BP Key Reason Why Egyptian Gas Production Is Surging

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About: BP p.l.c. (BP)
by: Callum Turcan
Summary

Egyptian natural gas production is making a comeback.

BP plc played a key role in this process by bringing offshore gas fields in the Nile Delta region online.

Overview of past upstream developments and near-term growth catalysts.

BP plc (NYSE:BP) has made investing in natural gas a key priority over the next decade. The ultimate goal is to shift BP plc’s upstream production mix to one that can better capitalize on long-term trends (BP plc expects global natural gas demand growth to outpace global oil demand growth over the coming decades). Egypt is a big part of this strategy as the nation has undergone a tremendous turnaround in its oil & (more specifically) gas industry as of late. Let’s dig in.

Overview

After undergoing social, political, and economic upheaval since the fall of Honsi Mubarak in 2011, Egypt’s natural gas production tanked and the nation had to turn to imports to meet domestic demand. For a long time, Egypt had been a net exporter of natural gas. In 2009, 30% of its country’s natural gas production was exported (primarily as liquefied natural gas). That changed after 2011, and in 2015, Egypt exported no natural gas. Blackouts became common as the government had to ration electricity supplies at a time when gas supplies were low while demand was growing.

Egyptian natural gas consumption stood at 56 billion cubic meters in 2017, a significant increase from the 48 Bcm of gas the country consumed in 2011. Back at the turn of the century, Egyptian natural gas demand stood at just 19 Bcm.

The turnaround

Over the past two years, Egypt’s fortunes have completely turned around in a process heavily aided by BP. The British energy major turned the offshore Taurus and Libra fields in the West Nile Delta online in March 2017 eight months ahead of schedule and under-budget. By May 2017, the nine wells developing these two gas fields had reached peak production rates which exceeded expectations. Initially, BP expected this project produce 0.6 Bcf/d of natural gas at its peak along with a marginal amount of condensate. Now BP is pumping 0.7 Bcf/d of gas and 1,000 bpd of condensate from the Taurus and Libra fields, which is equal to 7.2 Bcm of natural gas per year.

BP In Egypt

Source: BP plc

BP operates and owns 82.75% of the venture developing the Taurus and Libra fields, with RWE DEA (a subsidiary of DEA AG) owning the remaining 17.25% interest. The British oil giant has been operating in Egypt for over half a century and has a very well-established presence in the region. Including condensate production, BP expects this project will produce 105,000 BOE/d gross (80,000 net according to the company’s website).

Gas produced from the first phase of the West Nile Delta project is being fed to an existing onshore facility, the Rosetta gas treatment plant. BP purchased the Rosetta plant from Royal Dutch Shell plc (NYSE:RDS.A) (NYSE:RDS.B) back in 2016 for $128 million, and that deal helped set the stage for its Egyptian growth ambitions. Readers should note that BP is most likely selling natural gas to the Egyptian government at a price between $3.00 and $4.10 per British thermal unit, assuming the 2010 agreement between BP and Egyptian Natural Gas Holding Company is still in effect (there isn’t a lot of readily available information on the subject of BP’s Egyptian gas realizations). Whatever the case, the economics of this projects are supposedly quite strong.

During BP’s Q4 2017 conference call, management commented that Egypt’s government was willing to work with BP to ensure new upstream projects were both getting sanctioned and reaching first-gas in a timely manner in return for guarantees that BP would make a nice return on its investments:

“I think governments are understanding. Certainly in Egypt, we have a lot of support in helping make projects economic that can replace imported LNG. Same is happening actually in Libya.”

To keep the momentum going, BP aims to bring the offshore Giza and Fayoum fields in the West Nile Delta online by the end of this year. Part of this process includes upgrading the Rosetta plant to handle additional natural gas volumes from the West Nile Delta, which is why it was a good idea for BP to purchase the plant from Shell. At their peak, the eight wells that will be drilled as part of this endeavor will produce ~0.5 Bcf/d of natural gas, equal to 4.9 Bcm of gas per year. BP is the operator of this endeavor with an 82.75% stake in the Giza and Fayoum fields, and DWE AG owns the remaining interest.

Next year, BP is going to bring the final part of the West Nile Delta project online by reaching first-gas at the offshore Raven field. A new onshore gas processing plant is being constructed adjacent to the existing Rosetta plant to handle those volumes. Combined, all five fields are expected to produce 1.5 Bcf/d of natural gas per year (equal to 15.5 Bcm per year) along with some condensate as well. The five offshore fields are developing 5 Tcf of recoverable natural gas resources and 55 million barrels of recoverable condensate resources.

Final thoughts

Egyptian natural gas production currently stands at 6.6 Bcf/d (about 68.2 Bcm per year), up sharply from 4 Bcf/d in 2016. This has led to the country ramping up its LNG exports as domestic supply once again outstrips demand. Surging domestic production is also why Egypt is no longer importing liquefied natural gas, and largely why its economy has begun to stabilize. Due in part to the efforts of BP plc, Egypt is expected to save $250 million per month in import costs, making it a far easier task to fix its current account imbalance, as you can clearly see here.

In the future, Egypt may once again be a significant LNG exporter but let’s not get ahead of ourselves. Looking ahead, BP plc has the 2013 Salamat discovery and the 2017 Qattameya Shallow discoveries in the East Nile Delta in Egypt to keep the momentum going. Production from the Qattamera Shallow discovery may begin by 2020.

Egypt is both a key upstream growth generator for BP plc and a way for the energy major to gain greater exposure to the long-term upside natural gas production offers. As BP plc owns the vast majority of the West Nile Delta developments and 100% of the two discoveries mentioned above, these projects will or already have had a major impact on its upstream performance.

BP plc produced 0.75 Bcf/d of natural gas net in Egypt back in 2017, along with 40,000 bpd of crude oil net and 2,000 bpd of natural gas liquids net. Expect that to climb consistently higher over the coming years, particularly on the natural gas side of things. BP plc may divest some of its older producing properties in the area that offer minimal or nonexistent growth opportunities, but that doesn’t mean it isn’t heavily committed to growing its Egyptian presence. There are other noteworthy assets in Egypt that BP plc has a material economic stake in, like the Zohr and Atoll fields, which will be covered on a later date. Thanks for reading.

Disclosure: I am/we are long BP, RDS.B. 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.