Apache Takes Long Term View On Egypt

US independent Apache says Egypt remains central to the company�s long term future, despite its lessening reliance on the North African country � a trend that is set to continue. Apache was the single largest bidder in Egyptian General Petroleum Corporation�s (EGPC�s) recent bid round, bidding for six of the 15 blocks on offer � including all four in its Western Desert production heartland (the three other Western Desert blocks offered were in more remote locations). It is also close to finalizing a $150mn World Bank credit guarantee which is contingent on the long term expansion of its Egyptian operations.

Apache Chairman and CEO G Steven Farris, speaking at Apache�s Investors� Day last month, sought to reassure investors concerned at Apache�s exposure to apparent Egyptian instability:Egypt was �not like Syria, it�s not like Afghanistan� Apache is going to be there for a long time. We continue to grow our production there.� To ease investor apprehensions over recent Egyptian political developments he stressed that President Muhammad Mursi �graduated from USC [University of Southern California, PhD in Engineering, 1982] and his kids are US citizens� (Mr Farris was speaking shortly before Dr Mursi�s election).

Unlike many other, particularly smaller, foreign companies who have been being paid late for oil production (and/or less than their due) Mr Farris added that �we continue to get paid�we really haven't had a hiccup�. Larger producers of crude in Egypt, who market their own output, have generally been able to retain the proceeds from sales of their share of production. This has included other major players such as BP and Eni as well as Apache. But smaller players whose output is marketed by state firm EGPC have seen much less in the way of payments (MEES, 2 July), although an in-country presence and a well-connected local representative can make a big difference, MEES understands.

Production Edges Up; Relative Importance Down

Apache is Egypt�s largest single crude producer with 220,000 b/d gross output (around 30% of Egypt�s total). And gross gas production of 870mn cfd makes it Egypt�s second largest gas producer after Eni. Apache forecasts that its Egyptian production will edge up over the coming years but that, with production elsewhere (particularly the US) rising more quickly, Egypt�s share of the company�s output will continue its recent slide. Egypt�s share has fallen to 20% from 30% three years ago and is forecast by Apache to fall further to 15% by 2016 (see Table 1). Apache is keen to stress that this slide in Egypt�s relative importance is largely due to the good fortune of a string of US onshore discoveries rather than any wish to pull back from Egypt. �Although Egypt is going to grow, it�s going to become less and less part of our portfolio� This wasn�t on purpose, it is just the [project] inventory that we have in front of us,� Mr Farris says.

Table 1: Apache Egypt 1Q12 Figures

Source : Apache, MEES calculations.

Although Apache forecasts 1% annual average growth in its Egyptian production over 2011-16 (on a barrels of oil equivalent [boe] basis) this is sharply down on 12% annual average growth for 2002-11 when the company�s gross Egyptian output soared from 100,000 boe/d to 360,000 boe/d. In addition, predictions of a modest 10,000 boe/d rise over 2011-16 obscure the fact that Apache expects its net output to dip to 161,000-162,000 boe/d for 2012 and 2013 (from 165,000 boe/d for 2011). Output is slated to rebound strongly in 2014 and 2015 boosted by a hike in Apache�s Western Desert gas output with the start of production from the Hydra field and (in 2014) a major compression project at Apache�s key Qasr field. Delayed permit approvals have led Apache to scale back earlier forecasts: a year ago the company envisaged hiking production by 100,000 b/d by 2015.

The easing of Apache�s net (though not gross) Egyptian output since early 2011 is due largely to the terms of its Egyptian production sharing contracts, which have led the company�s share of production to fall as oil prices have risen (see Figure 1). Prices realized for Apache�s Egyptian crude sales are up 15% over the same period. But the $25/B fall in Brent-linked crude prices since their March peak is likely to see Apache�s net production rebound for the second quarter even without any change in wellhead output. Apache, as with other North American firms active in North Africa, has been keen to tout the proportion of its production that is Brent-linked and thus enjoying buoyant prices compared to domestic US grades (and even more depressed US gas prices). Fully 65% of the company�s first quarter revenue was Brent-linked, despite such output accounting for only 30% of production (Egypt 20%, North Sea 10%). Apache�s average realized Egyptian gas prices of $3.79/1,000 cu ft for the first quarter 2012 were down 15% on 1Q11.

Figure 1: Apache Egyptian Production 2009-12

 Source : Apache, MEES calculations.

Expansion Plans

Even though Apache�s plans to increase its net Egyptian production are relatively modest, a high rate of decline at existing fields (typically around 10% a year in Apache�s Western Desert production heartland) means that even maintaining existing production requites a stream of new projects and investment.

Boosted by a recent string of permit approvals (MEES, 2 April), Apache has  been adding rigs to its Egyptian drilling operations, raising 2012 drilling plans to 280 wells from 27 rigs, up from earlier plans for 250 wells from 25 rigs (MEES, 27 February). Egyptian capital expenditure for the first quarter 2012 was $250mn, up 10% on the fourth quarter 2011.  The additional wells will be development wells with the number of planned exploration wells roughly level with the 70 planned earlier in the year.

