Egypt

Contrast typifies Egypt. From its mysterious Pharaonic pyramids to ruined Roman towns to the throbbing crowds of modern-day Cairo, this vast and ancient country offers diverse faces to the world. Not far from lush fields of the Nile Delta, desolate expanses of rocky desert stretch to the horizon. Bedouins lack indoor plumbing, but eagerly chat on cell phones. Tourists jam the famed Khan el-Khalili bazaar, where vendors sell Egyptian souvenirs freshly imported from China. Egyptians embrace their incredible past, but they also live enthusiastically in the present. Nearly 80 million people call Egypt home, and a third of Egyptians are under 14 years of age. For Egypt's swelling population, economic growth and job creation override many other concerns. Oil has been and continues to be a major engine in Egypt's economy, but natural gas is emerging as a crucial component. The country's position as a crossroads between North Africa and the Middle East makes it auspiciously located for pipeline exports to such growing, energy-short countries as Jordan, Lebanon, Israel, and the Palestinian Territory. And, liquefied natural gas (LNG) plants on the Mediterranean coast ship Egyptian gas to ports throughout the world. Unfortunately, recent terrorist attacks at popular Red Sea resorts have also highlighted Egypt's need to diversify its tourist-dependant economy. Energy future Egypt reached its peak crude oil and liquids production of just under a million barrels per day in the early 1990s. According to state firm Egyptian General Petroleum Corp., the country now produces 680,000 barrels of oil and liquids per day. Field declines slice 50,000 to 60,000 barrels per day off each year's levels, although operators work diligently to arrest the slide. That's because three-fourths of the oil flows from decades-old fields in the Gulf of Suez, and production levels are hard to turn around. Egypt still consumes less oil than it produces, however. The U.S. Energy Information Administration estimates that Egypt exported 134,000 net barrels of oil per day in 2004. Its proved reserves stood at 3.7 billion barrels at the beginning of 2005. Natural gas offers a much different picture. According to Egypt's ministry of petroleum, the country contains 66 trillion cubic feet (Tcf) of gas reserves. Present production is 4.8 billion cubic feet (Bcf) per day, an astonishing jump from less than a Bcf per day in the early 1990s. Clearly, Egypt's geology favors gas accumulations, and three major supply areas have developed. The onshore and shallow-water Nile Delta have yielded first-class fields including Ha'py, Port Fuad, South Temsah and Wakah; the Western Desert, an Oklahoma-size area west of Cairo, has been producing fine Jurassic discoveries from deeper exploratory campaigns; and the emerging offshore Mediterranean basin, one of the world's few gas-prone deepwater provinces, boasts a string of multi-Tcf finds. Indeed, Egypt now leads North Africa in gas-reserve additions, thanks to its tremendous deepwater discoveries. Domestic demand for gas is robust: since 1995, this has grown an average of 12% annually. Even so, Egypt's gas riches exceed its internal needs, and the country aggressively markets the commodity to other nations. Its first gas exports were piped to Jordan in 2003 through a line constructed from Taba, on the north Sinai, to the city of Aqaba. At present, an extension of that line is under construction to Amman, and next year it will be able to deliver 230 million cubic feet a day. The Egyptian government plans to extend the line to Syria and Turkey, and sales of gas to Israel by pipeline are set to begin in 2007. The principal exports are now from gigantic LNG projects on the Mediterranean coast. Three trains liquefy Egyptian gas: the world's largest train at Diametta, on the east side of the Nile Delta, and two at Idku, on the west side. The three facilities liquefy a total of 1.2 to 1.5 Bcf of gas per day. Western Desert Oil was initially developed in Egypt's Western Desert, also called the Libyan Desert. Several sedimentary basins and regional structural features dot the region, which stretches from the western banks of the Nile to Egypt's border with Libya. Following World War II, major oil companies actively explored the Western Desert. They were frustrated; however, as the area yielded small clusters of 10- to 50-million-barrel fields rather than the giant-size accumulations they were seeking. Natural gas wasn't even considered a commercial option, as the concession agreements covered only oil and there was no use for natural gas anyway. That's all changed now. Egypt began granting rights to concessionaires to develop gas reserves in the late 1980s, and that spurred exploration in the deeper gas-prone Jurassic sediments that lay below the small Cretaceous oil fields. The onshore Western Desert has now emerged as one of the gas-supply powerhouses of Egypt. And Houston-based Apache Corp. has grabbed the position as the foremost