Higher Gas Prices Agreed, But Domestic Demand May Yet Halt New Egyptian LNG Train

Better Pay

Oil Minister Sameh Fahmy has agreed to raise the government's posted gas price substantially for gas produced in five different concessions in the Mediterranean Sea, offshore Egypt. The cabinet has adopted a new maximum price of US$3.95 per million British thermal units (/mmBtu) for the gas produced in the offshore concessions, with the price plan being expected to be rubber-stamped by parliament shortly, Upstream reported. Gas produced in the BG-operated Rosetta and West Delta Deep Marine (WDDM) concessions, RWE's North Idku, and Eni's and Hess's North Bardawil and West Mediterranean Block 1 concessions will be eligible for the new higher price for the volumes supplied to the state. The price represents a sharp rise from the previous maximum price of US$2.65/mmBtu, but is in line with last year's bilateral deal between the Egyptian government and BP/RWE, giving the company a US$4.5/mmBtu price for its gas to compensate for the high exploration and development costs involved in bringing gas onstream from recently discovered fields such as Raven and the BP/Eni field Satis.

The revised pricing formula is a victory for Egypt's offshore producers, who have been lobbying the government to raise its prices for years. Majors such as BP and BG have even recently abstained from participating in Egyptian offshore licensing rounds, saying that the costly investments required would not be justified at the low prices offered for most of their production volume by the state.

Domestic Growth

IOCs are required to sell around two-thirds of their production to the Egyptian state, which the government then sells on the domestic market at further knock-down prices. Egypt's domestic gas price subsidies have—as in most other Middle Eastern countries—proven very difficult to scrap, as governments balk at taking on the political cost of trying to wean their populations, used to disproportionate low gas prices, off wasteful consumption patterns, in order to curb spiralling demand growth. With rapid domestic demand growth in Egypt, securing the government's agreement for a new LNG export train might prove harder than making the recent discoveries. Domestic gas demand doubled between 1999/2000 and 2007, from an annual 14,135 million tonnes to 27,000 million tonnes, according to the Middle East Economic Survey (MEES), and summertime peak demand last year caused repeated gas feedstock diversions from Egypt's both liquefaction plants, at Idku and Damietta.

Haggling Over Reserves

Offshore exploration last year added around 4 tcf of gas reserves, which roughly corresponds to what the government and the IOCs see as the required reserve base for a second 5-mmt/y LNG train at SEGAS's Damietta plant. However, with the government policy of not allowing more than a third of the production to go on exports, the actual reserve base that would have to be secured might be as high as 12 tcf for any further LNG train to go ahead, a source told MEES. Even if a new 3.6-mmt/y train at the BG-led Idku plant is favoured (which is not currently under discussion given BP's preference to become a partner in the SEGAS venture and the fact that it has secured most of the added reserves recently), the reserves required according to that calculation still fall well short of meeting the requirements. Eni's and BP's recent discovery in the 6,500-metre-deep Satis field is now thought to add gas reserves of 1.3 tcf, according to Upstream, although a full appraisal and delineation of the field has not yet been completed (see Egypt: 1 February 2008: BP, Eni Make Large Gas Discovery Offshore Egypt, New LNG Train Eyed).

Outlook and Implications

While the recent Satis find naturally whets the involved companies' appetite for well-paying export possibilities, the government is in no position to allow domestic shortages to develop while raising gas exports, which well might be the consequence. Egypt's gas reserves are widely seen as sufficient for at least one new LNG train; however, the focus has to be on development speed and planning, in order to make sure that one demand side does not outgrow the other at any time during the 20-year-average contract planning cycle for a LNG venture. While Egypt's gas production has grown rapidly over the past decade, it has not grown rapidly enough in the past few years to meet both domestic demand growth and the export volume growth that would be the result of a new liquefaction train.

The main reason behind Egypt's failure to grow reserves—and more importantly, production capacity—quickly enough has been that the state's posted gas purchase prices have failed to reflect spiralling exploration and development costs, or the general move of Egypt's large-volume gas production ventures towards deeper waters and deeper-lying fields, which in itself has meant generally higher production costs. A sharp rise in the posted price will definitely attract more investment in field development and exploration, with a good chance of sufficient gas volumes coming onstream to sustain a new LNG train, although the higher prices will put an added pressure on the government budget as it is unlikely to raise domestic gas retail prices correspondingly. From that perspective, a decision over a new train at Damietta might now still be premature and quite likely be postponed to late 2008 or early 2009, when further development and exploration plans have surfaced.

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