Egypt's upstream conditions ripe for the picking

Egypt has become a big gas producer in recent years, attracting huge investment from the majors. But upstream conditions are ripe too for aspiring and upcoming international oil and gas companies.

The transformation of Egypt’s energy sector in recent years – from a declining oil producing state to a global gas exporter – owes much to the presence and deep pockets of major international investors such as BP and Shell, among others.

These companies have unearthed huge new finds offshore during the past decade, pushing the frontiers of the Nile Delta further out into deepwater territory and now into the ultra deepwater.

Some of these discoveries have identified world-class gas deposits, which have now been put to work feeding the country’s rising domestic demand, as well as its export capacity.

Egypt now supplies global gas markets through its two liquefied natural gas (LNG) plants on the Mediterranean coast, and regional markets such as Israel and Jordan by pipeline.

For the most part, liquids production has been in decline for over a decade reaching 722,000 barrels per day (bpd) in 2008. This is slightly up on the previous year but some way down on a decade or so ago, about 950,000 bpd in 1995.

Natural gas production has rocketed every year, however, reaching 59 billion cubic metres (bcm) in 2008, compared to 14 billion cubic metres in 1998.

Egypt now holds Africa’s third-largest natural gas reserves after Algeria and Nigeria, at about 1.89 trillion cubic metres.

Open for business

But another contributing factor to Egypt’s turnaround has been the warm reception it has given to small and independent oil and gas juniors, which view the North African state as a key opportunity area for corporate growth.

Indeed, some of these smaller companies have grown strong on the back of their involvement in Egypt, a country with undoubted geological potential, but perhaps without some of the political and security risks attached to other parts of Africa.

One of those companies to create a solid business out of its Egyptian upstream assets is UK-based Melrose Petroleum, which has a bunch of exploration and development concessions to play with, now delivering steady and reliable production.

Most of these are located in the Nile Delta area although it also holds a frontier exploration concession, Mesaha, in Upper Egypt, on the Sudanese border.

The company expanded overall group production last year to 39,000 barrels of oil equivalent per day (boepd), primarily through success in the field in Egypt, with no less than five new fields entering service: South Zarqa, North East Abu Zahra, North Dikirnis, Damas and South Khilala.

The FTSE 250 listed company now has a market capitalisation of around US$600 million, with additional producing assets in the USA and Europe.

It cites Egypt’s good fiscal terms, well developed infrastructure, a low industry cost base and low oil and gas marketing risk as among the major attractions for the market.

Just as important, Melrose continues to record success with the drill bit. As well as continuing work in the Nile Delta, seismic work is now underway on the frontier Mesaha block, with a view to sinking a debut well before the end of 2010.

Circle spins

Another UK-based operator to have recorded a flurry of recent finds is Circle Oil, which is a stakeholder in the North West Gemsa block, onshore, close to the Gulf of Suez, about 300 km south east of Cairo.

Its first well, al-Amir SE-1X, drilled in 2008, identified both oil and gas, with follow-up wells in the area also finding hydrocarbons, resulting in the award of a number of development licences last year.

Initial production flowed a year ago, providing Circle Oil, which is listed on London’s Alternative Investment Market, with a stable cash flow to help build-up its North Africa-focused business.

It also has interests in Morocco, Tunisia, as well as Oman and Namibia.

Recently, Circle Oil announced successful production testing from the al-Amir SE-5 appraisal well, the latest from the development area.

The well test flowed oil at an average rate of 6,150 bpd, plus gas on a limited choke, from the upper of two identified pay zones. It is now being prepared for production.

On April 21, it also kicked off the al-Amir SE-6X appraisal well, to delineate oil/water contact in the area, and targeting several different zones.

Dana spins

Another UK-based FTSE 250 company, Dana Petroleum, is aggressively targeting Egypt’s upstream potential with a substantial drilling campaign planned this year.

