CAIRO: A groundbreaking $9 billion agreement signed by Egypt this week should help it meet growing domestic and foreign gas commitments by boosting supplies and encouraging new exploration.
Under its terms BP and Germany’s RWE Dea agreed to bear all the costs in developing five offshore fields that will supply up to 1 billion cubic feet (bcf) per day of natural gas in 2014.
In exchange, Egypt will pay the two royalties for the gas rather than a take percentage of total production, as it has in previous concession agreements with foreign firms.
"The BP/RWE agreement is groundbreaking because it is structured very differently from Egypt’s traditional hydrocarbon agreements," said Femi Oso, an energy analyst with Wood Mackenzie.
"Before, the Egyptians would get a share of the gas, but now they don’t. BP and RWE get the full production," Oso said. "It is the first of its kind."
Analysts said the new arrangement will increase the profits of BP and RWE, making development of the offshore fields commercially viable.
The partners have already spent about $1 billion to develop the fields, an Egyptian oil ministry statement said. Under the amended agreement, they will spend another $8 billion, of which RWE says it will contribute $3.6 billion.
The new agreement "will encourage the foreign partners to increase their investments and confront the rising costs of exploration, development and all other forms of risk in deep water," the oil ministry said.
An alternative to royalty payments would have been for Egypt to have boosted the price it paid for the gas provided by the foreign partner under the initial production sharing accord, a move it would have found domestically sensitive, analysts said.
Its willingness to change its terms shows a flexibility and pragmatism that will increase investor confidence and likely lead to more exploration in the Mediterranean, analysts said.
"This represents another move by the Egyptian government to re-evaluate, and (at least in some cases) increase the share of oil and gas revenues it receives for the rights to develop the country’s oil and gas fields," said CI Capital analyst Fadwa Hossam.
Under their revised contract, BP and RWE will sell all the gas from two offshore concessions to the state-owned Egyptian Natural Gas Holding Company (EGAS), which will then feed it into the domestic grid.
"Definitely it will boost the ability of Egypt to meet its commitments, domestic and export, but the first port of call for the gas coming out of the development will be the domestic grid," Oso said.
The fields, in two deepwater offshore concessions near the port city of Alexandria, contain an estimated 5 trillion cubic feet (tcf) of gas reserves, BP said.
BP sold Apache Corp four onshore development leases in Egypt but retained its offshore interests.
Domestic demand
Egypt has a total 77.3 tcf of proven gas reserves, according to BP, with much of it deepwater off the northern Mediterranean coast, making it the 15th biggest holder of gas in the world.
It produced about 6.5 bcf per day of gas in 2009, but needs far more to supply the growing domestic market and to feed its almost 3.6 bcf per day of export capacity.
The bulk of production is used to feed industry and homes on the domestic grid.
Rising local demand pushed the government in 2008 to block any new gas export contracts until the end of 2010, when it is due to review the moratorium.
Dedicated gas fields supply all of the capacity of Egypt’s 1.13 bcf per day gas liquefication plant at Idku near Alexandria and half of the capacity of its 768 mcf per day SEGAS plant at Damietta.
SEGAS and Egypt’s 1 bcf per day pipeline to Jordan and 870 mcf pipeline to Israel must rely on the under-supplied domestic grid, and as a result none of the three runs at full capacity.
"Meeting domestic energy demand is likely to be more important to the government than are export profits," Oso said. –Additional reporting by Alastair Sharp and Yasmine Saleh
