The promises and challenges of Egypt’s Zohr gas field development

Eight wells have been drilled, four of which can produce 7.1 million-9.9 million cubic metres of gas per day each.
Egypt is to start produc­tion at the massive Zohr gas field before the year is out. The field, which was discovered in August 2015, has estimated reserves of 906 billion cubic metres — the largest in the Mediterranean.

Zohr is likely to have a huge effect on Egypt’s energy sector and that of the region. Major international firms are interested in maximis­ing Zohr’s infrastructure facilities to serve production from nearby stranded fields. BP and Russia’s Rosneft have 10% and 30% shares in Zohr, respectively.

Zohr’s first phase is being de­veloped in record time for a giant deep-water gas project — just 20 months after the final decision to invest. Senior executives from Eni, the Italian company that discov­ered the field, dismissed the possi­bility of creeping delays, saying de­velopment is nearly 90% complete.

Production is to begin in the sec­ond half of December. Eight wells have been drilled, four of which can produce 7.1 million-9.9 million cubic metres of gas per day each. Three pipelines to the shore have been built and tested.

The high development cost of about $12 billion forced Eni to sell shares to oil firms with deep pockets. Eni also faced a cash flow decline of approximately 19% dur­ing the recent oil price collapse, prompting it to share the gas field risk and capital expenditure with shares valued at $2.1 billion.

Eni owns and operates the Shorouk concession containing Zohr field. It once had 90% equity in Zohr but this has shrunk to 60%. There are plans for further divest­ment of Eni’s stake with Rosneft and BP as each offered an option of an additional 5%.

Egypt is one of the largest gas consumers in the eastern Mediter­ranean. Only Turkey’s needs are comparable. Egypt’s gas consump­tion is expected to increase at a rel­atively high rate of approximately 5% per year. The discovery of major fields is key to meeting Egypt’s ris­ing demand.

Zohr, which is expected to con­tribute 39.6 million cubic metres per day by next year, is expected to help meet some of the demand. Other new fields projected to come online include BP’s West Nile Delta (34 million cubic metres per day) and Italy’s Edison Abu Qir gas field (5.7 million cubic metres per day).

Egyptian demand for gas is not limited to the domestic market. The country is contractually obliged to supply European markets with liquefied natural gas (LNG) from its two Mediterranean shore LNG plants, Idku and Damietta. The two plants have suspended delivery due to a lack of supplies. Egypt needs new gas supplies to restart exports.

The discovery of Zohr in 2015 and Eni’s commitment to its fast-track development challenges Israel’s major gas field, Leviathan. The lat­ter has 595 billion cubic metres of reserves and a first-stage develop­ment cost of more than $6.5 billion.

The consortium developing Le­viathan encountered several obsta­cles, including difficulties raising sufficient funds during the 2014-16 oil price crash. Israel’s Antitrust Au­thority looked into the role of de­velopers, the Noble Energy-led con­sortium and Israel’s Delek. Political tension with neighbours delayed the signing of export agreements.

The major challenges Zohr poses to Leviathan are Eni’s fast-track development of the field, its deci­sion to seek help to defray capital expenditure costs and its ability to capitalise on Zohr’s proximity to stranded regional fields and export gas through an underwater pipe­line from Egypt to Italy. The Egypt-to-Italy export would utilise a gas pipeline Eni owns and operates from offshore Libyan fields to Italy. The pipeline connects with the Eu­ropean gas grid.

The energy sector in the eastern Mediterranean has several chal­lenges. Gas faces global competi­tion and renewable energy, such as wind and solar and carbon reduc­tion policies, especially in Europe, is also an issue.

The global gas industry has strong competitors, not least from the United States where shale pro­duction increased in recent years. The industry is experiencing rising short-term and spot trading, which are lowering gas prices for the long term. This makes it difficult for east Mediterranean LNG to secure long-term export contracts, which are essential to develop deep offshore fields (6,000 metres below sea level).

Finally, the commercialisation of eastern Mediterranean gas is diffi­cult as prices are at a low point.

Source: The Arab Weekly