To say the last 12 months have been hard on the hydrocarbons business undersells understatement. The price of a barrel of Brent, which already plummeted from over $100 to under $50 before the end of 2014, has continued to fall throughout the year, languishing at less than $40 as 2015 drew to an end. Natural gas fared little better, with the Million British Thermal Unit (mmBTU) value dropping to less than half its December 2014 peak by November 2015, although prices rallied in the last fortnight of the year.
Despite the state of global energy markets, Dana Gas, the Middle East’s leading privately owned gas company has faith enough in Egypt and the Al-Sisi administration to commit millions in exploration and production (E&P) in the country. Dana is based in the United Arab Emirates, but hasassets in Egypt and the Kurdistan Region of Iraq. Via its subsidiary, Dana Gas Egypt, it holds 100% E&P and development rights on fields in the Nile Delta and has a minority share in an LPG plant on the Gulf of Suez.
By the end of September 2015, Dana Gas Egypt had drilled its Balsam-2 and Balsam-3 wells onshore in the Nile Delta, where it discovered significant reservoirs of natural gas in 2012. Balsam-2 tapped into the longest gas column ever penetrated in the company’s history, while Balsam-3 also hit a water-free gas reservoir and demonstrated the viability of thewestern part of Balsam field. The company plans to spend €355m over three years to roll out an ambitious E&P schedule. This includes drilling at least 20 development wells and up to six exploration wells, Allman-Ward reveals, as well as pipelines and improvements to existing plants.
“The important things for a private-sector investor are: respect for contracts, rule of law, and the ability to return dividends to the country of origin of investment,” insists Patrick Allman-Ward, the CEO of Dana Gas Group and former General and Country Manager of Dana Gas Egypt. “I have to compliment the government on the fact that, despite the upheavals since 2011, one thing has been absolutely rock solid: its commitment to production-sharing contracts (PSCs) signed with investors.”
Meanwhile, the government has taken steps to settle its bills with international energy companies – €1.9bn, equivalent to 40% of its debts, has already been paid – and contractors, providing a welcome boost to investor confidence. Dana Gas Egypt still has over €155m outstanding on invoices worth €215m, Allman-Ward notes, but the company has reached a deal that will let it recover the amount overdue via the sale of the state’sshareofincrementalliquids from its future production.
“We hope that the recovery mechanism will start manifesting itself in 2016,” Allman-Ward says. “This is a real example of how the Egyptian government has been both flexible and imaginative in looking for alternatives to the problem of overdue payments. Our commitment as a private investor to increasing the capital that we are investing has, in return, given us a transparent mechanism through which we can recover and makean acceptable return on those investments. It is, indeed, a win-win solution.”
Another stumbling block, Dana Gas’ CEO explains, that stymied development of the gas industry in Egypt, to date, has been balancing demand and supply as the population grows and living standards rise. Following a decision to fix prices for domestic use in the 1990s, production lagged behind demand as operators became increasingly reluctant to fund expensive offshore E&P work due to low margins. But, last August, just weeks before the discovery of the Zohr super-field off the Egyptian coast, EGAS, the state-owned gas company agreed to raise the cost of gas from $2.65 per mmBTU to as much as $5.88 for new discoveries. “The gas price had to beaddressed to allow private investors to get a reasonable return on money invested,” Allman-Ward points out. “Again, this shows new flexibility that has been demonstrated under the leadership of Sherif Ismail, first as Petroleum Minister and now as Prime Minister. He really started off the initiative to liberalise gas prices and to allow private-state partnerships to enter into, again, win-win solutions. That can only be a good thing for Egypt and for its people.”