producer of oil and gas in the Western Desert. This March, the independent posted record gross oil and gas production of 119,500 barrels and 501 million cubic feet per day in Egypt, all from Western Desert concessions. During the past decade, Apache has invested $3.1 billion in Egypt, more than any other U.S. energy firm. "We produce about 15% of Egypt's daily energy output," says Rodney Eichler, Cairo-based executive vice president and general manager of Apache Egypt. "We're the most active driller in the country-we've drilled more than 600 wells since we became an operator in 1996." At present, the company runs 25 drilling and completion rigs in Egypt, more than half of the country's land-rig fleet. Last year, Apache spent $540 million in Egypt. It drilled 121 wells, and added 92 million barrels of oil equivalent (BOE) of gross reserves. "We will add production of almost 39,000 barrels of oil and 96 million cubic feet of gas per day just from our 2005 program," he says. "We plan to continue our trend of increasing our production every year." Apache's efforts in Egypt began in 1993 near Lake Qarun, a huge saline lake in the Western Desert's Fayoum area, some 60 kilometers south of Cairo. Desert oases are usually depressions fed by springs, but the Fayoum is fed by the Nile River, through a natural channel that cuts through the cliffs on its western bank. Lake Qarun was much larger during ancient times, and people have been attracted to its shores for millennia. Rich archaeological and paleontological sites are preponderant in today's Fayoum, which remains an important agricultural and tourist area. In a dry and quiet corner of north Fayoum, the independent farmed into a prospect offered by The Phoenix Resource Cos. Inc., a small Oklahoma City-based firm. It was an excellent decision, and resulted in a 12,000-barrel-per-day oil discovery on the Qarun concession. The crude oil was struck in Cretaceous Bahariya and Kharita reservoirs at depths of around 3,100 meters. In 1996, Apache acquired Phoenix and its interest in the crown-jewel Qarun discovery, estimated to contain some 70 million barrels of recoverable oil. Since then, the company has expanded its position to 10.67 million gross acres, spread across 14 producing and four exploratory concessions in the Western Desert. Khalda concession As part of its 1996 Phoenix purchase, Apache acquired a 40% nonoperated interest in the Khalda concession, in the northwestern portion of the Western Desert. Unlike the Qarun area, Khalda does not lie near any ancient or modern civilizations. This corner of Egypt is flat, rocky desert, punctuated only by the occasional herd of camels. It is arid beyond belief, and hot and terribly remote. Apache soon decided to consolidate its position at Khalda. When it entered the concession, Khalda hosted 15 producing oil fields and six shut-in gas fields. Most of the 30,000 barrels a day of production were made from shallow Late Cretaceous Bahariya and deeper Early Cretaceous Alam el Bueib (AEB) reservoirs. Several fields were in the early stages of waterfloods. By 2001, Apache had acquired 100% of the foreign-contractor interests in Khalda, and assumed operations. The company, through a relentless focus on Khalda, has turned this once-backwater area into its most prolific region in Egypt. In five years, Apache has doubled production of both oil and gas from Khalda, says Dave Talbott, assistant general manager and operation general manager of Khalda Petroleum Co., the joint-venture entity that consists of Apache and Egyptian General Petroleum Corp. (EGPC). Khalda Petroleum runs the Khalda-area development concessions, and Apache Egypt operates the exploratory concessions. "We've been replacing and growing reserves as well as increasing production," says Talbott. On a gross basis, the greater Khalda area now produces 78,700 barrels of oil and 460 million cubic feet of gas per day. Apache was also active in deepwater exploration in the Mediterranean Sea, operating the West Mediterranean (Block I) concession, encompassing onshore and offshore land in the Alamein area. Beginning in 2002, it and partners RWE-DEA and BP scored several discoveries. Based on the results of five wells, a gas resource on the order of several Tcf was established in Miocene and Pliocene reservoirs. Nonetheless, in January, Apache swapped its offshore interests in the concession with New York City-based Amerada Hess for properties in the Permian Basin of West Texas. The reason for the trade: in mid-2003, Apache had also discovered Qasr, a huge Jurassic gas/condensate field at Khalda. The company was looking at two multi-Tcf projects that each required substantial investment, and it decided to focus on Qasr. That find was a better fit with Apache's corporate style: it was onshore, in the midst of infrastructure, and could be quickly brought to market. "Now we're strictly a Western Desert player," says Eichler. Qasr, which contains proved reserves of 2.2 Tcf of gas and 61 