Egypt's oil and gas spoils

Egypt's oil and gas spoils搶劫 are proving as irresistible to investors as its hidden treasures have proved to archaeologists.



For the country situated at the gateway between the Middle East and Africa, the oil and gas industry has long made up a fundamental part of its economy.
The US Energy Information recently dubbed the country "a significant oil producer and rapidly growing natural gas producer".


"Suez Canal and Sumed Pipeline are strategic routes for Persian Gulf oil shipments, making Egypt an important transit corridor," it added.
The first oilfield was discovered in 1869 and put into production in 1910 by Anglo Dutch titan Royal Dutch Shell (RDSB) and a century later, Egypt continues to fight hard to cultivate a reputation as a strong contender for exploration and production activities.
Egypt, along with Algeria, Angola, Libya and Nigeria, represents up to 85% of Africa's upstream production, a coup for Ministry of Petroleum chief Sameh Fahmy who took steps at the turn of the millennium to overhaul the country's petroleum sector.
The Business Monitor International (BMI) recently forecast that Egypt will account for 18.56% of African regional oil demand by 2012, while providing up to 5.67% of its supply. Meanwhile, gas production should reach 85 billion cubic metres (bcm) by 2013, up from an estimated 55 bcm in 2008.
Oil demand is expected to rise from an estimated 671,000 barrels a day (bopd) in 2008 to 771,000 bopd in 2013.
As Egypt contends with a growing market for energy, a handful of UK listed companies have seized the opportunity to reap their rewards.
The North African nation recently made clear its mission to foster foreign investment after striking a groundbreaking deal with FTSE 100 (UKX) heavyweight BP (BP-) for its gas developments in the Nile Delta.
The government has agreed to give BP much improved terms for offshore development and production at its North Alexandria offshore concession in the Nile Delta Basin. BP is reported to have been given full rights over the production, while being guaranteed a significantly higher oil-indexed price for the gas produced for the government.
The North Alexandria block is believed to contain around five trillion cubic feet of gas (tcf), of which four tcf are located in the Raven field, as yet undeveloped.
Samuel Ciszuk, analyst at IHS Global Insight, says BP is expected to invest around $8 billion in the block, developing a 900 million cubic feet of gas per day production capacity from Raven and the smaller Taurus, Libra and Fayoum fields.
Cizsuk believes the deal will have positive ramifications for not only BP, but other companies operating in the region.
"It is very likely to unlock development not only on BP's block but also in other non-deepwater tracks offshore Egypt. For the government, BP's agreement to sell all its production to the state is of even greater importance.
"There will naturally be a strong push by all other explorers and producers in the area to receive the same terms, with renegotiations likely to ensue a few months from now."

Said Arrata, chairman of Canadian listed Sea Dragon and director of Dana Gas, is an avid supporter of the Egyptian oil and gas industry, hailing it as both a safe play and well versed in the needs of foreign oil companies.


"Egypt has had a century to hone its skills and most interestingly, it still has a great deal of undiscovered resources. There is a continuous flow of business and the government is very happy to foster growth in this area."


Arrata added that the government had worked hard to establish itself as a welcoming destination for overseas E&P companies and notes that the state seeks to make the terms and conditions as attractive as possible.
However, some have raised fears that this form of contract, along with Egypt's stringent fiscal regime, makes it less competitive than some of its peers.


Egypt operates under production sharing contracts, a common form of agreement in Middle Eastern and African countries.

 In contrast to UK tax royalties, the production sharing contract relates to the percentage of production both the company and the host country receive after the participating parties have recovered a specified amount for costs and expenses.

 Ciszuk acknowledges this sentiment, noting that "Egypt's upstream investment regime was already one of the more attractive, though not attractive enough to compensate for the high costs of offshore development."
However, he says the breakthrough deal between BP and the government has signalled a turnaround and could pave the way for other oil and gas companies.

 "The greater investment appeal achieved by this deal will unlock Egyptian growth elsewhere. In the long run this should pay for the higher gas price the government has agreed."


Dana Petroleum (DNA), a constituent of the FTSE 250 index and a key player in Egypt, brushes off claims that operating there could prove less lucrative.


Commercial director Stuart Paton told Interactive Investor: "Arguably the tax regime is very different to the UK but it is certainly not unattractive and is much more competitive than some of its fellow African regions

"For every £1 you invest in costs, you receive back so it presents a good arbitrage against the UK system," he adds.
Indeed he goes on to state that the ease with which the government does business allows it the opportunity to look into acquiring projects that might have previously only been earmarked for the super majors.
Dana, which first entered Egypt in 2005-2006 and now has the producing East Zeit field along with various development wells under its belt, said it hoped to increase its foothold in the region.
"We will look to increase our business there and we are currently in discussions about exploring new opportunities in exploration," Paton added.
Arrata agrees that Egypt's fiscal terms would not act a deterrent to potential investors.
"I operated in Southern Egypt and was able to negotiate very competitive terms. Not only does Egypt benefit from great prospectivity, it can also prove very profitable and they are flexible in encouraging investment by being open to negotiation," he said.
AIM listed Circle Oil (COP) knows only too well the benefits of Egyptian fruits. The company enjoyed its biggest intraday gain in two and a half months when it announced "significant gas shows" at its Al-Amir SE-6X well.
UK listed Premier Oil (PMO) will be the next on the list to tap into Egypt's spoils after recently being awarded the South Darag block located in the Gulf of Suez rift basin and close to existing production facilities.
The company plans to start exploration drilling in 2013 and says the resource potential is in the region of 50 to 250 million barrels of oil equivalent.
David Hart, analyst at Westhouse Securities, says Egypt's appeal lies in its lies in the fact that operationally-speaking it remains a prolific area.
"There remains a great deal of prospective areas which make it attractive and geographically speaking Egypt is well located," he says, before adding that Egypt is a "safe bet" in terms of political stability and its accessibility to foreign companies.
That is not to say that Egypt does not face growing competition from other African nations vying for a slice of the action, not least the likes of Cameroon and Uganda which have both taken steps to define new and existing hydrocarbon reserves.
However, business research group BMI maintains that the country "benefits from healthy, proven gas reserves, an established competitive landscape, a reasonable gas reserves-to-production ratio and attractive licensing terms.
"The country's risk environment is sound," it adds.
It seems the gods are still smiling down on the Egyptian oil industry.