Return on investment

What were PICO International Petroleum biggest achievements in 2015?
In the past year, we’ve drilled eight wells, conducted 18 workovers and invested around USD 280 million in Egypt alone. We also picked up a new concession called North Magawish. The difference between our company and some of the other companies is that we have been investing in the down cycle.

You produced more than 30,000 bopd in 2015. To what do you credit such a large amount of production?
Our focus has been the mature assets in the Gulf of Suez. We have been breathing new life into them, interpreting the subsurface in our own particular way, investing and going after other incremental opportunities.
The difficult thing about mature assets is that in the down cycle, things get more challenging. Much larger companies have probably left these assets in the past because of the materiality of the size of those companies. So, we think this province is ready to be looked at differently in fiscal terms. If you look around the world at places such as the North Sea or Malaysia, you will see that those provinces have looked at mature-asset fiscal terms specifically in order to maximise hydrocarbons recovery.
This country is probably on the cusp of needing to do just that. In mature provinces, you can’t apply the same kind of terms that you can for new provinces. And, by definition, a mature asset is more costly. In order to maximise hydrocarbons recovery for the country, you need to adjust your terms as you get to the end of the life of the fields and assets in question.

What exactly is your strategy for developing these mature assets in a low oil price environment?
Our strategy is, of course, to spend money where we get a return. At the moment, we are adjusting our investment and portfolio to reshape it for projects that work in a lower oil price environment.
What does this mean? We are concentrating on projects we think are right to do now, and we’ve got projects ready to start should the oil price recover in a reasonable timeframe. Having said all of that, in our business plan during the next year or so we’ve got about USD 300 million of investment lined up to spend on various things. The majority of that is happening in Egypt.

Could you go more into the opportunities that smaller, more mature assets provide?
It’s pretty simple. The very large companies such as BP, Shell, Eni and IOCs have their own materiality threshold because they are quite large. Opportunities which are becoming too small for them in terms of the size of the company, the size of the portfolio, becomes just right for independent companies.
Therefore, as larger companies dispose of assets or churn their portfolio, we see opportunities. If you look at the some of the larger companies in this country, you can work out yourself that there are going to be portfolio rationalisation over the next several years. The larger companies such as the BPs of this world will start to dispose of assets.
There will be opportunities coming down the track. Egypt has a huge opportunity to maximise hydrocarbons recovery and it’s an opportunity that shouldn’t be missed. I think a degree of focus needs to be put on it. What does this mean? The NOC could consider mature asset licensing, for example.

What could the government do to improve bid rounds?
The NOC could commission a large-scale, modern seismic survey and deliver a stronger and more focused licensing round. The second thing is, if assets have been through a competitive process in the past and no one has picked up the concessions, then direct negotiation should be allowed.
Sometimes things are all about timing and in some years a company may feel it doesn’t want to bid in a round because of internal capital allocation, whereas the year after, they may feel that they could be ready to take on more investment. After it has already been an open competitive process, I see no reason why there shouldn’t be an opportunity for direct negotiation on blocks which couldn’t be taken up in these competitive processes.
This is something which has happened in the past at Ganope, but to my knowledge I haven’t seen it happening in Egyptian General Petroleum Corporation (EGPC) and Egas rounds.

What would you say is the main difference between PICO and other companies operating in Egypt?
To be perfectly honest, this is an Egyptian company with very good Egyptian talent. We are focusing on opportunities in our home country. This is not a one-platform, one-field company. It’s a whole portfolio.
When you look at portfolio decisions, you can consider managing risk and opportunity in a more sustainable way than you can if you are just looking at one field, such as an integrated rig schedule.

