Dana Gas aims for higher prices in Egypt

Sharjah-based Dana Gas is negotiating a higher price for natural gas extracts in Egypt ahead of drilling its first offshore well in the country.

“What we do need right now is a clear mechanism for a payment method going forward,” the chief executive Patrick Allman-Ward said yesterday.

Egypt needs to increase its natural gas production, which has remained stagnant since the early 2000s. But the price the government pays producers is fixed at US$2.65 per 1,000 cubic feet. Mr Allman-Ward said that while Dana Gas appreciates the willingness of the government to revise prices, the company would like a market-based gas system in Egypt. "While the increase[d] flexibility is extremely welcome, it's difficult to do a discounted cash flow on the basis of a promise."

Egypt’s natural gas production fell 12.2 per cent in September compared with the same month a year earlier. Exports also declined 81.4 per cent as more natural gas was needed for domestic use.

The country faces its worst power crisis in history as it relies heavily on natural gas for power generation, much like the UAE. The Egyptian state-run Information and Decision Support Centre said that power generation accounted for 68.7 per cent of natural gas consumption, an increase from last year’s 59.6 per cent.

Power outages have crippled the country’s economy. Egypt dropped 14 places to 121 out of 144 countries for electricity supply in the World Economic Forum’s annual Global Competitiveness Index 2014-15.

In September, the Suez Canal Authority declared a state of emergency as blackouts paralysed the movement in the important waterway. The canal brings in about US$5 billion in revenue annually for Egypt, but ships were forced to remain stationary because communications, including mobile phone coverage, was down as a result of the power failure.

Operations were momentarily stopped at 10 oil refineries and pumping stations. Other industries like iron and steel also suffered, costing Egypt about $140 million in lost revenue.

Dana Gas has invested more than $1 billion for exploration and drilling activities in the North African country since 2007, doubling its reserves.

However, Mr Allman-Ward said that since 2011 the country’s instability has created a “crisis of trust” between Dana Gas and the Egyptian government.

Dana Gas will begin a new exploration and drilling programme in Egypt in the first quarter of next year, including its first offshore well on Block 6 in the North El Arish Concession Area near Gaza. The work programme will span over a seven-year period with the company drilling more than 20 new development wells and conducting a similar number of improvements of existing wells.

The firm is still owed $276 million, of which $160m is overdue payment since 2011. The new drilling programme was created to help the company accrue the money owed, which Mr Allman-Ward said he expects to receive by 2018.

“However, if you don’t know what the gas price is going to be, you can’t calculate whether that investment is going to make you money or not,” he said.

Follow The National's Business section on Twitter