million barrels of condensate, is one of the two largest gas fields in the Western Desert and the largest find in Apache's history. Royal Dutch Shell's Obaiyed Field, north of Khalda about 60 kilometers from the Mediterranean coast, is the other world-class Jurassic find. Not surprisingly, market access has been a perennial issue on this side of the Western Desert, and infrastructure has developed slowly. During the last decade, attention has shifted strongly toward gas, particularly since the 300-kilometer Western Desert pipeline and several gas-processing plants were completed in 1999. Today, Khalda and Obaiyed are the prime gas-producing concessions in the Western Desert, together making 660 million cubic feet of condensate-rich gas per day. At present, Qasr produces 270 million cubic feet of gas and 11,000 barrels of condensate daily from Jurassic Safa reservoirs at between 4,000 and 4,300 meters. "We are adding substantially to our facilities to handle the Qasr discovery," says Eichler. Driven by Qasr, Apache Egypt forecasts a net 28% increase in gas production and a 10% increase in liquids production this year over the 2005 level. Apache's hefty production jump will be achieved through several projects. Prior to the discovery of Qasr, Khalda gas was gathered through local systems to three gas-processing plants. The Qasr project now routes the gas through a carbon-steel pipeline system to a new hub at Shams Field, and then on to the gas-processing facilities. The plants separate, dehydrate and sweeten the gas/condensate mix. The liquids are stabilized and pumped into the Western Desert oil pipeline network, and the gas stream is compressed and piped to the Ameriya petrochemical complex, on the Mediterranean coast. There, more liquids are stripped and put into tanks for sale, and the dry gas is sent via pipeline to markets east. Now, Khalda Petroleum is installing permanent production-handling facilities at Qasr Field, to upgrade the temporary system employed to bring on production quickly. Because Qasr gas contains approximately 9% CO2, the company uses both duplex material and carbon-steel piping in facilities construction, says Talbott. Khalda Petroleum recently completed an 18-inch line from the field to Obaiyed, and at present produces 140 million cubic feet per day into Shell's plant. After two additional trains are brought onstream at the Qasr end-of-line facility, the company will be able to produce 210 million per day. The joint venture is also adding 110 million cubic feet of daily capacity at its Salam gas plant, and building a 24-inch line from Qasr to the plant. "We are also optimizing capacity at our Tarek facility, in the eastern portion of the Khalda area," says Hamid Abul Fotouh, field general manager, Khalda Petroleum. In addition to Qasr, the company made another Jurassic find at Syrah last year. The field, just north of Qasr, has pays in both the Upper and Lower Safa. It will be produced through the Qasr facilities. Oil production Although natural gas has taken center stage, Apache has not forgotten about its considerable oil production. "On average, we grow our production on the oil side between 6% and 8% a year," says Eichler. That's against an annual decline of 35% in the Western Desert fields. When Apache took over operations at Khalda, most of its production was from small, structurally controlled oil fields on Khalda Ridge, one of the large structural features that trends through the Western Desert. Since 2001, Apache has expanded into the southwest and northeast parts of its Khalda-area concessions. Hundreds of locations in the Bahariya, Kharita and AEB reservoirs remain all along Khalda Ridge, and west of the ridge Umbarka and Kahraman fields could support another 100 and 150 wells each, respectively. "We're also developing an oil field on top of Qasr gas field, in AEB reservoirs," says Eichler. The oil zones, found at about 3,300 meters, are currently producing 9,000 barrels of oil per day. The Qarun-area fields also continue to make substantial oil. Today, Qarun Field and its satellites produce nearly 9,000 barrels of oil per day. The joint-venture company, Qarun Petroleum-composed of EGPC, Apache and Oklahoma City-based Devon Energy Corp.-also handles oil production from the Beni-Suef, El Diyur and East Bahariya concessions, which bring its total production to about 28,500 barrels of oil per day. Gas is fairly minor here, as the production is from oil-prone Cretaceous reservoirs. "All of the oil is sent, either by pipeline or trucks, to the main processing center at Qarun base," says Abdou Maghraby Belal, assistant general manager for Qarun Petroleum. From there, it is piped 48 kilometers to two 350,000-barrel tanks at the massive Sumed pipeline. The oil is sold and added to the pipeline in tanker-size loads. As at Khalda, the oil fields at Qarun, East Bahariya and East Beni-Suef are in various stages of infill- and secondary-recovery efforts. "In many ways, with its multiple reservoirs