Egypt produced an average of 741.9 thousand barrels of crude oil per day in 2009, 0.92 per cent of the world total and a change of 2 per cent compared to 2008.

Egypt produced an average of about 594,000 barrels per day (bpd) of crude oil in 2004, down sharply from its peak of 922,000 bpd in 1996, but only modestly below the 618,000 bpd produced in 2003. Demand for petroleum products has been relatively flat since 1999, after rapid growth between 1995 and 1998. This is due largely to reductions in subsidies for petroleum products consumption and the increased use of compressed natural gas (CNG) as a fuel for motor vehicles.

Egypt is hoping that exploration activity, particularly in new areas, will discover sufficient oil in coming years slow the decline in output. Egyptian oil production comes from four main areas: the Gulf of Suez (about 50 per cent), the Western Desert, the Eastern Desert, and the Sinai Peninsula. Increased production of natural gas liquids, which averaged 114,000 bpd in 2004, also has offset some of the decline in crude oil production.

BP in Egypt ... pitching for exploration

Oil from the Gulf of Suez basin is produced mainly by Gupco (Gulf of Suez Petroleum Company) under a Production Sharing Agreement (PSA) between BP and the Egyptian General Petroleum Corporation (EGPC).

Production in the Gupco fields, with most wells in operation since the 1960s and 1970s, has fallen in recent years. Gupco is attempting to slow the natural decline in its fields through significant investments in enhanced oil recovery as well as increased exploration.

Egypt’s second largest oil producer is Petrobel, which is a joint venture between EGPC and Agip of Italy. Petrobel operates the Belayim fields near the Gulf of Suez and also is undertaking an upgrade programme to stem declining production.

Other major companies in the Egyptian oil industry include Badr El-Din Petroleum Company (EGPC and Shell); Suez Oil Company (EGPC and Deminex); and El Zaafarana Oil Company (EGPC and British Gas – BG). A new oil find was reported in October 2001 in the Gulf of Suez. Canada’s Cabre Exploration reported a drilling success in the offshore East Zeit block which tested at around 8,000 bpd. A larger new find, which may prove to attenuate the fall in overall Gulf of Suez production, was announced by BP in May 2003.

The Saqqara field, located offshore adjacent to the existing El-Morgan field, is expected to reach peak production of around 40,000 to 50,000 bpd, and begin commercial production in late 2005 or early 2006. Saqqara represents the largest new crude oil discovery in Egypt since 1989.

Offshore oil production possibilities in the Mediterranean are beginning to be explored. The largest concession awarded went to Shell, in February 1999, for a large deepwater area off Egypt’s Mediterranean coast. BP and TotalFinaElf also were awarded a large offshore block from the same bidding round. A smaller offshore concession was awarded to Italy’s ENI-Agip. While most discoveries offshore from the Nile Delta have been natural gas, it is believed that there may also be significant quantities of oil in the area. Shell reportedly is optimistic about the prospects for its North East Mediterranean Deepwater (Nemed) concession, but drilling so far has yielded natural gas rather than significant quantities of oil.

EGPC awarded five exploration contracts in July 2004 to a newly-formed state-owned upstream oil firm, Tharwa Oil. Four of the five concessions cover unexplored areas of the Western Desert, with the fifth covering an offshore block in the Mediterranean. Burren Energy of the UK also was awarded two blocks in the Gulf of Suez under the 2004 licensing round, which closed in January 2005. Other awards under the 2004 licensing round are still pending.

In April 2005 Melrose Resources reported that the Egyptian Parliament has confirmed a six-year extension to the El Mansoura Concession. The extension will be for two additional three-year exploration periods from the expiration date of the current exploration concession in June 2006. The further reported Two step out wells have been drilled on the South Batra Field. The South Batra No 19 was drilled to the Miocene Abu Madi and successfully encountered the reservoir section.

In May 2005 BP Egypt announced it had extended two concessions in the Gulf of Suez: the Merged Concession Agreement (MCA) and South Gharib. Extension of the MCA and South Gharib concessions with modified terms for BP will extend the life of the existing oil fields, maximise the recovery of the remaining reserves in these two concessions and provide a foundation for growth through future exploration.

The agreements enable BP to continue investing in these concessions and commit it to invest at least $615 million over seven years in exploration and development activities, as well as renewing and upgrading the existing facilities and infrastructure across the Gulf of Suez. Operations in these two concessions are conducted by Gulf of Suez Petroleum Company (Gupco), which is a 50/50 joint venture between BP and Egyptian General Petroleum Corporation (EGPC), and the agreements create new opportunities for the development of Gupco.