Are there any areas for improvement for attracting foreign companies to Egypt’s oil and gas industry?
I would say there are a number of things which attract foreign investors and there are a couple of areas which are pretty typical at the moment. We’ve seen huge inroads made on the outstanding receivables that the EGPC owes to international oil and gas companies, and it’s a journey. The country and EGPC are not yet at the end of that journey. So, finishing that journey and not leaving it hanging is incredibly important.
Egypt has built some confidence, but people are still concerned about getting paid. Also, getting paid is one thing, but getting paid in the right currency is another. So, making sure that the forex issue is resolved so that the payments can be received in USD and companies can repatriate the profits as described in the concession agreements is important.
Ratification of licence awards takes a long time, which I think is unnecessary. It’s difficult for a company to plan your investment cycle when you don’t know when or if you are going to get awarded a license. You’re always left wondering, “Should I go and spend my money somewhere else?” When it’s finally ratified you say, “Oh, dear! They are awarding me something and I’ve just spent my money!” This adds inertia to the system and there’s no reason for that.
For oil, allowing owners to lift their own share of the production would help because you’ve got direct access to the market, direct access to the currency inflow, you are getting paid immediately and it’s your share under a local concession agreement.
For gas, making sure that the pricing is right as it doesn’t cost the same amount of money to develop gas if it’s a large accumulation or a small accumulation, if it’s stratigraphically shallow or stratigraphically deep or if it’s in shallow water, onshore or deepwater. These are all differences. So, the country needs absolute gas supply diversity.
Egypt also needs to make sure that one or two big discoveries don’t make Egas feel too comfortable and that it continues to focus on supply diversity. Diversity is how we get security of supply. Also important, is smaller, incremental developments so you have a portfolio of supplies where you can manage your risk in terms of supply, alternative supplies and international supplies, should it be deemed appropriate.
You do not get security of supply by discovering one big gas field in the Mediterranean, drilling a few holes in the ground and turning on the tap. I speak from a perspective of having previously made a large development at West Delta Deep Marine when BG supplied 43% of the gas market, all relying on West Delta Deep Marine. Egas should not plan this type of supply concentration risk with Zohr.

What developments would like to see in order for Egypt to become a regional gas centre, or an actual exporter again?
The country’s strategic focus on gas supply is fairly short term. Egypt is looking at the next five years. What do you do in 5 to 10 years? What do you do in 10 to 15 years?
In my opinion, you’ve seen the Mediterranean discoveries, you’ve also seen the deeper Oligocene plays which will probably extend onshore. It’s highly likely that the country will find one or two material gas discoveries in the next couple of years. That’s okay for near-term supply, but we need to think about it in the timeframe of the next five to 10 years, not zero to five years.
Country Gas Supply strategy should consider: What am I going to do about export? What am I going to do about ensuring that I’ve got diversity of supply? What am I going to do about making sure that these separate developments are integrated in such a way that the country has a supply pipeline for the next two generations? These are the things to consider when one is thinking about this.
I personally believe that there are huge supply optimisation opportunities that can benefit the investor, benefit the country and improve the robustness of the long-term supply. I think getting projects off the ground for the near-term gas supply to fill the near-term shortfall, and avoid the regasification of LNG, which is coming at quite an expense is important. Once we get over those things, the planning horizon needs to be a little bit longer than it currently is.
Egypt in the right place to become a regional centre. We may soon get supplies coming in via pipeline from the borders between Cyprus and Israel. We’ve got potential supplies through pipeline that is already in Israel. There is a potential Arab gas pipeline and reverse flows from Kurdistan to Turkey in the future. You can actually see the potential for a developing centre.
However, these things don’t happen by magic. You have to consider what your strategy is and then consider what actions one wishes to put in place to make sure that it’s attractive. We can all draw lines on maps and talk about physical possibilities, but these things have to be commercialised. If they are politicised, then there are other issues to solve in time for these to happen.

What direction do you see PICO International Petroleum going in Egypt over the coming years as it becomes more of a regional energy centre?
As I mentioned in the beginning, we are 70% oil and 30% gas. I think I also hinted that in this very low oil and commodity price world, our gas portion in our portfolio is incredibly helpful because it helps buffer the tensions created by low oil commodity price.
I can see us giving due consideration to adding more gas into our portfolio and playing a slightly bigger role in gas in Egypt, should the opportunities present themselves.

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