Foreign companies will start to receive more money for natural gas as Egypt moves to boost production to meet some US$20 billion of planned power projects.
BG Group, the London-based company that is one of the biggest players in Egypt’s gas sector, will receive US$3.95 per million British thermal unit (btu) for natural gas from new developments, up from its previous terms of $2.65 per million btu, a BG executive said on Monday.
“The [government] is basing the [increased price for natural gas] on a number of variables,” he said, adding that it was not “fundamental to change the pricing for everyone”.
Also on Monday, the Egyptian oil ministry announced that it signed an agreement to raise the price it pays Germany-based Dea Egypt (formerly RWE Dea) for natural gas to $3.50 from $2.50. Dea Egypt declined to comment on the pricing, but did say that it was involved in many projects in Egypt, including the recently renegotiated West Nile Delta project led by BP.
“That alone shows investment opportunities in the country and that the future is strong,” said the Dea spokesman Uwe-Stephan Lagies.
The government is increasing what it pays foreign firms for gas in the domestic market to encourage them to raise exploration and production.
The price that Egypt pays each company for natural gas varies based on numerous factors. A government appointed committee looks at company reserves and costs, and the body takes a decision on the price based on information provided by companies such as how much it costs to build infrastructure, to drill and on estimated reserves.
Egypt sits on an estimated 77 trillion cubic feet (Tcf) of proven natural gas reserves, up 30.5 per cent from 2010, according to the US energy information administration. Most of the potentially large gas discoveries are located in deep offshore areas and remain undeveloped because of the complexity and costly technology required.
A lack of infrastructure can prohibit exploration and expansion for onshore gas fields as well. The Western Desert has only two gas pipelines, and required investment to build another pipeline is about $1 million per kilometre, according to one Western Desert operator. The company said that despite signs of willingness from the government to pay more for the resource, it would still need $6 per million btu of natural gas to consider expanding its exploration and extraction. “It’s similar to having an abscessed tooth versus a gum inflammation. It’s just a matter of pain and these new prices are just a little less painful,” said the operator.
The company is still hoping to get part of the price increase and is in negotiations with the government to receive $4.50, up from its current price at $2.50.
Sharjah-based Dana Gas is also waiting to receive word if it will receive more money for its natural gas, with the Egyptian government currently paying the company about $2.65.
The announcement of new gas prices is a welcome development, and it comes at a pivotal time as the North African country is looking to increase its power generation capacity. Natural gas makes up the majority of electricity generation at 68.7 per cent, according to the Egyptian state-owned Information and Decision Support Centre.
Abdel Fattah El Sisi, Egypt’s president, has implemented a fast-track power plan aiming to double the country’s current capacity of about 30,000 megawatts in five years.
Germany’s Siemens will funnel more than $10.5 billion in power deals after signing four agreements during the Egypt The Future conference this month, the first major event to be held in the country since 2011.
The US company General Electric announced it would fund $1.9bn of power projects, and Saudi Arabia’s Acwa will provide a $9.4bn investment.
According to Frost & Sullivan, Egypt would need to increase its natural gas supplies either by importing or increasing its production rates to meet the additional expansion. Natural gas and coal will account for 84 per cent of the new capacity, said Anup Barapatre, a power analyst for Frost & Sullivan. This also includes new developments like the West Nile Delta project, which is scheduled to begin producing gas by 2017.
At its peak, the project will produce equivalent to about a quarter of Egypt’s current gas production, which is estimated at 4.7 billion cubic feet a day, and it is all for domestic use, said the BP spokesman Robert Wine. Despite the announcement of new gas prices, Egypt has struggled in the past to pay foreign operating companies.
The country began making headway in payments in January, handing out $2.1bn owed to foreign energy firms. Dana Gas received $60m of $212m in overdue payments while BG received $350m, 27 per cent of its outstanding receivables.
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