Egypt struggles to meet demand growth for natural gas

Eric Watkins
Oil Diplomacy Editor

LOS ANGELES, Oct. 4 -- Egypt has awarded a drilling contract to the recently formed Egyptian Offshore Drilling Co. (EODC), a joint venture of Toyota Tsusho 50%, Egyptian Natural Gas Holding Co. 35%, and Ganoub El-Wadi Petroleum Holding Co. 15%.

The award comes as Egypt is stepping up efforts to increase its output of natural gas to meet growing domestic demand, as well as hoped-for exports to neighboring Arab countries and the European Union.

EODC will place a $400 million order for drilling rigs with a Singaporean heavy-machinery maker, yet to be named, and drilling is slated to begin as early as 2011.

Trading firm Toyota Tsusho, a subsidiary of Toyota Motor Co., will manage the entire project and procure the rigs, while Egyptian Natural Gas will operate them and carry out test drilling.

The JV has signed a $500 million loan agreement with a bank syndicate consisting of Japanese and Egyptian banks.

JBIC to back JV
In late September, Japan Bank of International Cooperation (JBIC) said it agreed to participate in the syndicated $500 million loan to the Japanese-Egyptian offshore drilling joint venture.

JBIC said the credit will finance the construction and operation of two offshore drilling rigs by EODC.

Also in late September, Egypt offered seven offshore exploration permits in Mediterranean areas potentially rich in natural gas, and companies have until Feb. 9, 2009, to submit bids.

Egypt's reserves of natural gas now stand at 76 tcf, according to Egyptian Minister of Petroleum Sameh Fahmi at a meeting of the Egyptian Holding Co. for Natural Gas on Sept. 22.

But there is growing competition for the supplies, especially in Egypt.

Demand on the rise
According to analyst BMI, Egypt's domestic natural gas demand has grown rapidly as thermal power plants, which account for about 65% of Egypt's total gas consumption, have switched from oil to gas.

BMI forecasts suggest that gas supply could reach 88 billion cu m in 2012 which, with demand of an estimated 40 billion cu m, provides export potential of 48 billion cu m.

In July, Fahmi and Syrian Petroleum and Mineral Wealth Minister Sufiyan al-Aw discussed the possibility of linking the Arab Gas Pipeline to the European gas network to deliver natural gas to Europe via Turkey.

"The fact that the Arab region has big gas reserves highlights the importance of the Arab Gas Pipeline as one of the most important projects linking main gas production centers with consumer centers," Aw said.

Egypt began exporting gas to Syria in July, and according to reports is expected to export some 900 million cu m of gas in the first year of operations, rising to 2.2 billion cu m/year over the next 9 years.

Syria gets gas, Lebanon doesn't
The start of Egyptian supplies is considered a useful boost to Syria which is struggling to stem the decline in production of its own hydrocarbons.

With an eye to eventual sales of gas beyond the Arab world, the AGP is being extended to Homs and Kilis on the Turkish border, widening the link to send the gas on to Turkey and, eventually, Europe.

Europe, meanwhile, is eyeing Egyptian supplies as well. In May, EU energy commissioner Andris Piebalgs said he expects to see the EU importing about 2 billion cu m/year of pipeline gas from Egypt in early 2010 through the AGP.

Still, there could be problems ahead as indicated in September when Egypt announced a delay in gas exports to Lebanon through the AGP until at least January 2009, after initially scheduling them to come on-stream in July or August.

Lebanon's Minister of Energy and Water Alan Tabourian confirmed the lack of current Egyptian supply capacity on his return from a visit to Egypt, adding that it appeared Egypt would only be able to supply half of the agreed volumes—60 MMcfd—when supplies are launched.

"The Lebanese team that traveled to Egypt was surprised to find out that the natural gas shipment has been delayed to January 2009 instead of this month," Tabourian said.

According to one analyst, Lebanon came into the picture "a little too late"—after the Egyptian government had been forced by popular protests to put a moratorium on future gas export contracts and renegotiate gas prices upwards with its buyers.

Contact Eric Watkins at hippalus@yahoo.com.

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