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December 2 1999
ANALYSIS
Massive drilling discoveries by BG and partners generate
great excitement, says Clive Mathieson
¸
BG's joint venture is supplying gas to the Beni Suef Cement works 150km
south of Cairo
Egypt aims to be queen of the Nile
again thanks to gas finds
As Egypt prepares for the next millennium, its sixth since
Cheops decided Giza would be a suitable location for his
Great Pyramid, the nation will once again turn to the Nile
for its prosperity and security.
A massive and (so far) highly successful drilling
programme is scouring the ancient rock channels created
by the Nile, the world's longest river, as it flowed out to sea
millions of years ago. The theory, which has been proved in
abundance by the likes of Britain's BG is that organic
matter carried down the river was deposited in the
Mediterranean, where it turned into enormous natural gas
reservoirs.
Reserves in the concessions offshore from the Nile delta
have trebled in the past five years to as much as 50 trillion
cubic feet of gas. The excitement about discoveries by BG
and its partners, who include the State-owned Egyptian
General Petroleum Corporation (EGPC), is palpable.
Egyptian politicians and oil company executives alike are
now talking about a "new Gulf of Mexico" and "the Saudi
Arabia of gas". They believe the geological trend, identified
by river channels, could run all the way to the Israeli and
Palestinian coast, opening up potential gas markets
throughout Europe and the Middle East. The question now
taxing the minds of the Egyptian Cabinet is just what to do
with all that gas.
To date, the overriding priority has been to ensure that
Egypt has enough natural gas to meet domestic demand
from industry and households - expected to double to 3.2
billion cubic feet a day by 2005. But the growing gas
reservoir in the Mediterranean has opened up the potential
for Egypt to become a net exporter of gas, most likely in
the form of liquified natural gas (LNG) via pipeline or
shipping.
Peter Dranfield, president of BG Egypt, says the previous
Egyptian administration was reluctant to embrace the
concept of gas exports. But in Sameh Fahmy, the new
Egyptian Minister of Petroleum, the company has found an
eager commitment to send Egyptian gas to world markets.
"There is a desire on the part of the minister and, indeed,
the Prime Minister to understand what it would take, from
the point of view of a commercial framework, to make the
export scheme work for all parties," Dranfield says.
Earlier this month the Egyptian Cabinet, which has been
ordered by Hosni Mubarak, the President, to revitalise the
country's export programmes within 12 months, granted
approval for the export of gas. It is now up to companies
such as BG to find markets for Egyptian gas and to settle a
commercial framework with the EGPC.
Fahmy is still drawing up his petroleum strategy for the next
millennium but would clearly like to be exporting LNG or
liquified petroleum gas (LPG) to Mediterranean markets
within three or four years.
There is a recognition within the Egyptian Government that
energy is a competitive market and that the chance to
export gas to nascent markets such as Turkey, Spain and
the Middle East must be taken now. "If we delay our
decision, maybe we won't find windows of opportunity
later," Fahmy says from his office in Cairo.
Graham Boyce, the British Ambassador to Egypt, says the
Egyptian economy - which is robust but only 5 per cent the
size of Britain's - can benefit enormously from the foreign
currency brought in by gas exports. "Gas is probably the
single biggest potential swing factor in the economy in the
next 10-15 years," he says. "And that's going to be a test
for [the Government] to see if they will be able to work to
accelerate projects for exporting gas and turn them into real
money-earners for Egypt."
BG has a multi-faceted role in the Egyptian gas industry -
from exploration, through transmission and distribution to
industry and households. The group, which was de-merged
from the British Gas empire in 1997, came to Egypt exactly
ten years ago, when it bought the exploration portfolio of
Tenneco. Those concessions have since been expanded
and exploration intensified.
In the past two years alone BG has drilled 13 exploration
wells offshore from the Nile delta, of which 12 have found
commercial quantities of gas. The company and its partners
- which include Shell, Edison International and EGPC - now
sit on the largest uncommitted gas reserves in Egypt.
BG, as operator of the fields, has signed a number of gas
supply agreements with EGPC for the domestic markets,
which will see production start next year. BG's involvement
in the country's gas market runs far deeper than
exploration. It has already managed more than $500 million
(œ310 million) of spending and is committed to oversee a
further $1.25 billion in the next three years on the
development of offshore fields and a gas distribution
network in Egypt.
Last year BG formed the Nile Valley Gas Company
(NVGC) with Edison, Egypt's Orascom and the Middle
East Gas Association. The partnership has a 25-year
exclusive agreement to supply gas to industrial and
residential customers in Upper Egypt. Its first customer, the
Beni Suef Cement works about 150km south of Cairo,
received its first NVGC gas last April. More than 500
residential customers in Beni Suef are now receiving gas,
with a further 20,000 connections expected in the next
three years in the booming commercial centre.
BG and its partners are now building a 370km pipeline
which will take gas as far south as Asyut, the second
biggest city in Egypt behind Cairo, by 2002. Eventually, BG
would like to extend the pipeline by another 530km to reach
customers as far south as the Aswan Dam.
For Frank Chapman, president of BG International, Egypt is
perhaps the finest example of the company's "gas chain"
concept, where it manages every link from gas exploration
to the residential household. "I believe we are the only
company that can really say we have skills in every link of
the gas chain . . . and skills to add the interface between
the links," he says immodestly.
These skills will come in handy as BG's role in the Middle
East moves from the commercial arena to the political one.
BG is raking the Mediterranean - from Spain in the west to
Jordan and Syria in the east - for LNG and LPG markets.
It has a bid in to supply LNG to southwest Turkey and
believes Egyptian gas can be competitive in the region.
There is enormous demand for gas in Israel and BG is
confident new exploration concessions off the Israeli coast
will, if its geological assumptions are correct, yield gas.
Whether or not those reserves will be enough to serve
Middle East markets is doubtful, leaving the door open for
Egypt.
Politically, the issue of an Arab country, or even Palestine,
supplying Israel with gas is sensitive. But both BG and the
Egyptian Government believe there is hope for the
negotiation of commercial arrangements which could, in
fact, help the peace process. Egypt's petroleum minister is
"studying the situation" but wants his foreign partners to
demonstrate the economics of exporting to Israel or other
Middle East countries before he gets involved with the
politics.
Chapman insists BG is not trying to play the political game
but says commercial reality would see the huge gas
reserves of Egypt and the eastern Mediterranean serve the
energy-starved markets of Israel and its neighbours. "We
may find a series of 'win-win' situations where there are
economic benefits for businessmen to do business across
boundaries where they don't necessarily run into political
problems," he says.
Next page: Graham Searjeant
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