Egypt's 2 Super-Massive Offshore Natural Gas Developments

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Includes: BP, E
by: Callum Turcan

Summary

Egypt's oil & gas industry has gotten hammered over the past five years due to civil unrest and a lackluster realized pricing regime deterring foreign investment.

Once an energy exporter, Egypt quickly became an energy importer, creating a series of crises in the process.

Massive offshore natural gas finds in the Mediterranean Sea and Nile Delta will help turn that picture around, with BP and Eni leading the way.

By 2020, Egypt aims to stop importing LNG as two massive offshore natural gas developments unlock a potential 40 Tcf+ of recoverable natural gas resources.

As the source of 40% of Africa's dry natural gas demand and 20% of the continent's petroleum demand, Egypt stands to gain a ton from being able to revive its upstream sector. Egypt's oil and gas production took a hit during the 2011 and 2013 uprisings and hasn't recovered since. Shifting from a net exporter to a net importer of energy has put a colossal strain on the nation's finances and foreign reserves, creating several economic crises in the process.

By 2012, Egypt was a net importer of petroleum products and other liquids. Compounding the pain from falling oil production, Egypt's petroleum consumption continued to rise at a steady pace, up 3% annually from 2004 to 2014. In 2014, Egypt produced 708,000 bpd of oil and other liquids, down from its 900,000 bpd peak in the mid-1990s, and below the 775,000 bpd of petroleum products the country consumed in the same year (2014). Declines at mature fields have been somewhat mitigated by the deployment of enhanced oil recovery programs in the 2000s and the expansion of NGLs production, but the trend remains.

Source: EIA

Unlike several of its neighbors, Egypt's oil production doesn't primarily come from super-massive oilfields, like Iraq's Rumalia and Majnoon oilfields or Saudi Arabia's Ghawar oilfield or Kuwait's Burgan oilfield, it comes from a series of small fields that are tied into expansive regional gathering systems. Roughly half of Egypt's crude production comes from the Western Desert, with the rest coming from the Eastern Desert, the Mediterranean Sea, Upper Egypt, Nile Delta, Gulf of Suez, and the Sinai Peninsula.

While a lot of attention has gone to the recent major discoveries of large natural gas reserves in the Nile Delta and the Mediterranean, Egypt has also had some exploration success in the Sinai Peninsula. The Egyptian government has sold off additional exploration blocks in the region over the past few years. That being said, the Sinai Peninsula remains a hotbed for terrorist activities and instability, which will hamper hydrocarbon development until the security situation is brought under control.

On the natural gas front, Egypt was compelled to begin importing liquefied natural gas, or LNG, last year to keep up with consumption. Rolling blackouts amid a major shortage of natural gas forced Egypt to choose between supplying natural gas to residential consumers, who often rely on subsidies, and industrial consumers with much deeper pockets. During the fall of 2015, the supply-demand imbalance was estimated to be around 700 MMcf/d. Torn between supplying heavy industry and running the risk of increased civil unrest, and supplying residential customers at the risk of continued economic malaise, Egypt choose to put residential customers above all else in an attempt to keep the peace.

Below is a look at Egypt's dry gas consumption and production through 2013, when the country pumped out 2 trillion cubic feet and consumed 1.9 Tcf of dry gas, exporting the rest. Today, that picture looks far different.

Source: EIA

That may change after a series of massive natural gas discoveries boosted Egypt's proven gas reserves to 77 Tcf at the beginning of 2015 from 59 Tcf in 2010. There is room for that to keep marching higher as BP (NYSE:BP) and Eni (NYSE:E) move forward on developing their respective finds.

Eni Zohrs

Last year, Eni announced that its Zohr 1X NFW exploration well in the Mediterranean Sea had located a huge natural gas prospect. The Zohr 1X well was drilled to a total depth of 13,553 feet, including through 4,757 feet of water, in the Shorouk Block. Eni owns 100% of the contractor's working interest in the block through its subsidiary IEOC Production.