In addition to its role as an oil exporter, Egypt has strategic importance because of its operation of the Suez Canal and Sumed (Suez-Mediterranean) Pipeline, two routes for export of Arabian Gulf oil. The SCA offers a 35 per cent discount to liquefied natural gas (LNG) tankers, with even deeper discounts for the largest LNG tankers, as well as other discounts for oil tankers.

The SCA is continuing enhancement and enlargement projects on the canal. The canal has been deepened so that it can accept the world’s largest bulk carriers, but it will need to be deepened further to 68 or 70 feet, from the current 58 feet, to accommodate fully laden very large crude carriers (VLCCs).

The SCA has attempted to reach an agreement with its main competition for northbound crude traffic, the Sumed pipeline. Such an agreement could bar any tanker small enough to traverse the canal from transporting oil through the pipeline. The SCA offers incentives for tankers to off-load a portion of its cargo through the Sumed, allowing for passage through the canal, and reloading at the other end of the pipeline.

Cairo has had a fickle relationship with international oil companies (IOCs) over the years, at times courting foreign investment, at other times repelling oil majors with new taxes and layers of red tape. Interest in Egypt’s modest reserves of oil and gas has also waxed and waned with the rise and fall of energy prices.

The Egyptian energy sector is emerging from one of its periodic bouts of uncertainty. Investors remain puzzled over the government’s policies, after it subjected energy companies operating in free zones to an unexpected tax in mid-2008 and later called a halt on any new gas-export projects. After strenuous lobbying by the likes of BG and BP, both long-time investors in Egypt, the government agreed to improve the terms under which it buys gas from foreign players, but the incident left a bad taste in the mouth of many prospective investors.

A test of confidence will come in the spring, when state-owned EGPC announces the results of its latest licensing round, for which bids were submitted in November. EGPC tendered eight blocks, while its sister organisation, Ganoub el-Wadi Petroleum Holding – which oversees the energy sector in the south of Egypt – offered three blocks.

The bid round is the first since late 2008, when state-owned Egas had a mixed showing for seven Mediterranean offshore blocks. On the one hand, both BP and BG participated in the bidding and each won a concession – in marked contrast to a previous round in 2006, which they both boycotted, citing the poor terms on offer. On the other hand, only four of the seven exploration blocks received sufficient bids.

Yet Egypt continues to offer just enough to keep investors hooked. Apache, which has invested more than $8 billion in the country in the past 15 years, continues to strike lucky on its patch in the Western Desert. The US’ independent reported its fourth successful oil strike in its West Kalabsha concession in January, which it says could boost production from the area up to 20,000 barrels a day. Meanwhile, the UAE’s Dana Gas, a comparative newcomer, last month announced its ninth successive oil discovery in a year in the Komombo concession.

Egypt’s onshore fields are, for the most part, small and scattered and have tended to attract oil companies with perseverance and an eye for strategic, long-term investment. These include regional companies such as Dana and those from further afield, such as Lukoil of Russia. Western majors, for the most part, concentrate on the Mediterranean and Nile Delta, where most of the largest gasfields have been discovered so far, and the Gulf of Suez, home to numerous ageing oilfields and the scene of recent exploration activity.

Thanks to this distribution, development and operation costs are high, particularly for deep-water gasfields such as Scarab, Saffron, Simian and Sapphire, where operators have had to develop innovative subsea collection and distribution networks to bring gas to shore. But the biggest obstacle to investment remains the government.

The first half of the past decade was, by and large, a good time for the Egyptian industry. Under Sameh Fahmy, the country’s technocratic oil minister, government institutions were streamlined and new ones created to encourage exploration of new areas such as the Mediterranean and the southern desert; the once-onerous process of awarding acreage to foreign companies was speeded up and tax incentives were introduced. This period also saw the emergence of a gas-export industry – its crowning glory the two liquefied natural gas (LNG) plants, at Idku and Damietta, on the Mediterranean coast.

This intensive period of exploration is beginning to bear fruit. Proved oil reserves rose by 5 per cent during the 2008-09 fiscal year, reaching 4.4 billion barrels at the end of June. Proved natural gas reserves had risen to 77.2 trillion cubic feet (tcf) by July last year, an increase of 1.2 tcf on the previous year, putting Egypt in the middle tier of gas-rich countries, which includes China, Malaysia and Kazakhstan.