A relative newcomer, arriving in 2008, the drilling work follows initial success in the offshore Nile Delta earlier this year, where the company is partnering heavyweight French investor Gaz de France.

Dana has already announced an important discovery this year at Papyrus, offshore the Nile Delta, and is currently drilling the much larger Bamboo structure in the same concession.

The Papyrus 1X well flowed at rates of up to 33 million cubic feet per day with 442 barrels of condensate per day.

The company also plans to drill two wells in the North Zeit Bay concession, onshore Gulf of Suez – in April, it said it had spudded the Lorcan-1x well in the area – and two or three wells in the East Beni Suef concession, onshore Western Desert Egypt, all during the first half of the year.

But not all has gone to plan, however. Dana’s earlier RAD-3x well offshore Gulf of Suez, was plugged and abandoned as a dry hole.

Gulf hopefuls

Egypt has also been a popular destination for aspiring upstream players from the Middle East Gulf region, a relatively close and safe place to cut their teeth.

Among them, Dana Gas of the UAE – a separate entity to the UK’s Dana Petroleum – has now grown into one of the largest local gas producers after arriving in 2006 following its acquisition of the Egyptian assets of Canada’s Centurion International.

The Abu Dhabi-listed group made two separate discoveries in March this year.

The first, El Panseiya-1, west of the El Manzala concession, produced at 10 million feet per day of dry gas, with a preliminary reserves estimate of 8-13 bcf.

The second and larger discovery, South Faraskour-1, also west of the El Manzala concession, tested at 16.3 million cubic feet per day of gas and condensate. Initial reserves estimates are between 27-57 bcm of gas plus condensate.

Dana Gas plans to connect the two discoveries to its El Wastani gas processing plant by the end of this year.

It continues an impressive run with the drill bit, after the company made eight gas discoveries in Egypt from 12 exploration wells last year.

“In terms of operations in Egypt, we have increased our proven plus probable reserves by 40 per cent to reach 132mn barrels of oil equivalent, while production is up by 20 per cent to reach an average of 37,400 barrels of oil equivalent per day (boepd),” said CEO Ahmed Al Arbeed.

The company is equally busy on the development front, launching first production from its West Qantara concession in the Nile Delta from the Sama field, which was put into service ahead of schedule in February.

With the latest discoveries also anticipated to come onstream this year, the company seems intent on growing its Egyptian production numbers sooner rather than later.

Kuwait Energy

Another aspiring player is Kuwait Energy Company, established in 2005 and headquartered in Kuwait City, but with a sizeable portfolio of international assets, spanning Europe to south-east Asia.

In Egypt, the company has interests in five concessions, three of them operated, and one where it partners the UK’s Melrose.

In March, it announced a new crude oil discovery in the northern area of the Burg El-Arab (BEA) field in the Western Desert, one of its existing producing assets, just two months after taking over as operator.

The BEA N-1X well production tested at an initial rate of 280 bpd of light crude.

“The new discovery is another milestone for KEC’s exploration efforts in Egypt,” said KEC deputy chairman and CEO, Sara Akbar. He said there remains plenty of “excellent” exploration potential within the same block.

Sustainable investment

Indeed, the conditions in Egypt – in terms of prospectivity, location and risk exposure – seem ideal for other smaller players to test their luck in the field.

It may be a long way from home, but Australia’s Beach Energy chose Egypt for its first international foray, taking a small equity interest in each of the North Shadwan and South East July concessions, in the Gulf of Suez in 2008.

Working alongside other partners – including BP – the company now has exposure to some world-class upside, working in an area with some known discoveries.

For such companies, Egypt’s familiarity, security, infrastructure and closeness to European markets will remain a major pull.

By continuing to draw in this tier of investment – in addition to the Shell’s and BP’s of the world – Cairo is creating a far more sustainable oil and gas sector going forward.

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
T: +44 20 7834 7676, F: +44 20 7973 0076, W: www.alaincharles.com

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