Seeking Alpha: Apache's Big Egyptian Presence
- Going over Apache Corporation’s joint venture with Sinopec in Egypt.
- New concessions and high-quality 3D seismic mapping services could unlock new oilfields to develop in the Western Desert.
- Egypt is a major part of Apache Corporation’s asset base, even though it doesn’t get mentioned that often.
Apache Corporation has shifted most of its capital expenditures to its onshore unconventional plays in America, namely its Delaware Basin and Midland Basin operations within the Permian Basin. What doesn’t get reported on that often is its sizable conventional upstream operations in Egypt, which covers a vast expanse of land across the Western Desert. Let’s dig in.
Back in 2013, China’s Sinopec, otherwise known as China Petroleum & Chemical Corporation, paid Apache Corporation $3.1 billion for a 33% stake in this asset. Officially, the joint venture is between Apache’s Egyptian division and Sinopec International Petroleum Exploration & Production Corporation.
This purchase came on the heels of several major power struggles within the country, including the overthrow of then-president Mohamed Morsi by the military which happened earlier that year. That coup was led by current-President Abdel Fattah el-Sisi, who just recently won a second term with roughly 97% of the vote. While not a major focus of this article, there is probably a geopolitical angle to this purchase by a Chinese oil giant. Apache has been operating in Egypt for over two decades, giving China a quality firm to partner up within the North African nation.
Apache’s asset overview
In 2017, Apache Corporation posted $2.307 billion in revenue from its Egyptian operations, which represented 39.2% of its total revenue for that year. Apache’s Egyptian operations made up 27% of its 2017 production base after taking into account Sinopec’s 33% stake in the business, and at year’s-end represented 15% of its estimated proved reserves.
On average last year, Apache’s Egyptian unit produced around 160,000 BOE/d (I’m assuming that is a gross figure), 60% of which was oil and the rest was primarily dry natural gas. Natural gas liquids represented a tiny portion of that output. The Apache-led venture conducts its business through production sharing contracts (abbreviated PSCs) with the Egyptian government.
Oil & gas is produced across 5.6 million gross acres that cover 25 concessions, a position that grew by 1.6 million net undeveloped acres after Apache received final approval for the Northwest Razzak and South Alam El Shawish concession blocks last year. 69% of Apache’s Egyptian acreage is undeveloped, offering up a ton of conventional exploration opportunities. It isn’t clear why Apache refers to its total concession holdings as a gross figure but used a net figure when talking about its recent concession additions. I’m assuming Sinopec has a 33% minority stake in that exploration upside as there is no reason not to.
According to Energy Egypt, Apache paid a signing bonus of $30 million and committed to investing at least $60.6 million to developing the 4,764 square kilometer NW Razzak concession (referred to as Block 6). That deal included a commitment to drill at least 10 exploration wells on Block 6. Apache also agreed to pay a signing bonus of $10 million to gain the South Alam El Shawish concession, which included committing to investing at least $12 million developing the 1,591.5 square kilometer block. The firm agreed to drill at least four exploration wells on what is known as Block 7. This information is sourced from Egypt’s Ministry of Petroleum, and both blocks are in the Western Desert.
The concessions currently in force will last for 4 to 20 years, with the ability to renew those leases depending on the venture’s exploration success and/or willingness to want to continue those leases via negations. As Apache and Sinopec have an enormous amount of acreage to explore and appraise in Egypt, future exploration successes are quite likely. Out of the 27 exploration wells Apache drilled in 2017, 52% were successful. The venture drilled 67 development wells last year to help maintain a flat production base. It is here I will note that it would take several major discoveries to revive production growth; the real goal is to maintain this cash flow cow for years to come.
Conventional exploration efforts rely heavily on 3D seismic mapping. Apache launched “high-resolution 3D seismic surveys” in September 2017 in the West Kalabsha concession. The venture is looking for a hydrocarbon pay in “multiple pay horizons in the Cretaceous, Jurassic, and deeper Paleozoic formations.” What makes that 3D survey particularly noteworthy is that it is the “first of its kind in the Western Desert.” By February 2018, Apache had received 2,000 square kilometers of high-quality seismic data from CGG and Ardiseis that covered the West Kalabsha concession, which should help cut down on future development costs as well as possibly locate new oilfields to develop.
Apache first won the West Kalabsha concession in 2004 and had discovered at least 19 oilfields across the position since then (as of 2014), according to the Oil & Gas Journal. Those fields were producing around 55,000 gross barrels of oil per day back in 2014. By utilizing this new seismic survey, which is two-to-three times as dense as past seismic surveys (meaning a lot more information is being captured, giving the venture a much better idea of the reservoir quality of potential new plays), Apache aims to unlock new resources across a tried-and-true area.
Oil production is sold for domestic use to Egyptian General Petroleum Corporation, abbreviated EGPC, or exported to foreign markets. The Apache-led venture receives a competitive market rate regardless of where the crude is sold.
Natural gas, particularly methane, is sold entirely to EGPC at a minimum price of $1.50 USD per million British Thermal Units and a maximum price of $2.65 per MMBtu, with an “upward adjustment for liquids content.” Apache’s 2017 10-K noted “the region averaged $2.80 per Mcf in 2017 (in regards to gas realizations).” The contracts are linked to Brent, which materially behooves Apache and Sinopec as that helps keep the venture’s gas realizations at the higher end of that range.
Apache Corporation and Sinopec don’t mention their Egyptian holdings all that much, but that shouldn’t be taken to mean these operations aren’t very lucrative. Due to the ability to sell conventionally produced oil at prices close to Brent, either domestically or abroad, and the relatively favorable gas marketing terms all else considered, this asset is a solid cash flow cow and should be quite profitable as things stand today. Its Egyptian operations played a key role in helping Apache Corporation get through the downturn.
By Callum Turcan
(Source: Seeking Alpha)