Gas production reached about 2.1 tcf in 2008. About 30 per cent of this is now exported – mostly as LNG or through the Arab gas pipeline to Jordan. But the domestic gas market is growing quickly, fuelled in part by Egypt’s fast-growing population of more than 80 million. In the five years to 2012, power demand is expected to have risen by more than a third.

“Investing here is not for the weak-hearted,” says Kamil Sedky, owner of a beach hotel in Hurghada, 500 kilometres southeast of Cairo. “We’ve spent 30 years building a tourism industry around our world-class beaches and coral reefs, and one oil spill could destroy everything.”

The Gulf of Suez, Egypt’s main oil producing area, accounts for 80 per cent of the country’s oil production. Over 180 offshore platforms siphon oil from the gulf’s maturing sub-sea fields, their gas flares illuminating the night sky.

Historically, the richest petroleum deposits were in the northern half of the gulf, but as the reserves were exhausted oil companies ventured further down the coast in search of more productive fields. The southward creep of offshore concessions has brought oil platforms uncomfortably close to some of Egypt’s most popular tourist resorts.

Offshore oilrigs now operate less than 70 kilometres from El-Gouna, a glitzy beach community with 35,000 permanent residents. Platforms are also within striking distance of Hurghada and Sharm El-Sheikh, which collectively boast over 90,000 hotel rooms and provide jobs for half a million Egyptians.

The meteoric growth of these coastal resort cities over the past 30 years is owing to their stunningly clear waters and the world-class dive sites that lie just offshore. While decades of oil mishaps have destroyed reefs and blackened beaches in the Gulf of Suez, the remainder of Egypt’s Red Sea coast boasts one of the world’s most diverse, and fragile, marine ecosystems. The vibrant coral reefs and myriad of small islands are home to over 1,100 species of fish and provide valuable habitat for sea turtles and migratory birds.

Tourism has a strong interest in protecting this marine ecosystem, asserts Sameh Howaidek, a board member of the Red Sea Investors Association. “If the beaches or sea are ruined, we’re out of business.”

Investors have sunk billions into developing Egypt’s ‘Red Sea Riviera’. But the fragility of this investment was emphasised when a small oil spill fouled over 20 kilometres of coastline, including a dozen hotel beaches in El- Gouna and Hurghada. The black sludge also covered several coral reefs and washed up on Tawila Island, a protected sanctuary for marine birds.

The spill was quickly cleaned up, but the incident left questions about the risk parameters and transparency of the government vis-a-vis the oil sector.

“We heard nothing from the government or on TV about the spill,” says Mohamed Nassef, a local dive shop manager. “Now it seems they’re trying to cover up the source of the leak to protect the company responsible.”

Howaidek says the damage from last month’s spill was relatively minor, but worries a larger spill could wipe Egypt’s Red Sea resorts off the tourist map. He acknowledges oil’s economic importance, but says tourism’s strong potential demands a reassessment of priorities.

“Of course oil is very important to the economy,” he says, “but if you compare the revenue generated by the tourism and oil sectors, tourism’s contribution is more than double.”

The Al Baraka-4 well is currently on-stream producing at a rate more than 5 times the sustained flow rate from any previous well in the field. The Al Baraka-4 well was spudded on December 5, 2009 and reached total depth of 1470 metres. It is located 470 metres to the southwest of Al Baraka-2 well.

The well encountered 16 metres of net oil pay in the previously defined reservoirs in addition to 8 metres in the new Six Hills “E” layer.

The new reservoir is proving to be more productive than the currently producing zones, having tested oil with natural flow to surface at a rate of 220 bpd. It is the first well on the concession to flow oil to the surface through the natural energy of the reservoir, without requiring artificial lift. The well was also tested with artificial lifting at a maximum rate of 1300 bpd.

The volume of reserves discovered is under evaluation. Dr Hany Elsharkawi, Dana Gas Egypt president says: “Al Baraka-4 expands a new era of petroleum exploration in Southern Egypt. The fact that oil has flowed naturally to surface from a new layer with better reservoir quality demonstrates that the Komombo basin is more prolific than originally thought”.

Ahmed Al Arbeed, Dana Gas CEO, says: “Our team in Egypt has worked with dedication and professionalism to develop our understanding of this emerging oil province and we are very pleased that their expertise has rewarded us with this recent discovery. Dana Gas will proceed with development of Al Baraka Oil Field and will continue with its exploration programme to explore the entire Komombo Concession”.

Meanwhile, Dana Gas posted a net profit of 33 million dirhams ($8.98 million) in the second quarter, as its Egypt and Kurdistan operations delivered high output, but the results fell short of analysts estimates.

