in its famed Northeast Mediterranean (NEMED) concession. At a depth of more than 2400 meters below the surface of the ocean, the new wells will allow explorers to move past the more accessible Pliocene layer of the earths crust to the much older Miocene, where the 10-25 million-year-old remains of plant and animal life may have produced large reservoirs of natural gas.

The ultra-deep operation, the first of its kind in the Eastern hemisphere, has been conducted almost entirely from Shells office in Heliopolis, and is made possible by technology previously used to explore the surface of the moon. About 150 kilometers offshore, a free floating rig is kept in place by a system of thrusters wired to a GPS locator, while nearly two and a half kilometers below the surface an unmanned drill probes the ocean floor, transmitting real-time images and information to Cairo via satellite.

In addition to digging deeper, Shell is also casting its gaze over a larger area. In the NEMED concession which, at 41,500 square kilometers, is roughly the size of the Netherlands Shell has surveyed over 13,000 square kilometers with two-dimensional seismic technology and an additional 9000 with three-dimensional seismic programs. In the last few months it has acted on those results, launching two major campaigns of five wells each, with each well costing around $15 million.

The Western Desert, although not quite as gas rich as the Mediterranean, made headlines last month when Apache discovered over 2.1 tcf of gas in the Qasr field of its Khalda concession and, in late April, signed a $5.5 billion gas sales agreement with EGPC. Its probably the largest field thats been found in the Western Desert, and its probably the biggest field weve found as a company anywhere, says Apaches Eichler.

Eichler expects to begin full-scale production on the Qasr field by 2005 and will soon begin supplying a contracted volume of 300 million cubic feet of gas per day. The speedy turnaround is made possible by the comparative ease of onshore drilling. I can drill and complete these wells for $2.5-3 million, whereas deepwater wells can cost $10-20 million depending on how deep they are, Eichler says. The Western Mediterranean project will produce about 375 million cubic feet of gas per day when that project comes on-stream, but in order to get that we have to invest $925 million to bring those reserves on production, so theres a big difference.

While its no secret that oil has been declining in Egypt over the last few years, most in the industry maintain that Egypts oil days are not yet at an end. BP continues to operate Saqqara, the largest oil field in the Gulf of Suez, and in the last two years BP has made three additional discoveries, two of which are already producing. The oilfields we operate in the Gulf of Suez have been producing for 25 or 30 years in some places, so the key for us was to continue to use technology to manage this decline, and these efforts have been very successful, BPs Mekawi says. Oil is still alive in Egypt, its old, but its still alive and it continues to surprise us.

Clearing the air

Oil may still be alive in Egypt, but in the coming years it will fail to keep pace with rising domestic consumption, and experts agree it is only a matter of time before Egypt becomes a net importer. The country will be able to recoup a large part of the lost revenues through the export of natural gas, but as the government is forced to purchase increasing amounts of oil on the international market, it will have to make serious decisions regarding its longstanding but terribly costly subsidy regime, a regime for which the government plans to spend LE 15.6 billion in the next year alone.

The government has always had to purchase its oil at international prices from the exploration and production companies that operate in Egypt, but because it shared in the profits of such ventures, the net amount it spent on oil was always less than the market value. When the government then sold oil to consumers at LE 0.40 per liter (and LE 2.65 per LPG cylinder) it lost money, but not as much as it would have if it had been forced to buy from abroad. Now, with domestic reserves dwindling rapidly and world oil prices at an all-time high, the governments day of reckoning is fast approaching.

Thats where Khaled AbuBakr comes in. Since 1975 his company, now known as the GENCO-Group, has been building and operating large parts of the National Grid, a 4500-kilometer network of pipes that brings natural gas to factories, power plants and over 2 million Egyptian homes. In 1997, EGPC deregulated the gas supply industry, awarding contacts to private companies to build and operate gas distribution networks. You build the infrastructure. Its owned by the government, but you run it for 25 years, and you get a commission on the gas. So as a company you have incentives to make a market, says AbuBakr, GENCOs vice chairman and managing director.

By convincing companies to give up oil in favor of natural gas, GENCO reduces demand for oil, freeing up dwindling reserves for export. [Egypt] produces a lot, and you have the opportunity to export it for the market price, but youre selling it here for 20 percent of the market price, AbuBakr says. The total direct subsidies are around LE 30 billion, and if you compare this to the budget of education, its shocking LE 26 billion this year... You can imagine the damage that is happening by not converting to natural gas.