Hydra Boost

The key production boost for 2013 will come from the $126mn development of the 272bn cu ft Hydra wet gas field. Development was stalled for five years before Apache early this year reached terms with the Egyptian authorities on a gas sales deal. Infrastructure work has already begun with the 11,800 boe/d field set to come on stream in early 2013.

The $340mn Qasr gas compression project is Apache�s largest Western Desert (and Egyptian) infrastructure investment and, along with Hydra, one of the company�s 12 largest projects worldwide over the next five years. A final investment decision is due imminently following Foster Wheeler�s completion of front end engineering at the end of 2011. Start-up is slated for September 2014, with delayed approvals pushing back the date from the earlier planned 2011 or 2012. Apache says the project will provide a production boost of 12,000 boe/d (as with Hydra output will be �mostly gas but with significant liquids and condensate,� says Apache�s Egypt manager Tom Voytovich) but the project is essentially defensive � aimed at maintaining production at the mature 2.5 tcf Qasr wet gas field � Apache�s largest ever discovery � through the raising of reservoir pressure from 30 to 120 bars.

Since production began in 2005, Qasr has been �the backbone of our Western Desert [gas] production,� Apache President Rod Eichler says. Current production of around 670mn cfd of gas (77% of Apache�s gross Egyptian gas production) is delivered to both Apache�s Salam processing plant and Shell�s Obayed facility to the north. Qasr also produces around 30,000 b/d of condensate.

Bidding Bonus

Longer-term Apache is looking to bolster its Egyptian production with the addition of new acreage � including the six blocks for which it bid in EGPC�s latest licensing round, which closed in April (MEES, 4 June).Apache is looking to create synergies with existing production: all four of the Western Desert blocks for which Apache bid either abut or are within a few kilometers of the company�s existing production facilities.

One of the blocks � North Matruh � consists of acreage in part previously relinquished by Apache (see Table 2). Apache is not the only company to have re-bid for acreage it previously gave up. Shell is a former concession holder on all three of the blocks on which it bid, all of which are Western Desert blocks for which Apache also tabled offers (see table below). All three of the Eastern Desert blocks for which TransGlobe has bid were formerly operated by Dublin International, which the Canadian firm bought in 2008 �the bid round�s Northwest Gharib Onshore block is largely the previously-relinquished portion of TransGlobe�s 12,000 b/d West Gharib block (see below and MEES, 7 May).

The other two blocks for which Apache bid are Gulf of Suez acreage abutting its existing East Ras Budrun (onshore) block, offering up the possibility of a new Egyptian production base. A September 2007 Apache exploration well tested at 1,900 b/d of extra-heavy 17� API crude. Apache took its ownership of the block to 100% last July with the $1.1mn purchase of the 25% stake of former minority partner Regal Petroleum.

Table 2: 2011-12 EGPC Licensing Round Bidders

*Wells drilled on area corresponding to current block. Extent of previous blocks does not necessarily coincide.

**Dublin was bought by TransGlobe in 2008.

BP Purchase

For all Apache�s efforts to maintain (and expand) its heartland production, the company�s Egyptian output would have fallen over the past two years were it not for the 10,000 b/d and 50mn cfd boost achieved from acreage acquired from BP for $650mn in November 2010 (see Figure 2). Gas output � all of which is from the Abu Gharadig development lease � has more than doubled to 90mn cfd whilst crude production there has stabilized at around 30,000 b/d having peaked at 34,000 b/d late last year.

Figure 2: Apache Production From Former BP Egyptian Acreage

Source : Apache.

These blocks will remain a key focus of the company�s continued expansion. �We�ve drilled forty-something wells on this acreage with only one dry hole. We�ve extended several of these fields and found deeper reservoir pays. And we�ve yet to really apply the new seismic that we�ve acquired in the last year. There�s a lot of low-hanging fruit to be developed in these assets,� Mr Eichler told an investors� conference call in late May. Work underway includes waterflood development at the 12,000 b/d Razzak field.

Funding Guarantee

The four development and one exploration license in the Abu Gharadig basin that that Apache acquired from BP are the focus of an application from the US government�s Overseas Private Investment Corporation (OPIC) to the World Bank�s MIGA for $150mn of reinsurance relating to Apache�s operations in Egypt. The coverage which was �requested and was not available from private insurers� is contingent on Apache �expanding operations� in Egypt, according to MIGA. Coverage would be for the next 13 years �against the risks of expropriation and breach of contract.� OPIC, which helps finance US firms� investments in emerging markets, has been providing coverage to Apache�s Egyptian investments since 2004. A decision is imminent.

The latest request �not only signals [Apache�s] intention to stay in Egypt but to expand operations,� MIGA says. This forms part of �MIGA�s efforts to mobilize $1bn in insurance capacity to support foreign direct investment into the Middle East and North Africa,� MIGA adds in its detailed review of the OPIC/Apache application. The latest reinsurance comes on top of $3mn Apache raised through an April bond placement. Of this $400mn (at 1.75%) is due in 2017, $1.1bn (at 3.25%) in 2022 and $1.5bn (at 4.75%) in 2043. The bulk of funds will be used for �general corporate purposes� as well as completion of a US-based acquisition.

© Copyright MEES 2012.