Four analysts on average had expected Dana to post a net profit of 36.3 million dirhams for the second quarter according to a Reuters poll.

Dana’s second-quarter net profit excluded an unrealised loss of 213 million dirhams for its investment in Hungary’s MOL oil and gas firm.

“There was a loss because Hungary’s stock exchange was impacted by the Greek crisis and weakness of the euro and dollar,” says chief financial officer Jim Dewar. 

Dana’s Egypt operations produced 3.8 million barrels of oil equivalent (boe) during the quarter, a 19 per cent increase compared to the same period last year, the statement says. 

“Our operations in Egypt and Kurdistan have delivered a good increase in production, while prices of gas remained strong,” Dewar says.

Dana posted a net profit 392 million dirhams in the second quarter of 2009 mainly due to the sale of a 10 per cent stake in Pearl Petroleum in Kurdistan. In the Kurdistan Region of Iraq, Dana Gas produced 1.06 million boe of gas and condensate during the quarter, an increase of about 88 per cent over the same period in 2009, the statement says.

Dana expects the first train of the liquefied petroleum gas (LPG) Plant at Khor Mor field to start later this year, says Dewar. “This year we will focus on developing our existing assets Egypt, Kurdistan and the UAE,” he says.

Last year, Dana said it was part of a UAE and European consortium that includes Austria’s OMV and Hungary’s MOL planning to pump enough gas from Iraq’s Kurdistan region to kick-start the estimated $10 billion Nabucco pipeline project to supply Europe. Asked about the company’s cash position, Dewar says it was $175 million, while a final decision on the farm out of 20-30 per cent of its Egypt assets will be made by the firm’s board members by the end of the third quarter this year or middle of the fourth quarter.

The contracts are valued at $2.3 billion, says Petroleum Minister Sameh Fahmy at the signing ceremony.

“Of the total, five are extensions and amendments to already existing deals and one is a completely new deal,” a ministry official says.

Adriano Mongini, chairman of Italian petroleum company Eni, British Petroleum (BP) chairman Hisham Mekawi, and Atef Abdel Sadek, chairman of Egyptian petroleum company Tharwa, were also present at the ceremony.

The Egyptian General Petroleum Company (EGPC), BP and Eni subsidiary IEOC were jointly granted a $1.1 billion Ras El-Bar concession, a $900 million concession in El-Temsah, and a $200 million concession at Ghara in the Gulf of Suez.

EGPC and BP were also granted a $60 million concession in South Balaeem, Gulf of Suez.

A concession at Theka in North Sinai worth $22.5 million was awarded to the Egyptian Natural Gas Holding Company (EGAS) along with Tharwa Petroleum and IEOC.

The final concession, a 43 sq km area in the Eastern Desert worth $17.5 million, was granted to Ganoub El-Wadi Holding Petroleum Company (Ganope) and Tharwa Petroleum.

Speaking at the ceremony, Fahmy emphasizes the oil sector’s commitment to attracting foreign investment in research, exploration and development of new wells in order to expand Egypt’s reserves to meet the needs of the local market and increase petroleum exports into the future.

Fahmy has pursued an aggressive strategy of growth in the petroleum sector, particularly in the growing natural gas sub-sector.

According to an emailed statement by CI Capital analyst Fadwa Hossam, petroleum discoveries made during fiscal year 2007-2008 constituted a year on year increase of 38.5 per cent, in line with an 86.6 per cent increase year on year in sector investment.

“The Ministry of Petroleum has been granting several concessions for exploration and drilling activities in order to increase crude oil and natural gas production,” Hossam writes.

Egypt’s oil and gas sector is a major source of foreign direct investment, and has remained resilient in the face of the global economic crisis.

The sector brought in 46 per cent of total foreign direct investment in 2007-2008 and accounts for 70 per cent of FDI inflows since the beginning of 2009.

“The success of the sector in attracting foreign investment despite the global financial crisis shows the confidence and credibility of the oil sector and its ability to deal with international companies in the framework of strategies and through clear policies based on mutual cooperation,” says Fahmy.

Privately-held Kuwait Energy Co says it found a new oil field in Egypt.

Oil flowed from the Al Zahraa oilfield at the rate of 2,615 barrels per day (bpd). Kuwait Energy holds a 49.5 per cent stake in the oil field, it says in the statement.

The discovery was in the East Ras Qattara block, and was the company’s fourth since it started exploring in Egypt in 2006.