Building on exploration success in Egypt

Egypt

Thomas Maher, president and COO of Apex International Energy, talks to The Energy Year about advantages in the Egypt Upstream Gateway (EUG) project and the company’s strategy at its Southeast Meleiha concession. Apex signed two PSCs with the government in August 2017 for the West Badr El Din and Southeast Meleiha concessions.

This interview is featured in The Energy Year Egypt 2022

How has Egypt’s oil and gas sector coped with the pandemic?
The sector was certainly affected, particularly out in the field. One of our first responses as a sector, with the help of the Ministry of Petroleum and EGPC, was to put an emergency response plan in place to prevent the spread of Covid cases in the field. That turned out to be a pretty timely and accepted document. It was sent out by EGPC to all their JV companies, so it became a standard. That helped manage the crisis and put some consistency behind the emergency response.
The pandemic also caused oil prices to crash in March 2020. Investment dried up and activity levels were hurt badly because companies needed to suspend what they could. No one suspended production operations, but discretionary drilling was curtailed along with any other discretionary spending so that companies could preserve their liquidity. That had an impact on activity, and this is showing up in Egypt’s oil production.
While the country’s gas production hit a record 7 bcf [198 mcm] per day this year in March, along with 1.5 bcf [42.5 mcm] per day exported through LNG, the oil side is a different story. Production has stabilised a bit in the last few months but has fallen around 20% from the high in late 2014, mainly because of the low oil price. Covid exacerbated the low oil price for much of 2020, which hit investment. Now that the oil price has recovered to around USD 70 a barrel, everyone is hoping for better days ahead with increased activity levels.
Most companies used the activity slowdown to do maintenance on their facilities. They have prepared themselves for the eventual uptick that should start to happen this year. We may already be seeing the start of a sustained recovery, but some companies are still cautious, making sure that the higher oil prices remain stable, and will not crash again. Apex as a company is optimistic.

How do you view the latest moves regarding the modernisation of the sector, such as the EUG project?
Digitalisation is a big part of that modernisation programme. There is unanimous applause for having digitised the formidable database of well logs and seismic data the government has, and now they offer easy access to these data.
We just recently enrolled in the EUG, so we are looking forward to making use of it. The initial feedback I am getting from our geoscientists is positive. They are glad to see the data in what looks to be pretty good shape and readily accessible. That will attract more investment and there will be more companies that will be willing, particularly in the age of Covid, to participate in a bid round where they do not have to send people in person.
The ministry has also been modernising the concession agreement. This started before Covid, and TransGlobe was successful in advancing this effort. Apache is a more recent example on a large scale because they have so many concessions. Not only are they modernising the sector in terms of technology and digitalisation, they are doing it in the fiscal realm too by merging concessions and improving the terms, making it more economical for companies to hold on to their assets through the maturity cycle.
The production-sharing contract, or PSC, is a popular and effective contract for resource sharing, and I understand why Egypt has used it for so long. We like it too, but one of the issues with it is that when you get toward the end of the mature field life, it is very hard to keep making a profit and stay invested in these properties. What we are seeing are these older concessions being merged, the concession terms improved and JVs modernised and sized for purpose. That is going to be a big plus attracting more foreign direct investment.

How do you see that impacting your operations?
On our side, we only have the Southeast Meleiha concession that we are exploring at present. We are now going into the development phase as we made three oil discoveries earlier this year. As a new entrant doing business in Egypt, we did not have a joint venture operating company with the government yet. We must form one and we are in the process of doing that. The minister of petroleum and mineral resources signed a decree establishing our JV, named Farah Petroleum Company, in April.
We are trying to take a different approach where the JV does not become too big too fast and hurt the economic viability of projects. Production will start at modest rates, and ramp up to something formidable with time, and the JV will grow with that growing production. It will not start as something big that is not fit for purpose. We are also seeing a modernisation of the thinking on how JVs operate strategically. This is also positive for attracting investment.

What is your strategy at the Southeast Meleiha concession?
At Southeast Meleiha, we have had some initial drilling success after having acquired two 3D-seismic surveys. We started drilling late last year and early this year and have made three oil discoveries in three attempts. We are in the process of designing facilities for early production at one of the fields. We have also contracted a rig and it has started another drilling campaign.
We have met all of our first period commitments under the PSC, so will elect to go into the second exploration period after the first expires in November, with plans to drill more exploration prospects, as well as start to develop these new discoveries.

