Following a rapid increase in production over the past three years, Egypt has once more become a net exporter of natural gas, and in late July it hosted the second meeting of the East Mediterranean Gas Forum, set up to promote co-operation between producers and consumers in the region and in southern Europe. Egypt’s role as the leading regional natural gas player depends on its ability to increase, or at least sustain, production so as to counter the effects of depletion and rising domestic consumption. However, the announcement by UAE-based Dana Gas that it had abandoned drilling of its first offshore exploration well in Egypt’s East Mediterranean natural gas basin and that it was seeking a buyer of its Egyptian assets has cast a cloud over the country’s aspiration to become a regional gas hub.
The Dana Gas disappointment and the failure, so far, of the Nour field, operated by Italy’s Eni—which developed the massive Zohr field—to live up to expectations raise questions about the sustainability of Egypt’s gas boom and its broader aspirations. The hub project envisages Egypt’s own supply being supplemented by gas from fields in Israel and Cyprus. However, the start-up of supplies from Israel’s Tamar and Leviathan fields through a pipeline that was originally built to pump gas from Egypt has faced delays (although they are now scheduled to begin in late 2019), and production from fields discovered in Cypriot waters will not start until 2024, according to the most recent schedule announced by Cypriot officials. The hub project also has to contend with hostility from Turkey, as well as the challenge of the global oversupply of natural gas, which has driven prices down to a level that threatens the commercial viability of costly offshore development.
The pullback from several projects
Dana Gas announced on July 27th that its drilling operations in the Merak‑1 well in its North el‑Arish (Block 6) concession off the coast of north Sinai had not encountered any commercial reserves of oil or gas and that the well had been plugged and abandoned. According to the concession agreement, which was ratified in 2014, Dana Gas was obliged to drill one well in the initial phase. As drilling started in May 2019, the company said that prospective resources from the well in the case of exploration success could be in the order of 4trn cu ft, which would put it in the mid-range of East Mediterranean discoveries so far. The company said that, despite this setback, there were at least three other promising prospects in Block 6 that were not affected by the Merak‑1 result. Three days later, Dana Gas said that it had been conducting a strategic review of its Egypt operations, which currently produce 34,000 barrels oil equivalent per day (mainly natural gas from onshore Delta fields), and that it had appointed financial advisers to look at a potential sale.
The start of drilling of the Merak‑1 well came two months after Eni announced that it had made a discovery in the Nour North Sinai concession, to the west of Block 6. Over the previous nine months there had been speculation that Nour would contain reserves comparable to the 30trn cu ft Zohr field, discovered by Eni in 2015. However, Eni has yet to provide any reserve estimates for the Nour‑1 well, which suggests that the earlier exuberance in industry circles may have been misplaced.
Export markets remain undeveloped
The Zohr field itself has been rapidly developed, and production is set to be ramped up from 2.3bn cu ft/day to 2.95bn cu ft/d towards the end of 2019. Owing to Zohr and other fields, notably those in BP’s West Nile Delta development, Egypt’s gas output has recovered strongly after falling below 4bn cu ft/d in 2016, and is currently running at about 6.8bn cu ft/d, compared with demand of about 6.1bn cu ft/d. According to officials quoted by Al Borsa, a local financial newspaper, recent boosts to production from the Giza and Fayoum fields in the West Nile Delta cluster have led to a 50% increase in the allocation of gas to the Idku liquefied natural gas (LNG) export terminal to 750m cu ft/d. The two trains at Idku, which are operated by Royal Dutch Shell, have the capacity to process about 1.1bn cu ft/d of gas, and the Damietta LNG plant can process a further 750m cu ft/d. Owing to the decline in Egypt’s production from 2010 onwards, the two LNG complexes virtually ceased operating in 2014, and between 2015 and mid-2018 the government imported LNG to make up for a shortfall in supply.
According to BP’s Statistical Review of World Energy, Egypt’s natural gas production rose by 20% year on year in both 2017 and 2018, while consumption rose by 12.5% and 5.8%, respectively. The rate of increase in domestic gas demand was higher in 2017 because of the rise in the proportion of gas used in thermal power generation to its current level of about 85%, following major power supply development. Gas consumption is likely to continue to increase at a brisk rate, but, at least for the next few years, Egypt is likely to have a sufficient surplus to allow the Idku and Damietta LNG plants to run at close to full capacity, as Zohr and West Nile Delta reach their plateau output of 3.2bn cu ft/day and 1.4bn cu ft/day, respectively, from 2020 onwards. Once the pipeline from Israel is operating, supply will be boosted by up to 700m cu ft/day. With the addition of Cypriot gas to the mix from the mid-2020s, there may be scope to expand the existing LNG plants, or, as has been recently suggested in the Israeli media, to build a new plant on the south Sinai coast, oriented towards exports to Asian markets.
However, for such a scenario of an expanding natural gas hub to be realized, a number of critical conditions will have to be met. These include the smooth development of fields discovered in Israeli and Cypriot waters, in the face of tough financial and political challenges. Another important consideration will be whether Egypt will be able to continue to increase its production or at least sustain it at a stable level, despite an estimated depletion rate of about 10% per year. This, in turn, depends on a healthy level of exploration activity, and on a regular flow of new discoveries.
