The Egyptian government has taken another big step towards improving upstream investment terms at its offshore acreage in order to unlock significant gas developments in the Nile Delta that BP has hitherto been unwilling to launch given their questionable profitability.
IHS Global Insight Middle East Energy analyst Samuel Ciszuk’s analysis follows:
Significance
BP has reached what seems to be a groundbreaking deal with Egypt, giving it full production rights in its Mediterranean North Alexandria block and guaranteeing it a significantly higher oil-indexed price for the gas produced for the government.
Implications
The deal means that BP now is highly likely to move forward with development of its 4-tcf Raven gas field and other deposits in the block, after years of standstill. Egypt needs to raise its domestic gas supply amid strong demand growth, but has found it a struggle to agree to higher gas prices on a broader range of fields than just the expensive deepwater ones—where it had already agreed to offer higher gas prices in 2008.
Outlook
The deal is likely to unlock BP development, but also sets a precedent for other offshore areas in Egypt and could well lead to a new drive of offshore investment in the prolific sector between its Mediterranean deepwater and shallow water acreage.
Improved Conditions
After years of standstill, the Egyptian 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. The acreage, where RWE holds a 20% partnering stake, is defined neither as deepwater nor shallow water. The government has radically changed the investment terms for upstream production in the offshore acreage. BP is reported to have been given full rights over the production, while agreeing to Egypt buying all of its gas output from the block, at a price range much higher than previously, the Middle East Economic Survey (MEES) reports.
BP will receive a price for its gas indexed to the Brent crude price, with the upper limit of US$4.10/mmBtu being not too far off the US$4.5/mmBtu agreed by Egypt for gas produced from deepwaters in 2008 in order to unlock stalled costly deepwater developments. The lower limit in the new North Alexandria gas price band will be US$3/mmBtu, still a fair price increase from the current price ceiling for conventionally produced offshore and onshore gas of US$2.65/mmBtu.
The North Alexandria block contains about 5 tcf of gas reserves, of which 4 tcf are located in the Raven field, discovered in 2004 but hitherto undeveloped. The new price agreement, giving BP full freedom to plan and execute development and set its production levels, is called groundbreaking by MEES. It is very likely to unlock development not only on BP’s block but also in other non-deepwater tracts offshore Egypt, if the government allows its spread—which is probably the authorities’ intention—across the Nile Delta play. BP is expected to invest about US$8 billion in the block, developing a 900-mmcf/d production capacity from Raven and the smaller Taurus, Libra, and Fayoum fields, which the company discovered in 2000–01. There is also likely to be a significant condensate flow from the assets. The 900-mmcf/d production would represent a 19% rise in total Nile Delta gas production. For the government, however, BP’s agreement to sell all its production from the block to the state is of even greater importance. It means that instead of receiving about 300 mmcf/d—with another 300 mmcf/d going for export and the remaining third of the theoretical production capacity being retained for future generations, as has been called for under Egypt’s former gas agreements—the state will now be able to bring onshore three times that production in order to rectify its domestic supply shortfall.
Outlook and Implications
The Raven field is located in water depths of 650 metres, only about 40 kilometres off the coast, and shares those characteristics with a large amount of other Egyptian discoveries, exploration blocks, and producing fields. 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, given Egypt’s need to solve its tight domestic gas supply after years of near or actual shortages. In fact, although the government has agreed to pay significantly higher prices for the gas produced at BP’s North Alexandria block, it could well have managed to set the scene for a large-scale offshore investment push, which over the coming five to eight years could finally give it a significant overcapacity in supplies of domestic gas and room for growth, especially as it continues to try to constrain demand growth by slowly raising domestic prices for heavy industry and other major users. The large number of developments expected when the terms spread to other similar offshore tracts could also, by the middle of the decade, lead to the plans for an additional LNG train to be revived, as the country’s current export constraints can be loosened.
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—especially not when only one third of the production could be exported, one third had to be saved, and one third was mandatorily sold too cheaply to the government to satisfy domestic demand. Now, however, 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, as the country’s industrial growth has been largely capped by the gas shortage (translating into an electricity shortage) experienced over the past decade, which has made it difficult to carry out expansions and establish new projects.
About the author: Samuel Ciszuk is IHS Global Insight’s Middle East Energy analyst.