Eni estimates that the find could hold as much as 30 Tcf of natural gas resources (equal to 5.5 billion BOE) as its Zohr 1X well encountered a 2,067 foot long "hydrocarbon column in a carbonate sequence of Miocene age with excellent reservoir characteristics", equivalent to over 1,300 feet of net pay. The Zohr 2X appraisal well, 1.5 miles southeast of the Zohr 1X well, "encountered 1,614 feet of continuous hydrocarbon column in a carbonate sequence with excellent reservoir characteristics", equivalent to ~1,000 feet of net pay, as it drilled through 4,800 feet of water to reach a total depth of 13,684 feet.

After its initial successes, Eni plans to drill another three wells to further delineate its newfound prospect. Eni also plans to drill a dedicated well to test out the deeper Cretaceous upside in the area, which could further boost its resource potential in the region.

To encourage the development of this massive resource and other discoveries, Egypt changed the rate that it pays foreign producers for natural gas from $2.65/MMBtu to $3.95-$5.88/MMBtu. This prompted Eni to quickly jump on its Zohr discovery and move forward with bringing the massive natural gas field online. By the end of 2017, Eni aims to start producing natural gas from the Zohr field, which will ramp up to roughly 500,000 BOE/d by 2019. In 2015, Eni's net Egyptian output stood at 200,000 BOE/d.

BP and the Nile

Another major player in Egypt, BP, is currently working on a major upstream development of its own with RWE DEA dubbed the West Nile Delta development. BP owns 82.75% of the venture and RWE DEA owns the rest. The first phase entails bringing the Taurus and Libra fields online through nine subsea wells, with production tied-in to Royal Dutch Shell's (NYSE:RDS.A) (NYSE:RDS.B) Burullus facilities. Output from that phase is expected to start-up in 2017 and the project is currently under construction.

In the second phase, the venture will modify the onshore Rosetta plant while building and integrating a new one adjacent to the facility, which will enable the consortium to bring the Giza, Fayoum, and Raven fields online. Production from the first two fields will be tied-back to the Rosetta plant, which BG Group (now owned by Shell) agreed to give the venture operational control of starting in the middle of 2016, while output from the third is connected to the new plant.

The Taurus, Libra, Giza, Fayoum, and Raven fields, located in the offshore North Alexandria and West Mediterranean Deepwater blocks, are estimated to hold a recoverable 5 Tcf of dry gas and 55 million barrels of condensate. At its peak, the West Nile Delta project will pump out 1.2 Bcf/d of natural gas. Future development of the Viper, Ruby, Polaris, Maadi, and Hodoa prospects could uncover an additional 5 Tcf - 7 Tcf of recoverable natural gas resources.

In another positive update, Eni (75% stake) and BP's (25% interest) partnership developing the Abu Madi West block in the Nile Delta was able to expand on their progress. The Nidoco North 1X well builds off the venture's success at locating the Nooros prospect, and will help boost output from the concession to 45,000 BOE/d following the start-up of the Nidoco North 1X well. By mid-2016, Eni and BP plan to boost output from the block to 60,000 BOE/d through an additional developmental well program.

Final thoughts

The Egyptian people have been through some very turbulent times, to put it mildly, over the past five years. With Egypt's natural gas production set to surge, the start-up of these massive offshore developments could mark the end of rolling blackouts and shuttered industrial operations with the beginning of something new. Egypt plans to stop importing LNG by 2020 after leasing two floating storage and regasification units to help meet its energy needs over the next several years.

BP and Eni also stand to gain in a major way as the new pricing regime combined with hefty resource bases to develop means plenty of cash flow generation possibilities. As Egypt is starved for natural gas and has the capability to export excess production, there is a long growth runway ahead for both Oil Majors as it won't be hard to find an end consumer.

Investors interested in reading more about the oil and gas sector should check out BP's enormous Shah Deniz 2 expansion in Azerbaijan, which you can read about here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.