Coverage of Egypt Oil & Gas November 2014 Roundtable

In Uptown Cairo on November 19, Egypt Oil & Gas held a round table to discuss the vast reserves of stranded gas in Egypt under the patronage of HE Eng. Sherif Ismail Minister of Petroleum. The event gathered industry leaders from the government and its foreign partners – representing the most prominent players and operators in the oil and gas sector in Egypt. The round table was chaired by EGAS Vice Chairmen Geol. Mahfouz El Bony; its participants included the former Minister of Petroleum Eng. Abdallah Ghorab, EGAS Vice Chairman Eng. Osama Elbakly, Apache Vice President Thomas Maher, Country Manager of KUFPEC Egypt Mohamed Al Ajeel, Country Manager of Sea Dragon Ahmed Moaaz, and Egypt newcomer Aidan Murphy, the Country Chairman and Managing Director for Shell Egypt.

Stranded gas refers to a reserve of natural gas that has been already been discovered, but remains undeveloped due to commercial, technological, or logistical reasons. The general consensus at the round table identified the economic challenges as the most prominent obstacle facing the development of stranded gas, but other barriers were examined.

Many participants expressed ambitions to tackle the issue and offered viable solutions. Eng. Mohamed Fouad, President of Egypt Oil & Gas, opened the event expressing his hopes for a fruitful and productive discussion, hoping the round table would achieve its goals and reinforce the cooperation between oil and gas producers and the Egyptian government.

Fouad noted that this round table discussion on Egypt’s stranded gas came at the right time to address such changes, as previous meetings and dialogues emphasized the importance of collaboration to achieve stability of the energy markets and provide sufficient oil and gas supplies. He also explained that as the demand for natural gas increases, oil and gas producers have a big part to play in embracing new technologies to optimize the reach to the much needed stranded gas reserves, while the government should ease the path for the investors and producers to achieve their aim.

Identifying Egypt’s Stranded Gas Assets Within a Mature Oil Economy

Geol. Mahfouz El Bony, Vice Chairman of EGAS for Agreements and Exploration, kick started the discussion, stating that Egypt is in dire need to increase its natural gas [and oil] production in order to cover the country’s domestic energy needs. He also stressed that the main objective of the round table is to reach a conclusion and to propose recommendations, which will assist in the development of the country’s untapped stranded gas reserves.

El Bony stated that according to studies conducted on the matter by the United States Geological Survey (USGS), IHS and others; there are about

1,700 economically stranded gas fields around the world containing some 3,500 trillion cubic feet (tcf) of gas. Of these, some 2,190 tcf is onshore and the remainder is offshore. 1,530 tcf consist of gas in gas fields and the remainder comprise of gas stranded in oil fields. The majority of these reserves are in Russia and the Middle East. He explained that as the majority of “easy” oil and gas is already discovered, more efforts should be channelled towards recovering the world’s stranded gas.

“Egypt is an oil mature country; we discovered oil a long time ago. However, until 1980, the concession agreement did not support the exploration for gas. There have been several modifications to the agreements since, so as to allow investments gas discoveries,” El Bony explained. He added that since 1973 there have been a total of 455 concessions, of which 396 belong to the Egyptian General Petroleum Corporation (EGPC). Moreover, the Egyptian Natural Gas Holding Company (EGAS) has 34, and 25 concessions belong to Ganoub El Wady Holding Petroleum Company (Ganope).

El Bony elaborated that between the years 1963 and 1973, exploration in Egypt had begun taking place under the Participation Module, which was changed in 1973 to the current Production Sharing Agreement (PSA). In the fiscal year 2013/2014,

36 concession agreements have been ratified, of which 13 agreements are new and nine amended

– EGAS and Ganope each with seven concession agreements. He added that 20 more agreements are currently being ratified, allowing the drilling of about 133 wells amongst all 56 ratified agreements during the years 2013 and 2014.

Egypt is currently producing 5.4 billion cubic feet (bcf) per day from the Mediterranean Sea, the Nile Delta, and the Western Desert, El Bony pointed out adding that, “Two thirds, or 66%, of this figure is from the Mediterranean while about 26% of gas is from the Western Desert and 7% from the Nile Delta… As for reserves, 80% of Egypt’s gas reserve is located in the Mediterranean Sea while 11% is located in the Western Desert.”

