Right-size the industry

Egypt

Randall Neely, president and CEO of TransGlobe Energy Corporation, talks to TOGY about how the Egyptian government is supporting the oil and gas industry and its shift towards greater flexibility, as well as the company’s plans for growth in the country. Alberta-based TransGlobe Energy Corporation has E&P assets in Egypt and Canada.

How accommodating is Egypt’s government in regards to the oil and gas industry?
The reality is that the mindset and culture of moving the business forward has never been better. The government situation and economics are slowly getting better. The IOCs have been repaid. We see Egypt as a good place to invest, but you have to be able to find the oil. We see the government is proactively interested in matching economic returns to the challenges faced by the explorers and producers.
You have to have the right incentives for companies. They are trying to modernise the industry and right-size it in a way to get the right fit and format. It’s harder to make new discoveries as most onshore land available in bid rounds has typically been explored and relinquished by previous companies.
Trying to produce more oil from old reservoirs requires different fiscal terms to justify additional investment in the form of new technologies required to recover additional oil. As shown in the recent oil price downturns, you have to be able to be profitable when oil prices go below USD 50 or you can’t invest.

What have been the company’s key activities since entering Egypt?
In 2004, the company came in through a farm-in agreement on an exploration block in Upper Egypt but didn’t find any oil. We liked Egypt and felt it was a good place to operate as a small company.
We acquired assets in the Eastern Desert, including our West Gharib PSC, which was producing approximately 3,000 bpd in 2007 through 2008. We took that asset up to about 13,000-14,000 bpd through aggressive drilling and waterflood development. There were 25 or 30 wells on it when we bought it, and we drilled around 200 more.
In 2011 we acquired West Bakr, another asset in the Eastern Desert. That was producing about 3,500 bpd and today it is producing over 8,000 bpd thanks to hard work and applying well-grounded operating practices. These assets were originally owned by a company with other interests and hadn’t focused on them to the degree we do.
Today we have about 13,000-14,000 bpd of production in Egypt and we hope to grow. We see that growth coming through continued redevelopment and exploitation from our existing mature assets or brownfield projects, and from new discoveries, including our recent discovery in our South Ghazalat PSC in the Western Desert.
Regarding technology, we have focused on integrated reservoir management and optimisation by combining detailed reservoir simulation with field pump and waterflood optimisation projects. In addition, we have identified several pools in Egypt which are candidates for horizontal drilling and multi-staged fracking, similar to what we have been doing in our Canadian business unit.
Because of the intensity of the operating and capital costs, the old PSC world doesn’t support these new brownfield approaches because expenditures have to be recovered over four or five years and you only get a small profit. It goes counter to approaches you see in other countries.
In western Canada, if you drill a horizontal well on crown land, you get a 5% royalty. Egypt is flexible and willing to listen to what is happening in other countries in order to move these projects forward. The easiest oil to find is the oil you already have, if you can apply new technology to get it out of the ground.

What are the specific technologies you are applying in Egypt?
We have successfully applied technology in Egypt that they didn’t have before. We were the first to put progressive cavity pumps (PCPs) into use. Other players thought they wouldn’t work. Technical people here come from other places, especially Canada, where there’s a huge amount of heavy oil, and we figured out how to resize the pumps so that they worked very well here. We’re the largest user of PCPs here and we have been using them for 10 years. They run longer and can pump at a higher rate, and they require less maintenance.
We also do waterflooding. When we took over West Gharib, none of the fields were being waterflooded and today we have five pools under water flood. In West Bakr we have focused on infill drilling and zone recompletions combined with optimised surface facilities and that’s why after 30 years on a field that was producing 3,000 bpd we now have it producing over 8,000 bpd. We take a fully integrated approach on every pool to look at what makes sense on a well-by-well basis to determine optimum results.
We have some assets in Canada, where we do horizontal drilling and multi-stage fracking, including lands that hadn’t been drilled since 2012 or 2013. The last wells drilled by the previous operator were mile-long horizontals that had a maximum of 18 fracks in that one mile. In the ones we finished last fall, we did up to two miles and we do 40 fracks per mile.
The technology to increase the frack intensity and do it faster with more precision has increased remarkably in the past five years, so we want to bring that technology to Egypt. There’s an opportunity to do that here. We are working with the government to right-size the fiscal terms surrounding our PSCs. If we can do that, we would look at fracking shortly thereafter. It’s capital intensive and a big commitment, so we want to make sure the risk/reward is calibrated properly.