and stacked pays, the Western Desert is similar to West Texas," says Eichler. Indeed, much of what Apache does in its Egyptian oil fields constitutes basic practice in America: fracturing reservoirs, initiating waterfloods, and improving artificial-lift strategies. Prior to 2001, just 11 frac jobs had been performed in all of Egypt; today, Apache and its joint-venture companies have completed more than 200 jobs. Last year alone, Apache performed 454 production-enhancement operations on its wells. The growth in waterflood projects has also required capacity additions. Apache has increased oil-processing capacity from 98,000 to 202,000 barrels of per day, and water-injection facilities have blossomed from 50,000 barrels of source water per day to 75,000. By year-end, Apache will be injecting 130,000 barrels of produced water per day. Apache also encouraged the use of beam-pumping units in Egypt. In the past, Egyptian wells mainly used electric submersible pumps. Beam pumps, so familiar to U.S. oil fields, are excellent tools for oil wells producing at relatively low bottomhole pressures. Apache arranged with Lufkin Industries Inc., of Lufkin, Texas, to import several pumps to Egypt. Today, Apache has 51 units working at Khalda. Exploration ongoing Along with all of its producing areas, Apache still has substantial exploration potential in the Western Desert. Of its 10.67 million acres, about 1.9 million are held in development leases and the remainder are exploratory. Overall, the Western Desert is not mature, and the gas-prone Jurassic offers the potential for large accumulations. The company relies heavily on 3-D seismic, and sees a direct correlation between this seismic and its drilling success. By the close of this year, it will have 25,000 square kilometers of 3-D seismic data. At present, 93% of its development leases are covered by modern 3-D, and half of its pre-2005 concessions. During the coming 18 months, Apache plans 18 exploration wells, about 55% of which will seek oil. "We're drilling secondary and tertiary oil prospects in the Cretaceous, but we are still in the primary exploration phases for Jurassic gas prospects," says John Polasek, Khalda exploration manager. Canadian interest Apache may be the largest and most visible North American firm that works in Egypt, but there are a number of smaller Canadian companies that also focus intensively on Egypt. One public firm that boasts a long and excellent track record in Egypt is Calgary-based Centurion Energy International Inc. The company was formed in 1997 by the amalgamation of a couple of junior companies that owned properties in Western Canada, Tunisia and Egypt. "We quickly made the decision to divest the Canadian assets and focus on international E&P," says Said Arrata, president and chief executive. Initially, Centurion concentrated on Tunisia, but that changed when Marathon Oil exited Egypt and sold its assets there to Centurion. "That was how we built our land base, and we started active exploration in 2000." Centurion began with a reentry of a well on its El Manzala concession in the Nile Delta. The El Watsani 2 tested 11 million cubic feet of gas and 230 barrels of condensate per day. From that auspicious beginning, the company's production has rocketed upward. This year, Centurion expects to produce an average of 38,000 BOE per day from Egypt, a stunning 65% increase from its 2005 average of 23,000 BOE per day. Today, Centurion owns 6.4 million acres of leases in Egypt, spread among three producing concessions and two exploratory blocks in the Nile Delta; a huge exploratory concession in the Kom Ombo Basin near Luxor; and a 30% interest in the Tanganika Oil Co.-operated West Gharib concession, on the west side of the Gulf of Suez. Its Nile Delta blocks are far and away its most prolific assets: the 16,000-acre El Wastani and East El Wastani production leases and the 10,000-acre South Manzala lease currently produce 160 million cubic feet of gas and 6,500 barrels of liquids per day. Centurion holds 100% foreign-contractor interest in each block. Additionally, the company nets about 800 barrels of heavy oil per day from its interests in the West Gharib area. Now, its attention has turned to two new exploration blocks: West Manzala and West Qantara. Centurion operates both, which comprise 800,000 acres and surround the company's development leases. "We have embarked on a major exploration program this year," says Arrata. The company has formed a partnership with Shell, and the major is farming into 50% interest in West Manzala and West Qantara in exchange for cash payments and its share of future exploration and development costs. Centurion retains operatorship. At present, the company has three rigs at work, and plans to drill between 15 and 17 exploration and appraisal wells this year on the two concessions. "We have a budget of $150 million this year," says Arrata. Centurion's typical Nile Delta well reaches a depth of up to 3,500 meters, encounters