22 July 2005

Analysis

BEIRUT: Just a few years ago pessimists laughed off Egypt's ambition to become a credible liquefied natural gas (LNG) exporter, arguing the country did not have the gas reserves potential to lure foreign players to costly deep-water exploration acreage in the Mediterranean Sea. That perception has, of course, changed rapidly with super majors such as British Petroleum (BP) and Shell setting their sights on adding new liquefaction trains to the country's two existing LNG plants.

Executives say it is only a matter of time before more export trains are built along Egypt's Mediterranean coast as a new wave of exploration drilling gets under way in a bid to unearth the gas treasures of the area.

"Remember that exploration in the Nile Delta started only a few years ago. There is a lot of upside potential," explained BG Egypt president Oscar Prieto. "It is a matter of time before we all prove more reserves. The gas industry has a bright future in Egypt."

Prieto, though, cautioned: "On the other hand, Egypt is not Qatar, which has almost infinite reserves."

Egypt's proven gas reserves are now estimated at about 65 trillion cubic feet (Tcf). Cairo is hoping to double that figure through exploration and new licensing rounds based on the prolific Nile Delta.

Shell has high hopes for its promising North East Mediterranean Deepwater (Nemed) concession where it is embarking on a fresh drilling campaign aimed at finding commercial quantities of gas. Shell has sounded out the Egyptian government on building its own LNG plant.

Shell Egypt boss Iman Hill says the super major raised the issue of such a separate plant with Oil Minister Sameh Fahmy. "We did discuss the possibility of a Shell greenfield LNG plant."

Hill, however, says Shell would first look at using spare capacity at two existing facilities.

"You have to look at it as a staged approach. You have got to think about the volumes you have," Hill said, adding the development of a new LNG plant would only follow if drilling activities in the Nile Delta led to the discovery of significant commercial quantities of gas.

BP's plans for an LNG outlet in Egypt are more advanced than those of its rival even though the company has opted to add to production at the Eni-led Damietta liquefaction plant near Alexandria rather than build its own scheme from scratch.

BP is teaming up with Eni and Egyptian Natural Gas Holding Company (Egas) to double capacity at Damietta to 10 million tons per annum (tpa) by adding a new liquefaction train. The trio signed a memorandum of understanding in March to secure 5.3 Tcf of gas to feed the new train over 20 years.

The expansion will give BP a chance to get on the LNG bandwagon in the Middle East where rivals ExxonMobil, Shell and Total are emerging as significant players by ploughing billions of dollars into projects in Qatar, Oman and Yemen.

The first Damietta train began production in December. It is operated by Segas and owned by Eni, Spain's Union Fenosa, Egas and Egyptian General Petroleum Corporation. BP officials say the company has proven gas reserves of 9 Tcf in Egypt, enough to merit the construction of a separate LNG plant, but it sees the existing facilities as offering a faster route to export markets.

Apart from Damietta, Britain's BG and partners began production from their own LNG plant at the nearby port of Ikdu in the second quarter of this year. A similar train with capacity of 3.6 million tpa is scheduled to go on-stream later this year, further boosting Egypt's LNG production.

The Idku site has space for four more trains of similar sizes but new gas reserves are needed to move ahead with expansion.

Natural gas has become the shining star of Egypt's economy in recent years with output soaring by 150 percent over the past decade.

That growth is set to continue at a nimble pace as companies such as Apache, BP, Eni and Burlington Resources implement gas development projects both onshore in the Western Desert and offshore in the Nile Delta.

Domestic gas use has grown in tandem with production thanks to rising demand from power generation and the industrial sector. Home consumption is projected to rise by up to 7 percent per annum in coming years.

This is a slowdown from an annual growth rate of 15 percent in recent years, fueled by the needs of power generating companies encouraged to switch to gas.

As domestic demand slackens the key driver behind Egypt's accelerating exploration pace is to add new reserves to sustain the growth of its successful LNG export industry. Cairo is determined to cash in on rising global demand at a time when its oil production is in decline.

The country has added an average of 5 Tcf of new gas reserves every year over the past decade. Company executives in Cairo are banking on the trend continuing with the new wave of deep-water exploration, helping Egypt to achieve its dream of 120 Tcf of proven reserves.

Egas, which oversees the gas industry, is determined to keep the exploration ball rolling both through the award of new acreage and holding fresh licensing rounds.

Foreign companies say Egas would lure more foreign investment if it moved to streamline the bureaucratic process involved in licensing rounds. It sometimes takes up to 30 months to finalize an exploration contract from the launch of a bid round.