“Egypt has a lot of stranded gas that we would like to add to the production; however, there are obstacles,” explained El Bony as he elucidated that Egypt’s stranded gas reserves face several economic and technical hurdles in extracting and adding it to the national production. He pointed out the importance of highlighting different technologies that make it possible to access these reserves.

Discussion Leaders Classify

Main Challenges

Chairman of Agiba Petroleum Geol. Mostafa El- Bahr explained that stranded gas is gas that has already been discovered which is impossible or difficult to retrieve. As exploration “is a high risk-high cost process,” El Bahr stressed the importance of data processing and availability. “We have to se- cure some data for the investors – without data it is difficult to apply for new concession licences.”

El Bony agreed that data and the volume of the SPEC are very important, especially for deep water drilling, ultra deep water and Oligocene extraction, adding that EGAS is proposing to acquire a 16,000 sq. km 3d spec survey and a 20,000 line km 2D spec survey.

Eng. Osama ElBakly, Vice Chairman of EGAS for Production and Fields Development, then commented that it is a fact that Egypt has a large quantity of stranded gas, and that investors, explorations companies, and the government should work to- gether on eliminating the barriers currently making it difficult to reach those reserves.

President and Country Manager of GDFSUEZ Maqsood Sher then introduced a very important question – whether EGAS or Ganope have any available information on stranded gas assets in Egypt as well their volumes. El Bony replied that EGAS, EGPC, and Ganope all have information and data on Egypt’s stranded gas assets.

Shell Egypt Country Manager and Managing Director Aidan Murphy explained that geological data facilitates the exploration, as the availability of such information has a huge effect not only on the development risk, but also on the cost of development. “The huge amount of geological information available in the U.S has a huge influence on the risk for development and it also has an impact on the cost of development,” Murphy said. “One of the biggest resources Egypt has is its wealth of geological data, and particularly the data available on onshore.”

Murphy went on to say that the main obstacle is not in fact identifying where stranded gas is, but if it is economic to produce. “Shell has already identified at least 1 tcf of potential [stranded gas] in our existing concessions in the western desert… the question is not where, it is whether it’s actually economic to produce.”

Assessment-pilots – similar to the one Apache and Shell are conducting in Apollonia in the Western Desert – are needed as they provide exploration companies with information on the development of the wells, Murphy said, “It’s not an identification of where the [stranded gas] resources lie, it’s an identification of the cost of development.”

Ahmed Moaaz, Country Manager and Director of Sea Dragon, clarified that it is vital to identify the category of stranded gas; if it is basins that have been discovered but undeveloped or if they have been detected only by searches but not yet reached. “Stranded gas is typically a result of major challenges in its extraction, either commercial and logistic or technical. It is important to identify these issues in order to continue to their resolution,” he reinforced.

“Quite frankly, in some of our areas we don’t want to find the gas,” Country manager of Transglobe Energy Brian Twaddle said. He continued that for small and independent players in the field the cur- rent gas rate of $2.65 per million Btu is deterring them from investing in gas. He further added that most of these reserves are in small pockets, which might be reached easier and sooner than stranded gas in the Mediterranean Sea. “At the minute the [value] propositioned isn’t enough.”

“Oil Investments are different from gas investments,” replied El Bony. Development of an oil well is concluded sooner and with less investment in infrastructure and technologies than gas exploration. “The cost of development of any gas field is significantly higher than an oil field.”

El Bony also agreed that small pockets could be aggregated, and suggested that data on these small pockets should be gathered from each investor to integrate into a possible valid economic facility.

Eng. Abdallah Ghorab, former Minister of Petroleum stressed that it is also important to discuss different aspects to the topic other than the financial one, “The economics [of gas exploration] were created by contracts and agreements that can be modified. We need to consider this issue on a strategic level.”

Country Manager of KUFPEC Egypt Mohamed Al Ajeel asserted that his company is keen on in- vesting more in Egypt but is faced by challenges. He also added that gas rate, being a very political issue, has been discouraging field players from participating in new bid rounds and attaining new concessions. “Raising the gas rate from the current

$2.65 to $5.8 or $6 – which is already being negotiated for some concessions – is indeed profitable to most investors,” Al Ajeel stated. He suggested that EGAS might consider contributing with the gas developers as an investor, bearing some of the risks. He introduced another alternative that is developing a different receivables model to reassure investors.

Time to Change the Model?

“It’s not the price only, it’s the terms of the con- cession agreement, it is hard to work under the current system,” countered Samir Abdel Moaty, Country Chairman of Beach Petroleum, questioning whether the PSA is the best agreement model. “One model can not fit all… Maybe it is about time to change the model,” he said.

