RWE Reaches Long-Term Gas Sales Deal with Egypt, Launches North Idku Field Development

RWE Relieved

RWE Dea, the upstream arm of German utility RWE, yesterday revealed that it has reached an agreement with the Egyptian General Petroleum Corporation (EGPC) and Egyptian Natural Gas Holding Company (EGAS) over a long-term gas sales contract for its future production of gas from the North Idku field. RWE Dea, which holds a 100% interest in the concession after buying French IOC Perenco's 30% stake recently, immediately said that it was launching the first development phase of the field, which has been planned since 2006. First production is now expected to come onstream in 2010, with both development and production being managed by the Suez Oil Company (SUCO), a joint venture between RWE Dea and EGPC. Construction and development on the field will be concentrated on its southern part, closer to the shore, from where it will be piped to existing onshore processing facilities in the Abu Qir Bay. The company did not state its expected production levels upon the completion of the development.

Price-Fuelled Development

Egypt's recent re-evaluation of its price ceilings paid for gas earmarked for domestic use has already produced tangible results, with several expensive offshore gas projects appearing to move forward. RWE Dea's hesitance to develop the North Idku find has put highly successful pressure on the Egyptian government to reform its gas purchases, as domestic demand has spiralled and Egypt's largest and most substantial finds lately have been made—at increasingly high costs—in Mediterranean deepwater and/or complex and deep reservoir structures, offshore the Nile Delta.

The Egyptian government, through EGAS and EGPC, recently agreed to lift the US$2.65/mmBtu price ceiling for the amounts of gas producers have to supply to the domestic market, in order to reverse the increasing trend of holding off expensive developments and exploration; a tactic that has been spearheaded by RWE, but threatened by a host of other players. A price of US$3.95/mmBtu was first mooted as the new ceiling, but the government was forced to raise this to US$4.5/mmBtu for the most expensive BP- and RWE-operated offshore fields last year (see Egypt: 12 February: Higher Gas Prices Agreed, But Domestic Demand May Yet Halt New Egyptian LNG Train). This has forced a continued rise, with the new total and definitive government-adopted ceiling now set at US$4.7/mmBtu for gas from a defined amount of offshore blocks, according to the latest Middle East Economic Survey (MEES) report.

Egypt's Gas Woes

The threat to the Egyptian gas businesses' profitability is clearly indicated by the amount of gas that producers need to sell to the government, as compared to its share of their profits. According to EGAS chairman, Mahmoud Latif, Egypt's gas exports account for 65% of the total gas revenues, despite 72% of the gas output now going to domestic consumption, MEES said. With domestic demand continuing to grow rapidly, Egypt is in dire need of new production capacity coming onstream, with the slight slowdown in exploration and development seen in the offshore Nile Delta and deepwater Mediterranean potentially causing a much larger squeeze in the country's gas industry than first assumed. In order to supply the domestic market and honour its export commitments, an increase in production from around 6 bcf/d to 10 bcf/d by 2011 is called for, according to Latif. The Ministry of Petroleum has been more careful with its long-term demand growth figures, putting 10-bcf/d demand further back to 2013.

A strategy to curtail domestic gas demand growth has already been formulated at government level, although the plan to phase out energy and fuel subsidies over the coming years is politically very daring and will require an advanced level of political leadership. Both macroeconomic and political turbulence might derail the plan and its full implementation still looks uncertain. However, it does look as though a phasing-out of gas price subsidies for most of the country's heavy industry might go ahead in the near future and be implemented to the full, unless a downturn in the economy occurs.

Outlook and Implications

Egypt needs to see major gas projects coming onstream, as well as to continue to fuel interest for exploration both in areas of large opportunities, such as the deeper Nile Delta and Mediterranean deepwater acreages, and its more humble onshore tracts. The complication here, however, is also to offer the companies wider access to more lucrative gas exports, while at the same time securing sufficient volumes of the incremental gas output to satisfy the domestic market. As long as there remains a price discrepancy between the state-decided domestic sale price paid to producers and the international market price, this paradox will be hard to navigate, given the country's tight gas supply situation.

Nevertheless, RWE Dea's decision to go ahead demonstrates that the Egyptian government's decision to raise gas sale prices for the companies producing gas in expensive offshore developments is bearing fruit. It promises more projects to follow, even if they will not be allowed to export their production. Understanding the necessity to enlarge its export facilities to stimulate further exploration, the government nevertheless seems set to move ahead slowly with the project to add a third train to the Damietta liquefaction facility, even though RWE Dea's North Idku seems to have lost its chance to gain access to the facility.

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