Monday,20 November, 2017
Current issue | Issue 1261, (3 - 9 September 2015)
Monday,20 November, 2017
Issue 1261, (3 - 9 September 2015)

Ahram Weekly

Energising the economy

Eni’s gas discovery makes Egypt’s medium-term energy outlook more than rosy, writes Sherine Abdel-Razek 

Gaz
Gaz
Al-Ahram Weekly

“Super giant” is how oil experts describe Eni’s discovery of gas off the Egyptian coast. The deep-water Mediterranean field has 30 trillion cubic feet of gas, accounting for half of Egypt’s proven gas reserves, equivalent to 5.5 billion barrels of oil.

“The field is clearly very large. It is the largest found in the Mediterranean though there are some larger fields in the Gulf,” Robin Mills, an energy analyst at Manaar Energy Consulting in Dubai, told Al-Ahram Weekly.

It is estimated that when developed, the field will produce seven million cubic feet per day, a major boost to current production of four million. And within five years, says Eni, daily production could reach 11 million cubic feet. Indeed, the field is so large, it all but eliminates fears of energy shortages in the medium term.

“It will be sufficient to cover Egypt’s consumption until 2020, even when population growth is factored in and the growing demand on electricity — mainly generated by gas fuelled stations — from the industrial sector,” says Ibrahim Zahran, an energy expert.

The benefits, though, will not be immediate. The discovery will not have an impact on LNG import deals already agreed with trading companies. Egypt will still need to import about one-quarter of its gas requirements for the next two-three years.

But the find is likely to impact on controversial supplies from Israel, says David Butter, MENA analyst at Chatham House think tank. Any deal with Israeli companies to export gas from the Tamar field through the same pipeline Egypt used to send its own gas to Tel Aviv, and the possibility of processing Leviathan gas through the Dike gas liquefying plant “now look very doubtful”.

Development of the Leviathan field, estimated to contain 21.9 trillion cubic feet of natural gas earmarked for export, has been stalled while the Israeli government attempts to reformulate its energy policy.

“The giant gas field discovery in Egypt is a painful reminder that while Israel has been sleep walking and delaying the final approval of the gas outline, holding up further exploration, the world is changing in front of our eyes,” Israeli Energy Minister Yuval Steinitz said on Sunday, the day on which shares in Israeli oil companies nosedived on the back of news of the Egyptian discovery.

While the yields after development are expected to generate $5 billion annually, the depth of the discovery, at 1,450 metres, will make the operating costs high, says Hani Geneina, senior economist at Pharos Holding. Fields up to 400m in depth are classified as shallow, up to 1,500m as deep-water, and deeper than 1,500m as ultra deep-water.

Butter agrees with Geneina, saying that while EGAS, Eni’s state-owned local partner, estimates first phase development costs at $7 billion the final cost could be more.

“Being in deep water and more than 100km from the coast will add to the expense,” he says. “There is some existing infrastructure closer to the Egyptian coast, much of it operated by Eni, either on its own or in partnership with British Petroleum, which could allow for some saving.”

Eni is open to selling a stake in the gas field to secure the funds needed for development, Claudio Descalzi, the company’s chief executive officer, told the Italian daily Republica on Monday.

Last year Eni was the first oil major to cut its dividends after the plunge in global oil prices. It has already sold part of a major gas discovery in Mozambique and is seeking to sell another 15 per cent.

Eni has been working in Egypt since 1954. In June it signed an energy exploration deal with Egypt worth $2 billion, allowing the company to explore in Sinai, the Gulf of Suez, the Mediterranean and areas in the Nile Delta. In July Egypt raised the prices it pays Eni for the natural gas it produces.

While the end pricing of the newly found gas is unknown, experts believe Egypt will receive its share for free and buy that of its foreign partner for around $5-6 per Million British Thermal Units (MBTU), depending on the terms of the concession agreement.

Stable gas prices will help companies which have halted production due to gas shortages.  

“Several listed industrial firms have suspended part or all of their capacity expansion plans due to political and economic risks, including the risk of natural gas shortages. Accordingly, we expect significant capacity expansion plans to be revived over the coming 6-12 months and expect foreign direct investment to recover sharply in sync.” wrote Geneina in a research note.  

The market reacted positively to news of the discovery. According to Bloomberg the 2.8 per cent the EGX30 index gained on Monday was the highest in the international market, a sign that investors were optimistic the discovery will end domestic supply shortages and earn Egypt billions of dollars in export revenues.

Descalzi told Republica that part of the output from the Egyptian field could be shipped to Italy or other destinations as liquefied natural gas.

Eni is a partner in a plant at Damietta that chills gas until it transforms into a liquid so that it can be loaded onto vessels and transported to buyers not connected by pipelines. Recently the facility has not been operating because of a lack of gas, said Descalzi.

Egypt has virtually suspended its natural gas exports since 2014 due to acute supply shortages and diversion of production to power stations. Indeed, in 2015, Egypt became a net importer.

The energy sector has struggled in recent years with natural gas output declining by 20 per cent from its peak amid a volatile political situation.

Delays in paying arrears to foreign explorers made the later reluctant to develop new fields, adding to the supply problem, while a generous subsidy programme encouraged domestic consumption.

To correct this, the government has introduced an energy sector restructuring programme that includes cutting subsidies, expanding investments in renewable energy together and moving forward with a nuclear programme.

The new discovery should not slow these efforts, says Zahran. The government must go on with the necessary restructuring of the energy sector.

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