Murphy agreed that the current PSA model makes it very difficult to attain precise data, he pointed out that conventional and unconventional exploration varies widely.

Eng. Shamel Hamdy, the Senior Vice President of Trident Petroleum, also agreed that in case the terms of the agreements are modified based on whether the gas in question is conventional, un- conventional, or stranded – it would allow [some of] the stranded gas reserves to be developed and brought onto production.

Sher on the other hand presented an important view as he brought up the need for easy third party access to refineries; a measure he reckoned would help develop some of the unreached gas.

El Bony then commented that the terms of agreement are not fixed and could be changed, although explorers should start by providing an estimate of the production as well as a full clear development plan including numbers of wells to be drilled, etc. Therefore, EGAS currently sees it fit to decide on the prices upon the actual gas discovery, and would consider this a better option to fixing a price, which might later prove difficult to change.

He added that it is no secret the government has raised the cost recovery from 20%-25% to 40%, a move aimed as an incentive to the investors.

Moaaz disagreed, saying that the PSA with the cost recovery should be exchanged for a more profitable system such as the tax/royalty agreement, to which El Bony responded that EGAS is awaiting suggestions and recommendation on the amendment of current concession agreements that might need modification.

Hamdy then replied that a certain flexibility and ease is required between the government and the investors to allow such changes and modifications to the agreements to take place. “The economics should not stop us from producing gas from a well. [Egypt] needs all the gas it can produce.”

El Bony expressed that EGAS wishes to participate in the exploration as an investor or change the PSA to another model but “it’s not that simple;” he explained that a similar measure has been taken for a concession agreement in the Mediterranean Sea. The agreement was replaced by a service agreement. El Bony also agreed with GDFSUEZ’s Sher on that easier access to refining facilities should facilitate the extraction of stranded gas.

Egypt used to be a place where private sector is- sues with concession agreements could be easily resolved with officials from EGAS or EGPC. Now however, the challenge of an expanding bureaucracy has loomed over the procedures, where everything has to go through committees and boards to be achieved. El Bony attributed the changes to the unrest in the last years since 2011 and the official’s fear of being persecuted.

He concluded the first part of the roundtable by highlighting that in the case of gas imports, Egypt would be importing for a price close to the inter- national one at about $14. Thus, it is better to add stranded gas reserves to the production and en- sure a solution to the issues hindering these efforts.

Employing Leading Technology to Monetize Reserves

As the Roundtable progressed, technology came to the forefront of the discussion. Advances in technologies that aid in the harvesting of stranded gas are of an absolute necessity for the advance- ment of current and future projects. It was largely agreed upon that the means are already in use in other parts of the world, but need to be put to use in Egypt.

Horizontal drilling was one of the methods most mentioned. The difference between a horizontally drilled well and one drilled vertically can differ as much as six to seven times in the amount of gas harvested. This method needs to be put in place alongside multi-stage fracturing to bring about the highest level of return. Mr. Thomas Maher, Vice President of Apache said this was admittedly done on a, “learning basis,” but was showing a great deal of success in certain places, such as limestone layers.

Maher also stated that it was very important to bring in a service provider that could deliver horizontal well or fracturing technology to project sites for a reasonable rate. Although the initial price of $200 million per well seems high, successful pilot pro- grams could be quickly expanded into much larger producing concerns – for example, three trial wells could be expanded into 40.

There was also a lot of discussion of LNG, CNG, and Floating LNG. Egypt’s many resources of stranded gas in the Mediterranean Sea and the deeper deposits were seen to be the deposits with greater future potential, but access and transportation were seen as key issues that needed to be addressed.

Mr. Jean-Pascal Clemencon, Managing Director of Total E & P, brought up that because some – al- though not all – of these deposits were small, what is needed for these deposits is a mobile system flexible enough to not only harvest these deposits one after the other, but also capable of reaching deposits farther offshore in deeper water. Both Clemencon and Maher considered some of the subsea and multi-phase technology that is current- ly in use in the Gulf of Mexico in favorable terms, that high-pressure exploitation of these deeper wells is paramount in having a profitable enterprise.

As the discussion continued, a question was raised by Moaaz on Egypt’s stranded gas reserves, to which El Bony responded that he believes “Egypt has about 15-17 tcf of stranded gas,” a claim Jean-Pascal Clemencon agreed with according to To- tal’s data.