Although the privatization of the industry has led to the creation of eight separate gas distribution companies operating all over the country, AbuBakr says the government must do more. There needs to be a national strategy to remove [dependence] on other products and switch to natural gas. Some of the factories will say that they have to make their own donation, say LE 600,000, to make the connection to convert their factories. But there is no strong economic reason for them to pay this initial cost as long as they are enjoying low-cost fuel.

AbuBakr maintains that since a viable alternative to oil exists in the form of cleaner and more plentiful natural gas, the government should be able to take action against the subsidies without seriously endangering public welfare. The subsidies do not go to poor people, they go to huge industries that should be making profit from something else, AbuBakr says. If you start to take away the subsidies, these companies will look for other ways to perform.

If the government has been slow to promote natural gas as an alternative fuel source for factories and power plants, it has also been faulted for the slow pace of conversions to compressed natural gas (CNG) engines. In the 1990s, Egypt was an early pioneer in CNG technology, but at present, taxi drivers are the only consumers who have embraced the alternative fuel in significant numbers.

Many in the industry blame the subsidies for removing the incentive to invest in conversion, but according to a recent survey conducted by Nexant Group, an international energy consulting firm, CNG is unpopular for other reasons as well. The report found that a majority of those who have converted to CNG have regretted it, objecting not only to the cost of conversion, but the inconvenience of refueling Nexant found that the average wait at CNG stations is 45 minutes and the technical performance of the converted vehicles. Complaints have also come from the suppliers themselves, who point to the long and complicated procedures required to obtain permission to sell CNG.

In spite of these obstacles, the government continues to push the fuel as a cleaner and less expensive alternative to gasoline, and even plans to export its CNG technology and know-how to other countries attempting to make the transition. Our big milestone will be when we convince the private sector to convert their cars. This will be a major success, AbuBakr says. In the meantime, he adds, our company and others are trying to capitalize on our experience by exporting to other countries. From the Atlantic Ocean to the Arabian Gulf, we are building different opportunities, considering different bids, and this is a big challenge for us.

Libya wakes

With ample natural gas reserves, a robust domestic market, and a stable and long-established oil and gas industry, Egypt remains a reliable target of foreign investment, but as regional political realities change, many in the industry suspect that competition will heat up. Iraq could have as much as 265 tcf of natural gas reserves, but the current political situation makes it impossible to predict what kind of effect it will have on the international market. More significant, from Egypts point of view, is Libyas re-emergence as a major venue of exploration after more than a decade of economic sanctions.

The US Department of Energy rates Libyas known natural gas reserves as 46.6 tcf, but says actual reserves could be much higher, perhaps 70-100. In 1971, Libya became the second country in the world (after Algeria in 1964) to export LNG, but since then the program has suffered from technical limitations and the countrys inability, on account of sanctions, to replace worn equipment.

If Libya continues on its present path of reform, experts say it is only a matter of time before it begins to compete with Egypt for foreign investment and export markets. Theres no question [Libya] is going to create competition in the neighborhood, Apaches Eichler says. There are only so many companies in the business and so much capital to be invested in any given year, and so everybody has to compete. (See Go West Young Man ... To Libya, page 34).

The heads of most major oil and gas companies in Egypt have at this point adopted a wait-and-see attitude when it comes to Libya. Privately, many expressed a strong interest in Libya, but no one would discuss the matter in any detail.

There is, however, general agreement that as new players come into the region the stakes will be high that companies will have to vie for prized concessions, and that countries will have to compete for precious foreign investment. The key to survival, now and in the future, is speed. The world we are living in is moving quickly, so pace is very important, especially when you get to the exports market, says BPs Mekawi. Competition is fierce and things dont wait for you. If you dont capture them they go away.

The Ministry of Petroleum has been lauded not only for pushing exports, but also for streamlining and accelerating the bidding process over the past couple of years. But many industry leaders believe there is still much room for improvement. The biggest impediment overall is the inherent bureaucratic structure. The pace at which the work is done here in the government is just slow, says Eichler. We always get to the right place eventually, but it sometimes takes a lot longer than you hoped it would.

The only way to compete, Eichler says, is to maximize exploration. You need to procure the markets, of course, but until you have the reserves the markets wont do you any good, so you should be focused on facilitating and streamlining everything that allows for the discovery of new reserves. In this business, Eichler says, Whats important is drilling wells. You can have the best seismic, the best technology, and the smartest geoscientists, but at the end of the day what really matters is how many holes you put in the ground. bt