Post-Zohr reforms to boost appeal

EgyptWith first production from Eni’s giant discovery likely to be less than a year away and other finds on the path to development, the country is taking the chance to revamp and streamline the bidding process.

Egypt’s upstream sector was given a much-­needed boost when Italian operator Eni discovered the ­giant Zohr field in the summer of 2015.

With first production from Zohr now likely to be less than a year away and other significant discoveries also on their way to production, there is a much more optimistic view of the country’s potential, despite the economic and political challenges it still faces.

Now, though, with Eni having attracted new investors to Zohr in the form of UK supermajor BP and Russian state-owned giant Rosneft, plus new acreage having been awarded from outstanding rounds, Egypt is pausing its licensing rounds in both the promising gas-prone Mediterranean Sea and the mature oil-bearing onshore areas.

With much acreage already licensed in its existing core plays, the government is taking the opportunity to embark on radical reforms aimed at enhancing the appeal of its energy sector, while streamlining a cumbersome bidding process.

Model Contract

The overhaul involves crafting a revised model contract, speeding up block awards and approvals, cutting red tape and setting up an independent regulatory body.

The reforms are being carried out in consultation with international oil companies.

As a result, state-owned Egyptian Natural Gas Holding Company (EGAS), which oversees the offshore sector, and the onshore-focused Egyptian General Petrol­eum Corporation (EGPC) are delaying their next planned rounds until 2018 at the earliest.

“We will be asking oil companies what obstacles they have been facing in the process, from the launch of bid rounds until we sign concession agreements with them.

“We intend to shorten the award process and remove obstacles faced by the investors,” senior EGPC executive Nasser El Waly tells Upstream.

“The modernisation (reform drive) is a strategy the Ministry of Petroleum has initiated to transform the sector from the current phase to become a modern one and lead Egypt to become a regional energy hub in the coming few years,” he explains.

One of the main features of the reforms will be the unveiling of a revised model agreement, expected to be in place by the end of the year.

“We will try to remove areas of concern and confusion in the revised version, and take into consideration investors’ suggestions about issues such as cost recovery,” says an official of the Oil Ministry in Cairo.

“We are determined to make the revised version more attractive. However, our existing production sharing agreements are already attractive, with few complaints from oil companies.

“Problems, though, relate to the implementation of the new model agreements and not their nature.

“Most people agree that our production sharing agreements are reasonable, but they complain about the implementation.”

The aim is to fast-track new block awards by taking steps to speed up the time taken to secure the parliamentary approval that is required before concession agreements become officially binding.

The parliamentary approval process is usually a cumbersome bureaucratic hurdle in Egypt, with companies having to wait more than a year before getting the endorsement of blocks they secure in bid rounds.

New Agreements

Oil Ministry officials say the overhaul of the oil and gas sector will also see an increase in new agreements based on BP’s deal to develop the high-profile West Nile Delta (WND) project, which covers the North Alexandria and West Mediterranean Deep-Water concessions.

“Because of the challenging nature of North Alexandria, that lies in deep waters and requires cutting-edge drilling technology, BP and EGPC agreed on a hybrid model agreement before agreeing to develop the area,” says another senior Oil Ministry official. The North Alexandria formula can therefore be expanded to include frontier ­areas with similar geological characteristics, including the northern part of the Red Sea, where water depths are challenging.

Operators would commit to invest whatever they deem appropriate, and then sell the gas they produce to the government at a price that will allow them to recoup their investment and also make a profit.

The entire reform process may take three years or more to complete, though state-owned companies including EGAS and EGPC are expected to come up with certain aspects of the revised model agreement and other incentives aimed at luring international players to their planned bid rounds.

Both EGAS and EGPC are now planning their next licensing rounds while working to reform the petroleum sector on instructions from the Oil Ministry.

Oil Minister Tarek El Molla told Upstream in late January that EGAS could launch its next bid round next year, hoping that the Zohr discovery will act as a catalyst to inject further vigour into deep-water exploration.

Seismic Data

The next EGAS round is expected to include acreage off the Western Desert, covering an 80,000-square kilometre frontier zone.

About 7380 kilometres of 2D seismic data acquired by Petroleum Geo-Services will underpin the offering, along with about 10,000 kilometres of re-­processed legacy 2D seismic.

Although undrilled, the area being opened up has the potential to host western extensions of the prolific Nile Delta gas trend and, in the Herodotus basin, the new carbonate play established by Eni’s 30 trillion cubic foot Zohr find.

Before the Zohr find and the BP deal on WND, investment in Egypt’s Mediterranean waters had been suffering following the 2011 revolution and the dislocation that followed. This caused severe payment problems for the industry and forced the country to halt all gas exports to help feed galloping domestic consumption.

However, the Zohr success, the planned reforms and Egypt’s willingness to offer attractive gas prices to investors are part of a picture that has helped encourage significant new investment that in the coming years will lead to an upsurge in domestic production, particularly of natural gas.

(Source: Upstream Online)

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