Huge gasfield find could drive Egyptian economy for decades

Italy’s Eni said that the find, covering an area of about 100 square kilometres, at the Zohr Prospect in the Mediterranean Sea could hold a potential of 30 trillion cubic feet – the largest discovered so far.

Eni chief executive Claudio Descalzi, third from left, and other company officials meet with Egyptian president Abdel Fattah El Sisi, right, regarding the latest gasfield discovery. MEAN via AP

The discovery of one of the world’s largest gasfields off the Egyptian coast could fuel the country for decades.

Italy’s Eni said on Sunday that the find, covering an area of about 100 square kilometres, at the Zohr Prospect in the Mediterranean Sea could hold a potential of 30 trillion cubic feet (Tcf) – the largest discovered so far in the area. Egypt has proven gas reserves of 77 Tcf, according to the US Energy Information Administration (EIA).

“The historic discovery will be able to transform the energy scenario of Egypt,” said Claudio Descalzi, chief executive of Eni. He said that as a result of being close to existing infrastructure, the start-up for the gas project could come quickly.

This would be a welcome sign for a country that has struggled with power problems over the last few years. Egypt relies on natural gas for nearly 70 per cent of its electricity production and its installed capacity is about 30,000 megawatts. It wants to double its current generation capacity by 2020 – a target that is seen as key to supporting ambitious plans for economic growth.

Khaled Abdel Badie, head of the Egyptian Natural Gas Holding Company (Egas), said that he estimated investment at the field could reach $7 billion.

Ahmed Ben Salem, a Paris-based analyst for Oddo & Cie, said that Eni typically has a low discovery cost, even at its offshore operations.

“For this year, the company’s discovery costs was around $1.70 for each barrel,” he said, adding that on average over the past seven years the cost for the same discoveries totalled about $2.60.

“So when you purchase for $3 to 4 dollars a barrel, that’s still a good price for the company,” he said.

Eni said that it was open to selling a stake in the huge gas find, similar to what it did in Mozambique and Nigeria. "It's an open door to give value and solidity to Eni's balance sheet," Mr Descalzi told Italy's La Repubblica newspaper.

An executive at a gas producer with operations in Egypt said that it was a great time to buy, but only for some companies. “There is a surplus and enough stress on pricing because valuations will come off, but it is for companies that are sitting on piles of cash,” he said.

The operator said that Egypt could potentially, in the longer term, go back to being a net exporter.

It could also apply for companies that are looking to expand, and take more risk into the region, such as Russia’s Gazprom.

“I think that Gazprom could be interested in the project, and Eni should look for the strategic partner,” said Andrew Polischuk, senior vice president of Moscow’s Raiffeisen Bank. He said that it would depend on whether the price was attractive. “I think that the main market for the project is Egypt itself, which means that the margin of sales would be low for the initial stage of the project,” he said.

Gazprom could not be reached for comment.

However, Paris-based equity research company Alpha Value believes that developing a huge project for gas alone is impossible in the next two years due to the collapse in hydrocarbon prices.

“Eni may try to sell a part of its asset, but the buyers may be shy or not willing to pay high prices,” said Alexandre Andlauer, analyst for Alpha Value.

Egypt has previously paid US$2.65 per million British thermal units (Btu) for gas, but newer contracts reportedly range from $3.95 to $5.88 per million Btu, according to the EIA. Eni declined to comment on any prices being negotiated in the contract it signed last year with the petroleum ministry and state-owned Egas.

Egypt maintains that the price will be negotiated on a case-by-case basis taking into account the cost of exploration and development.

The Egyptian stock benchmark, the EGX 30 index, rose 2.7 per cent yesterday, lifted by the news of Eni’s discovery. That made it the world’s best performing stock index for the day, according to Bloomberg.

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