up to four pay intervals, and contains about 50 Bcf in recoverable reserves. The Shell deal also includes an agreement for the two companies to cooperate in developing LNG opportunities if enough gas is discovered on the concessions. "We are targeting gas exports, and we believe that our partnership with Shell puts us on the fast track to monetize our gas resources at world prices." Export capability is highly desired, as domestic gas prices are controlled. At present, gas sold into the Cairo market fetches $2.80 per thousand cubic feet. And, although the Nile Delta is considered a mature area, plenty of gas remains. "Onshore, big reserves are tough to find. But for a small company, you can absolutely find reserves that can impact growth and be used as a steppingstone to other opportunities." Going forward, Centurion will remain focused on Egypt. "We're very happy to be there, and we're expanding on our base. We've grown very fast and we want to be careful that we manage our future growth correctly," says Arrata. Kom Ombo Basin While Egypt's discovered fields lie in Lower Egypt and offshore, some companies see intriguing exploratory potential farther south. "We were looking for opportunities in the region, and came across an interesting, relatively undrilled rift basin in the Upper Nile region," says Ross Clarkson, president and chief executive of TransGlobe Energy Corp., a Calgary-based firm that holds interests in three production-sharing contracts in Yemen. The Kom Ombo Basin that attracted TransGlobe's interest was analogous to oil-bearing Jurassic-Cretaceous rift basins in Sudan, Yemen and Chad. Quadra Resources, also based in Calgary, had won a concession on a 7.5-million-acre block called Nuqra. "We made a deal with Quadra to take over operations and carry them for seismic work," says Clarkson. "We now own 50% of the project at Nuqra." TransGlobe shot 800 kilometers of 2-D seismic and reprocessed about 3,100 kilometers of existing 1990s-vintage seismic on Nuqra. Arsenal Energy Inc., another Calgary-based company, acquired Quadra Resources last year. "We completed the Quadra acquisition in August 2005, and the Egyptian block was its principal asset," says Jesse Meidl, chief financial officer. "It's very tough for a small North American producer to show any real growth, and there are no significant land positions available. Egypt offered the right combination of concession opportunity and stable political regime," he says. Another selling point was that the block is likely to be oil-bearing, but if gas is discovered, it could be sold to markets through Luxor or Cairo. Just five wells have been drilled in the colossal block, which is roughly the size of Belgium. Three of those wells had oil shows, and one flowed about 150 barrels of 38-degree-gravity oil per day. "That well tells us that source rock is present. It's mature, and oil is being generated and trapped in the basin. Obviously, we need more than that to make it work," says Clarkson. "But I get very excited when I see a relatively unexplored Jurassic-Cretaceous rift basin in the North African region that has only five wells, some of which have tested oil. Most of these types of basins hold billions of barrels of oil." The size and magnitude of the exploration area are hard to comprehend: Arsenal and TransGlobe have identified 13 primary structures on their seismic, but the data cover only about 20% of the block. Geologically, the largest structure could potentially hold 150 million barrels in place and the smallest, some 10 million barrels. Drilling is next on the agenda. "We're out to bid for a rig right now, but Egypt is extremely busy and rigs are extremely tight," says Clarkson. "We're going to be ready in the fourth quarter, and if we get a slot, we'll drill two wells." The partners control the part of the Kom Ombo Basin that lies east of the Nile, about two-thirds of its total. Centurion holds Block 2, the other third of the basin on the west side of the river. The companies have shared mobilization and demobilization on seismic crews, and now may share costs on a rig. During the next three years, TransGlobe has budgeted C$10 million for exploration on the concession. It is also looking at expanding its presence in the country. "Now we're an operator and we have people on the ground. Several bid rounds are under way, and we'd like to get some additional holdings," he says. "Egypt is a very hot country right now for oil and gas explorers and producers," says Meidl. "We're certainly excited about our prospects there." So that's onshore Egypt: it offers situations for every taste, from large independents building infrastructure-intensive gas projects to tiny firms scouting remote desert concessions for oil. Firms are fabricating sparkling new LNG terminals and others are rejuvenating aging oil fields. And, operators can drill anything from infill wells on waterfloods to wildly promising, rank wildcats that make the most seasoned explorer salivate.