Algerian Gas Set For Boost From 3.7 BCM/Y Petroceltic Development

Algerian Gas Set For Boost From 3.7 BCM/Y Petroceltic Development

Algeria is close to its biggest upstream project approval this year as negotiations between Irish independent Petroceltic and state firm Sonatrach over the 3.7 bcm/year development of the 2.2 tcf �Ain Tsila discovery approach their climax. A final investment decision is expected later this year, with first production from the Isarene permit in Algeria�s prolific Illizi Basin slated for 2017, James Cockayne writes.

Negotiations between Petroceltic, its Italian partner Enel, and Algerian state firm Sonatrach over the details of the declaration of commerciality are at a �very advanced stage,� Petroceltic says, and are set for conclusion by 10 August. This deadline was twice put back (from 25 April and then from 24 July) as the counterparties sought to hammer out the details of gas sales and marketing agreement.

The development plan envisages a 14-year, 355mn cfd (3.7 bcm/y) production plateau of wet gas from total �saleable� reserves of 2.2 trillion cu ft gas and 180mn barrels of liquids. Condensate and LPG production will each be around 15,000 b/d. Petroceltic says there is considerable upside to these projections, given an estimated 10.3 tcf of gas in place. Production will likely be tied into the Algerian gas network via the Total-operated 5.5 bcm/y Tin Fouye Tabankort (TFT) field around 80km to the north (see map).

Petrocelticsays that its draft plan, originally submitted in January, has now been �substantially agreed� and that �very significant progress has also been made towards�the principal terms of the associated gas sales agreement.� All gas will be sold to Sonatrach at a Brent-related price at the edge of the field perimeter, with Sonatrach bearing all subsequent transport costs, MEES understands. However, as has often been the case in recent years, the foreign partners will retain marketing rights for their share of liquids production � although the most likely option in practice is that liquids will be marketed by Sonatrach on behalf of Petroceltic in� return for the payment of a small fee.

After last year bringing on board Italian power firm Enel � the second largest end-user of Algerian gas � it had looked for a time that Petroceltic and its Italian partner might have been able to secure greater control of gas marketing. Algeria has indicated in recent months that it is prepared to be increasingly flexible with contract terms in order to attract foreign investment required to boost the country�s oil and gas production (MEES, 14 May).

Final approval of the agreement from the Algerian authorities and a final investment decision (FID) from Petroceltic and its partners are expected before the year-end. In addition to approval of the development plan Petroceltic says that a positive FID is dependent on an ongoing �gas sales feasibility study� concluding that development will be profitable. Front end engineering and design (FEED) is slated for 2013 with construction set to begin in 2014.

Second Farm-Out Planned

Petrocelticplans to sell a further stake in the project in order to fund its share of $1.5bn expected capital expenditure to first gas, a massive amount for a company whose market capitalization is $290mn. Negotiations for a second farm-out have proceeded in parallel with the commerciality proceedings; Petroceltic expects to finalize a sale this year following which it anticipates being responsible for 38% of development costs. Development drilling will begin in 2015 with a total of 20 wells planned, leading up to first gas in 2017 � from when development will be self-financing. Some 150 development wells are planned over the field�s lifetime.

Analysts Peel Hunt note in a recent report that �Petroceltic will require significant additional funds in order to maintain its development strategy� and that a second farm-out �has the potential to remove funding uncertainty from the project�s development.�It adds that with 2011�s six-well appraisal drilling program having almost doubled mid �gas in place� estimates to over 10 tcf since the Enel deal was struck, a second sale is likely to place a higher value on 'Ain Tsila, and thus Petroceltic itself given that the Algerian field is by far its largest proved asset.

End-User Attraction

Petrocelticsays that having Enel on board has been of great benefit both in terms of the Italian firm�s close relationship with Sonatrach and its position as a key purchaser of Algerian gas. Italy is the key export market for Algerian gas, with Enel the country�s largest end-user. �Enel�s unparalleled knowledge of European gas markets combined with its historic relationship with Sonatrach makes it an ideal partner� The expertise and knowledge that Enel brings has already greatly enhanced Petroceltic�s understanding of and access to the European market for Isarene gas,� the Irish company says. Enel has a stake in the 33 bcm/y TransMed pipeline linking Algeria with Italy via Tunisia as well as the planned 8 bcm/y Algeria-Italy Galsi pipeline, although the latter now appears unlikely to go ahead (MEES, 11 June).

Enelpaid Petroceltic an initial $100.6mn for a 18.375% stake in the Isarene permit, which comprises Blocks 228 and 229a (although the deal was struck in April 2011 payment was not received until February this year, leaving Petroceltic struggling to raise the funds for last year�s appraisal drilling). Petroceltic retains 56.625%, whilst Sonatrach has 25%. Enel will make an additional payment of around $25mn upon approval of the declaration of commerciality, with the exact amount dependent on the declaration�s official figure for recoverable reserves. Enel�s purchase price equates to 18.375% of costs for the initial April 2005-April 2010 exploration phase and 49% of 2011�s six-well program.

Algeria�s Gas Infrastructure And Petroceltic�s Isarene Permit