As a new bid round approaches, many upstream firms still see Egypt as a good place to invest, despite governments late payment of revenues

Shell and Athens-based upstream firm Vegas Oil and Gas are set to boost production at two concessions in Egypt one jointly owned by up to a combined potential increase of 35,500 b/d of oil.

A consortium led by Vegas is evaluating using water injection to increase oil output from its Northwest Gemsa concession in the Gulf of Suez. It expects to boost production to 12,000-15,000 b/d from the current 9,500 b/d output, Vegas CEO Mike Earle tells MEES.

The NW Gemsa concession covers an area of 260 sq km and is situated 300km southeast of Cairo in the Gulf of Suez basin. Vegas, which owns a 50% stake, is carrying out field appraisal and development in conjunction with its partners, Irelands Circle Oil (40%) and Canadas Sea Dragon Energy (10%). Circle Oil said on 13 September that the al-Ola-1 well was oil-bearing with no sign of oil-water contact. The well also gave strong indications of gas in a deeper interval that was a secondary target.

Current NW Gemsa production comes from two reservoirs in the al-Amir Southeast and Geyad fields. On al-Amir SE, the consortium announced that it successfully tested a fifth appraisal well that is producing at 1,100 b/d. Subject to state owned Egypt Gas Petroleum Company (EGPC) approval, Vegas will implement a full field development plan in 2011. The consortium has invested almost $100mn in exploration, appraisal and development. The commercial feasibility of producing gas is being reviewed and any gas production would require additional investment.

In the Western Desert, the Shell-led Alam el-Shawish West concession produced first gas in July (MEES 5 July). Production will ramp up to 200mn cfd of gas and 30,000 b/d of condensate by 2013, MEES understands. Shell took over as operator on 13 February and its full field development plan is still at blueprint stage, and is expected to be finalized by the year-end. The total investment to date has been $400mn, mainly on seismic data and 25 wells. A future investment of perhaps $600mn will be needed for development and operating costs, including injection wells and facilities. Vegas, which formerly operated the concession, sold 20% to Shell earlier this year while retaining a 35% working interest. Shell holds 40% and GDF Suez holds 25%. There are existing oil and gas discoveries in the concession with plans in place to boost production.

Vegass business model to date has been to obtain exploration concessions through bid rounds and farm out after hydrocarbons are proved through exploration drilling. Vegas won the 100% East Ghazalat concession in 2007 after a bid round. It covers an area of 858 sq km in the Western Desert. Vegas is now the operator with 50% participating interest, having farmed out a 50% working interest to Trans-Globe in February this year. A 450 sq km 3D seismic program was completed in 2008, and Vegas has this year drilled four exploration wells and made two discoveries. Further drilling in 2010 is required to evaluate the reservoir performance and reserves potential of this area. The consortium will have spent $20mn by year-end.

Attractive For E&P

The investment environment in Egypt remains attractive for E&P companies. The evidence for this is that new players are still trying to enter the country, Mr Earle tells MEES. Vegas has been approached several times this year to see if it has anything to farm out or sell. The fundamentals in Egypt are attractive, though there is a consideration that EGPC is behind on its payments to oil companies for their share of revenue under the production sharing agreements, Mr Earle said. Small exploration and production companies aim to reinvest oil revenues directly back into the country, and some of Vegass joint venture partners are having to restrict their investment in Egypt because of the late payments. Nonetheless, Vegas is keen to sustain its investment in Egypt and is actively seeking new opportunities, he said.

Payment is delayed by three-six months, causing problems for companies that borrow money to invest in production, especially those that are ramping up output - the amount owed grows in proportion. Sea Dragon Energy CEO Said Arrata tells MEES: This is the cost of doing business. We factor in late payment into cash flow. Sea Dragon also jointly operates Kom Ombo Block on a 50:50 basis with UAE-based Dana Gas Egypt, and plans to boost output from 700 b/d to 2,000 b/d by year end.

Next Bidding Round

Bidders for the next round of blocks to go to auction which MEES understands will be early next year will take late payment into account when they make offers. In 2009 Cairo was disappointed to award only three Mediterranean blocks out of 12 (MEES, 9 March 2009). The bidding was affected by the financial crisis and lower oil prices. Egypt has since looked at auctioning three eastern desert blocks and eight Gulf of Suez concessions. The next bidding round is likely to see some of these blocks repackaged and offered again. Following the BP Gulf of Mexico disaster Cairo is rethinking any future Red Sea deep water exploration, as its tourism industry would be hit hard by any leaks.

In 2008-09 Egypt received $5.3bn in foreign direct investment (FDI) in its hydrocarbon sector, and expected a further $2.2bn FDI from eight upstream gas developments in 2009-10 (MEES, 21 September 2009).

In addition to auctioning more blocks Egypts petroleum ministry will start production from 12 natural gas fields in 2010-11 in order to meet growing demand, the daily Asharq al-Awsat reported on 15 September. The plan will boost output to 6.7bn cfd. Average production of sales gas rose 9% in the past three years to about 5.8bn cfd, the paper said citing a report by state-owned Egyptian Natural Gas Holding Company (EGAS).

Copyright MEES 2010.