It was clear from this discussion that there are only a few companies in Egypt that were prepared to take this step. Moaaz stressed that contract agreements would have to be tailored to encourage implementation of the most up-to-date technology. New and returning companies would also need to receive special encouragement to join in the bidding, exploration and exploitation process. The strand- ed gas, which was not possible to recover in the past for geological reasons, would need to be revisited for potential advancements that would make recovery possible. This was especially true for many sites in the Western Desert.

Stranded Gas Projects: Securing the Financing

Financing stranded gas operations was a subject that was always in the background of all the other topics of discussion. One of the suggestions El Bony made was that of financial integration, or using money and material targeted to similar projects that were physically close to one another – for example, several small gas fields right next to each other either onshore or offshore. Sharing costs was seen as a good initial first step in the cutting of costs. Illustrating the need for financial integration, Maher stated that the cost of a single well is about $150 million, and as high as $335-$410 Million for a deepwater high-pressure outfit.

There were divisions that came up as the discussion continued. EGPC and EGAS maintained that their role was to decide project financing. However Moaaz contested that the public sector is in an unfavorable position to run the oil and gas sector in Egypt. Govern- ments are traditionally averse to taking large risks with money and to be successful in the energy sector. “You [the government] must be prepared to do exactly that,” Moaaz believed, saying that no con- crete examples of a government running such an enterprise exist.

Moaaz put forward Malaysia as a successful model – a privately owned, stock-traded entity to be financed by the people of the country. He stated that there are many investment entities in the Middle East presently that are ready, willing, and able to start this kind of enterprise, and who could draw in the expertise of Egyptian technicians, scientists, and engineers to benefit the country overall.

El Bony countered that the philosophy of Egypt in both business and government was very averse to this kind of risk-taking, and it would be very difficult to set some similar thing up without it having a number of pre-conditions that would hamper the government currently.

Murphy added that it was not only the issue of finance, but also an issue of trust and confidence. He mentioned that financing would always be readily available for a stranded gas project that seemed profitable, but once that project was underway, delays in various inspections and certifications by various government bodies tended to cost the overall project and lessen its profitability.

The Future of Stranded Gas: Recommendations and Consensus

The general outcome of the evening was an appeal for increased collaboration on every front. One major consensus at the roundtable was a call for more comprehensive data collection to present to investors. Participants agreed that Egypt is at an advantage for the wealth of geological data that has been collected, and it is vital for EGAS to compile it for publication by a data consultancy firm such as Wood Mackenzie or Deloitte.

As El Bony suggested, data on small pockets of stranded gas should be integrated. Representatives from the private and public sector – Sher and El Bony respectively – came together in proposing that easier, third party access to refining facilities would assist the process in tapping into stranded gas reserves.

Financial integration of marginal discoveries is also an important step, so operators could share the costs for nearby gas fields, which would make implementation of advanced technologies more accessible.

Several recommendations were put forth concerning the investment model. As Ajeel suggested, EGAS could play a larger role and bear some of the investment risks along with the foreign partners. Moaty and Murphy both agreed that the terms of the concession agreement poses difficulties, particularly in reference to the specifications that unconventional exploration and development requires. Hamdy also believed the terms of agreements must be amended, and doing so would unlock stranded gas reserves. Concerning technology, as Moaaz points out, flexibility in contract agreements are vital to implementing the most up-to-date, advanced methods.

From the government side, El Bony called on every partner to provide a report of production estimates and clear development plans, and to submit concrete recommendations for the agreement model. A joint effort between the private and public sector should produce a map representing stranded gas reserves, illustrating what is required to produce the reserves, in terms of resources, what type of technology, and the cost impact of technology.

Greater communication between the private and public sector, as well as between operators, was goal for all parties involved. It was also suggested that greater transparency in the media was imperative for the people of Egypt to better understand the energy economy and the oil and gas sector. To that end, various government departments would update their websites more frequently and provide more information that could be easily accessed by all parties, particularly the media.

“These events may be transient,” Fouad acknowledged, “but they mark a clear indication for effective and more comprehensive collaboration as we are facing significant uncertainties and change ahead in the [Egyptian] energy market.” Despite uncertainties, the fact is that Egypt’s vast stranded gas reserves represent a great potential. The commercial, technical, and logistical challenges the sector faces in accessing these reserves has already begun to inspire all-en- compassing advancements.