Potential in the Western DesertMay 1, 2019
TOGY talks to David Chi, vice-president of Apache Corporation and general manager of Apache Egypt Companies, about the impact of economic reform on the oil and gas industry, Egypt’s potential in oil production and challenges faced by upstream players. Apache is a US-based independent E&P company.
Bearing in mind the recent economic reforms, what is your assessment of Egypt’s overall economy, particularly as it relates to the oil and gas industry?
The country went through economic reforms starting a few years ago, and all of the ministers have been pushing similar initiatives. The minister of petroleum and mineral resources is among them, and the main project he is pushing is the modernisation strategy for the oil and gas sector. That is quite encompassing of all the key areas, including both upstream and downstream.
A lot of progress has been made in the industry, and the major gas discoveries in the Eastern Mediterranean have changed the energy picture for the nation, which is very important because it helps the overall economy. The biggest costs for the government are subsidies and importing oil, gas and refined products. Improving that import balance helps the nation to continue to progress in its financial position.
In terms of flexibility, the government is committed to accelerating domestic gas production to eliminate the need for LNG imports and advance the country’s domestic refining capabilities. All of these efforts will bolster the country’s economic position.
I am on the board of the American Chamber of Commerce and I see people outside of the oil and gas sector, and my feeling is that we have a very capable and elite group leading the government, especially at the top level. The majority of ministers are capable and genuine in trying to do the right thing to see the country move forward.
Egypt understands the need to improve the deficit situation. Over the past couple of years, the government has removed various subsidies with a goal of balancing the budget and removing energy waste from the economy. This is particularly important not just because of the improved cashflow for the nation, but also due to the requirement of a more efficient economy to support the population growth in the country.
Overall, the economy has improved a lot, inflation has been curbed and now with a more stable currency foreign investors will feel less uncertain about coming into the country. The balance of cashflow in the government has come down significantly, foreign currency reserves have gone up and there is more economic growth. I think what they have tried to achieve, they have achieved.
The aim for the second phase of the economic reform is to bring more investments, from both domestic and foreign companies, and to generate even higher economic growth. For Egypt, one of the biggest challenges is related to its rapid population growth. This can be beneficial as it translates into a larger labour force and market, but at the same time it also means the needs to create more jobs, educate the population and develop the capacity so that they can be productive. The government is fully aware of this opportunity and challenge, and it is taking serious actions on capacity building.
What is Egypt’s potential in oil production?
The two most important oil-producing areas in-country are the Western Desert, which is the largest liquids producing region in Egypt, and the Gulf of Suez, which is more mature.
I think the Permian Basin in west Texas and southeast New Mexico is a great example of the remaining potential in the Western Desert’s future production. The Permian Basin has changed the entire global oil market with its rapidly growing production. And considering that it has been in operation for more than 100 years, this is quite remarkable.
In a depletion industry, the longer you produce, the less you have. Nevertheless, the Permian continues to break production records. The foundation for the Permian’s outstanding performance is its exceptional hydrocarbon resource base, as it has a large geographical area, with lots of vertical thickness that is full of hydrocarbons. This means that there is a very large volume of oil and gas in place, which is what you need to sustain and grow production.
The Western Desert is similar to the Permian Basin in that regard. The oil acreage alone is close to 30,000 square kilometres, and it has only been producing for about 40 years, so it is a lot less mature. The point of differentiation is technological innovation: You always have to apply the right technologies to extract more out of the space that you have. The Permian was in decline for many years, until new technology came on the scene and radically changed the outlook for that region. The same is likely true for the Western Desert: New technology must be brought to the table if the country hopes to grow production in that area.
What is the company’s position in Egypt in terms of investment and production?
We are the largest American investor in Egypt. We have invested more than USD 20 billion in the country in the last 20 years. We are looking to continue to sustain, and most likely increase, our investment in upcoming years in Egypt.
Our liquids production is at about 210,000 BO/D [bopd], while gas production is about 750,000 MMCF/D [mcf per day, as of February 2019].
You are also one of the most active drillers in Egypt. Can you tell us more about your drilling programmes?
We have a pretty extensive acreage – more than 6 million acres [24,280 square kilometres]. We almost doubled our acreage in the last two years and we have a lot of opportunities in terms of exploration, appraisal and development. We run a lot of rigs, and we drilled more than 120 wells last year. We are the most active driller in Egypt. The nature of our activity is different from that of a company that focuses on offshore, because they will drill far fewer wells. We have many places to target, from the Nile River to the Libyan border.
What is Apache’s take on the new bid rounds to be announced, the new PSAs and the change in the gas legislation?
All of these latest developments are positive. In general, the government has improved the efficiency in awarding acreage, they have also improved the flexibility of fiscal terms to attract more investments. We still need to see how the government is going to implement the new gas law, but the principle is that we should be able to sell gas directly to the market and that will allow more flexibility on the producer side, which is also very positive.
I believe besides the improvements we’ve already seen, there are more reforms for the fiscal terms in the plan, again this is a good thing for investors.
The key to success in my mind is that fiscal terms need to be designed to generate value for all stakeholders, or a win-win situation. It is also critical to engineer terms that will address specific resource types, such as unconventional resources or deepwater exploration, to sustain the progress that we’ve already experienced in the last few years.
What major challenges are E&P companies experiencing?
The tendering process is an issue: Tenders tend to be very long and they are inefficient. Another issue that is both a benefit and a drag is that the tendering process in Egypt focuses more on cost, rather than value. That has a benefit because it will eliminate corruption. That is also what has made Egypt one of the lowest direct operating cost environments in the world. At the same time though, if you want to see a leap forward in terms of performance, you have to start being more flexible with technology, and this is still lacking.
Additionally, the structure of our joint ventures with EGPC need to be streamlined. There are far too many steps that have to be followed to get anything done. Because of the lengthy approval process that requires dual signatures of numerous people for nearly every decision, our operations are not nearly as nimble and responsive as they could be. Simply put, decision making is an area that is a major challenge and could be optimised to create value for all shareholders.
The good thing is that the ministry has recognised this as an opportunity for improvement and is putting tremendous efforts into reforming and modernising the current structure in the oil and gas sector. I’m very hopeful and confident that we will see improvements in these areas soon, given the clear direction and determination of H.E. Minister El Molla in improving the efficiency in the sector.
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