What is your drilling programme?
We have a modest programme because the assets are fairly mature, so there aren’t many drilling opportunities; this is also because of the economics. For the assets in the Eastern Desert we are drilling about seven wells, including one exploration well, and we’re drilling an exploration well in the Western Desert as well. We are focused on maintaining production in the Eastern Desert, and beyond that taking some exploration shots on and around our property that are not extensive and that have nearby proof of concept.
In the Eastern Desert we’re drilling a well near a successful well of one of our competitors. In the Western Desert we’re drilling an exploration well that is a follow-up to the discovery we made last fall. We aren’t trying to build the company on big exploration; we’re building it on exploitation and development opportunities.

What are some of the challenges you encounter in Egypt?
Overall the services in the country are good. It could be better. It’s not North America; it doesn’t have that competitive atmosphere, which it would be good to see developed. What we find challenging here as opposed to in Canada is that everything you do in a joint venture has to be put out for a competitive bid. That gets you the best price quote, but it’s a long process and can be very challenging and time consuming to introduce new technology or innovation which often comes at a higher cost.
If things were more competitive, you could make companies bid on the spot for a project. So if something breaks, you could go to three providers and tell them you need a bid tomorrow. But that’s not how it works here.
Also, there are fewer participants in the industry. What we see elsewhere in the world is that the more participants you have, the more innovation you have. That’s why North America has the most innovation: Small companies try to come up with new approaches to sell to the bigger ones. It’s an entrepreneurial mindset.

Have you felt changes since the discovery of Zohr?
We haven’t on the oil side. However, we do see that the Zohr success has sparked a lot of creative thinking about how to solve problems as opposed to doing things the way we’ve always done them. What is impactful for us is the idea that a PSC may not be written in stone. As the fields age, a conventional PSC no longer suits the remaining potential of the field. You have to think about how to capture any oil that’s left.

What are your Egypt portfolio’s characteristics?
Our Eastern Desert production is generally from about 3,000- to 5,000-foot depths. The oil is heavier, 20 API, with a higher sulphur content which requires complex refining. It’s all exported because there’s no in-country refining capacity, and there shouldn’t be because it’s a small unique blend in Egypt. Most oil here is lighter.
The fields vary in size from a few million barrels of potential recoverable oil up to the potential long-term for 40 million barrels recoverable. It’s a lot of small fields. There are a couple of fields that are at the scale of 150 million-200 million barrels, but that’s in-place, not recoverable, so hopefully we can recover 25% over the long term.
We believe we have about 600 million barrels in place in the Eastern Desert and we’ve recovered around 50 million barrels. We think we can recover another 25 million or 30 million in addition to the 2P reserves of approximately 25 currently booked. In the Western Desert, we have a new discovery with addition potential on the block. That was a nice test out of two zones, with 3,800 bpd of light oil on flow test, but we think that will be a relatively small field. We’ll drill another exploration well this year.

In 2015, you started direct marketing of Eastern Desert oil to international buyers. What was the strategy behind this?
Within our PSCs we always had the right to do that, but we needed government co-operation to do it. You need to manage the product once it’s produced. If you are producing 3,000 bpd and are in maximum cost recovery, you are getting 40% of the barrel, so that’s 1,200 bpd. In order to ship a vessel with oil in it, you need to accumulate 500,000 barrels, and that’s going to take a long time to produce at that rate, so in the meantime where do you put the oil? Historically, it wasn’t practical for the previous owners to export so they would sell the oil to the government. And for years the government was slow to pay: The norm was four to six months for payment.
When the revolution happened, these payment times increased to 10-12 months and at the same time oil prices were high. So a little company like ours went from having USD 50 million-60 million outstanding from the government to USD 250 million outstanding as a result of our rapid growth from 2009 to 2012 and the high prices. It was a big problem that concerned our investors, who thought we were never going to get paid. We knew the government would pay but it was hard to calm investors during the turmoil.
We started looking at what else we could do and decided we should sell our own oil. We were producing 14,000 bpd so we could fill a tanker in a few months and that would calm the fears of our investor base. So since January 2015 we’ve been mostly selling our own oil.

Are you looking at acquiring new assets or entering into new farm-outs or other deals in Egypt?
Yes, we are committed to being in the country. The type of assets we would be looking for are those similar to what we have: assets that are in development or should be in development. Or there are projects such as West Bakr, which has been producing for a long time but not as well as what we could do with our know-how. We would like to substantially grow here; we have the infrastructure and the right staff, and that’s not easy to do in a new country.

What is your vision for the company in 2019?
My long-term vision is to be a much larger entity built on a focus on development and exploitation as opposed to exploration. With that in mind, I want to focus on cashflow and net asset value growth rather than just production growth. I want to focus the talent on making the most money for our shareholders. We believe that because we have a well-built machine here we can do a big chunk of that in this country. We want to substantially grow our platform in Egypt.

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