Egypt could become a natural gas exporter again

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New discoveries have brought confidence that natural gas imports, currently the primary fuel source for Egypt’s power plants, will decline significantly once the fields start producing. The government will no doubt be looking to this new production to supply the ever-increasing demand, leading to energy self-sufficiency and, eventually, surplus.

PRODUCTION & CONSUMPTION: With production starting from the BP-operated North Alexandria Field in March 2017, Egypt’s natural gas output rose to 5.5bn standard cu feet per day (scfd) that year, up from a minimum 3.8bn scfd in 2016. The Ministry of Petroleum has stated that it aims to increase this to 5.8bn scfd in 2017/18 and 7.2bn scfd in 2018/19.

This rise is needed to feed the country’s growing natural gas demand, particularly in the electricity and industrial sectors, which consume at the highest rates. According to BNP Paribas, domestic electricity generation utilises 60-65% of Egypt’s gas output, and has been under upward pressure as a result of rapid population growth, with the country’s populace increasing by 1.5m-2m per year. As noted in the “BP Statistical Review of World Energy 2017”, Egypt’s natural gas consumption reached 1.81trn cu feet in 2016, up 7% for the year, compared to an average growth rate of 4.2% in the 2005-15 period.

Consumption levels are particularly high in the hot summer months. In August 2017, for example, power plant usage rose from 3.5bn scfd of natural gas to 4.2bn scfd as temperatures spiked, according to the Egyptian Natural Gas Holding Company (EGAS). “Demand for energy products in Egypt will continue to grow based on GDP and demographic factors, although the cut in subsidies will lead to an inflection point in terms of fuel consumption per capita,” Ayham Ammora, director and country chairman at Chevron, told OBG.

ZOHR: Discovered by Italian energy company Eni in August 2015, Zohr Field contains 30trn cu feet of estimated reserves, making it one of the largest finds to be developed in recent years. Located in the Mediterranean Sea 190 km north of Port Said, the project has generated significant investment interest, with Russian energy giant Rosneft buying a $1.1bn stake in the field in October 2017. The Italian company will hold 60% of the development, with Rosneft taking 30% and BP 10%. Production at the 100-sq-km Zohr Field began in December 2017 at an initial output rate of 350m scfd.

A second large-scale gas development came on-line at the end of 2017. The Atoll Field – an offshore joint venture between EGAS and BP located in the North Damietta offshore concession in the Nile Delta – contains estimated reserves of 1.5trn cu feet of gas a 31m barrels of condensates. Initial production from the field is expected to deliver 300m scfd to the domestic market.

EXISTING FIELDS: The new flows come on the back of heightened activity in 2017, as gas output rose steadily at existing fields. In May BP began production at two of the five fields that make up the North Alexandria and West Mediterranean deepwater offshore concession blocks, with the initial take pumped directly into the national grid.

The 700m-scfd output from the Libra and Taurus fields has helped raise Egypt’s gas production, and once all five fields are fully operational in 2019 BP expects production to reach 1.6bn scfd.

REDUCING IMPORTS: In September 2017, as reported by industry publication Egypt Oil and Gas, Tarek El Molla, the minister of petroleum and mineral resources, announced the goal of reducing liquefied natural gas (LNG) imports – which cost around $2.5bn in 2016/17 – by 42% to 69 cargo loads by the end of 2017/18. The number of cargo loads was already down from an expected 154 to 119 during FY 2016/17. Currently, around 952m scfd of imported LNG fuels power plants after it is converted into usable gas at floating storage regasification units and injected into the national grid for generation.

EXPORT ROLE: Egypt hopes to achieve gas self-sufficiency by the end of 2018, according to El Molla. He told local media that the country was eyeing a gas surplus by 2019, raising the possibility that it could begin exporting again. Egypt was a net energy exporter for many decades, but a drop in production and increased domestic demand in the late 2000s saw it become increasingly reliant on imports.

Although balancing rising domestic consumption with export goals will be a challenge, the new discoveries put Egypt on track to reclaim its energy exporter status. The country has two LNG plants with a combined liquefaction capacity of 12m tonnes per annum, though one has been closed since 2012 and the other operates at reduced capacity due to a lack of natural gas for export.

In addition, a 2017 report from BNP Paribas noted that advanced export infrastructure is “the defining pillar of Egypt’s regional hub strategy”, since connecting Mediterranean discoveries to existing domestic infrastructure requires lower investment than the construction of new LNG facilities in nearby Cyprus or Israel, for example.

REGULATION: The executive regulations of the New Gas Market Law (Law No. 196 of 2017) – approved by Parliament in July 2017 – would be published in February 2018, El Molla said in December 2017. The legislation is meant to encourage investment by allowing private companies to directly ship, transport, store, market and trade natural gas, providing access to state pipeline and network infrastructure.

The law also allows domestic firms to choose their own gas suppliers, establishing an independent Gas Regulatory Authority to license companies to import and transport natural gas. Ahmed Hafez, co-head of research and senior analyst, industrials, at HC Securities & Investment, told OBG, “It is still early days for gas deregulation, but given what is happening with exploration and discoveries, in Egypt and throughout the region, liberalisation of the market should bring something positive that aligns with the broader economic changes we are seeing.”

“At $40-50, Brent crude is still economically feasible to selectively continue drilling in the Western Desert,” Jason Stabell, CEO at hydrocarbons exploration and production company Merlon, told OBG. “However, potential gas investment is affected by local set pricing. Allowing producers to sell directly to consumers without going through the government’s set pricing regimes would open up more investment on the newly discovered gas fields, especially for smaller producers.” The rise in domestic gas production is helping to curb energy imports, alleviating pressure on foreign currency reserves, reducing expenditure and supporting broader economic growth. With competitive operating costs, established infrastructure and new reserves, Egypt is likely to be an attractive base for gas production.

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