What was the key to achieving a 100% drilling success rate in the concession?
The three exploration wells we drilled were all close and along the same geological trend that held an existing field named Zarif, operated by Agiba. It was discovered in the mid-1990s. If you look at a map of oil and gasfields in the Western Desert, you see that they are generally grouped together. There is the Shushan-Matrouh Basin area, where there are clusters of Khalda and Agiba fields, and then you have the same in the Abu Gharadig Basin, with a number of the Bapetco, Khalda and Qarun fields. It is rare in the Western Desert to see a field sit all by itself and nothing near it, so Zarif was an anomaly that intrigued us.
One of the things we noted when we looked at this in the bid round is that, outside of a small 3D-seismic survey around the field itself, there was no 3D seismic in the area. From the collective Western Desert experience our exploration team has, they found a good number of new fields using 3D seismic in areas that had little to no exploration drilling before. They thought the hydrocarbon system was there – Zarif had oil, so there was a reasonable chance that oil had migrated in the area. Our thesis was that, if we have some structures identified from the 3D seismic, we will have some success, and that has turned out to be true. All three of these new fields are around the same structural trend as the Zarif field.
For future exploration drilling, we have several prospects north of this Zarif trend and hope to extend into a different play type, proving that the migration is even more robust than just along that one fault trend. Exploration is a risky business, but having had three successes, and indications of a robust oil charge in the area, we are hopeful that more mapped closures or prospects will be filled with oil as we move north of the Zarif area.

Will you drill an appraisal or an exploration well next?
We have contracted with the Egyptian Drilling Company (EDC) for their Rig 65 for a year term starting June 1. We have four wells ready to be drilled now as we have the long-lead items. The first well we plan to drill is Fajr-2X, an appraisal well near the biggest of the three discoveries that is now named Fajr field. Fajr-2X is a little over 1.7 kilometres from the original discovery well.
Then we are also going to drill a development well closer to the discovery well (Fajr-3). We will drill two wells in that field so that we can get production started, possibly in the third quarter. We have already contracted Tanmia and Onspec and will plan to be mobilising early production facilities in late June.
After the two Fajr wells, the rig will move north and drill two separate exploration prospects I mentioned earlier, the SEMZ-4X and the SEMZ-9X. That will give us a much better idea of whether oil has migrated to that part of the concession, and if successful, will require a more robust development plan for the concession, as we will then have four or five discoveries to develop. We want to develop the stronger fields first, and then the ones that will be more capital intensive and likely to require fracture stimulation and waterflooding, two very common operations in the Western Desert.

Are you also going to fracture stimulate well 1X?
We have received development leases for two of the three discoveries, Fajr field (SEMZ-11X) and Farah field (SEMZ-3X). The other discovery, named Mashreq (SEMZ-1X), is the very first discovery we made. We did test oil at Mashreq, but our data shows reservoir quality is not as good as the Fajr and Farah discoveries and will require fracture stimulation to produce at commercial rates.
Our plan is to get production facilities in place and cashflow started, and then it will be easier and more economical to connect the commercial production we hope to establish in Mashreq. We do not want to fracture stimulate it now and have the frack fluid sit on it for months or even a year before we can produce it. We do not want to work on that well and develop that field until the facilities are in place at the nearby Fajr field. They are only 8-10 kilometres apart.
We have not applied for the development lease at Mashreq yet, but we will probably do that towards the third or fourth quarter of this year, when we have a better handle on facilities and can perform that fracture stimulation operation. We are confident based on our experience in this particular reservoir – Bahariya – that it will respond well to fracture stimulation.

How are you planning to lower your carbon footprint once producing?
The oil we have discovered is low GOR [gas/oil ratio], so there is very little associated gas and no sulphur with it. We should be doing little to no flaring once we start up, and what little gas is produced can hopefully be used to fuel our operations, and not flared. We are designing our greenfield facilities with the goal of minimising emissions, protecting and conserving freshwater, and disposing of produced saltwater safely to protect the environment. Blue Water Energy and the International Finance Corporation (IFC) are two of our primary shareholders, and they hold us accountable to the IFC environmental and social performance standards. So not only will they be watching us, but they will also be helping us.

What is your outlook for Egypt’s hydrocarbons sector in 2021 and 2022?
The first half of 2021 may be a little slow, as companies continue to recover from Covid aftershocks. The majors are also rationalising their portfolios across the globe, and we saw that in Egypt recently as both BP and Shell announced sales of their more mature assets while staying active in Egypt exploring and producing offshore gas.
That said, there were 62 field discoveries in 2020. That is substantial, and they will need to be developed. There were also many new concessions recently awarded in the Mediterranean and Red Sea. With oil prices at USD 70 per barrel, we are going to see activity levels pick up in the second half of this year and I expect 2022 will be a big year for activity and investment.
The Ministry of Petroleum is focused on oil production. They have done such a good job of modernising refineries and planning additional petrochemical plants. All of that requires crude oil, and it is counter-productive to be bringing that crude in from other countries when you have it here in your own backyard. This will result in a push for increased oil production, just like there was with natural gas. In 2016, Egypt was producing 3.9 bcf [110.4 mcm] per day, and now we are producing over 7 bcf per day. Hopefully, we can see that turn around on the oil side as well.

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