The promises and challenges of Egypt’s Zohr gas field development
Beirut - Egypt is to start production at the massive Zohr gas field before the year is out. The field, which was discovered in August 2015, has estimated reserves of 906 billion cubic metres — the largest in the Mediterranean.
Zohr is likely to have a huge effect on Egypt’s energy sector and that of the region. Major international firms are interested in maximising Zohr’s infrastructure facilities to serve production from nearby stranded fields. BP and Russia’s Rosneft have 10% and 30% shares in Zohr, respectively.
Zohr’s first phase is being developed in record time for a giant deep-water gas project — just 20 months after the final decision to invest. Senior executives from Eni, the Italian company that discovered the field, dismissed the possibility of creeping delays, saying development is nearly 90% complete.
Production is to begin in the second half of December. Eight wells have been drilled, four of which can produce 7.1 million-9.9 million cubic metres of gas per day each. Three pipelines to the shore have been built and tested.
The high development cost of about $12 billion forced Eni to sell shares to oil firms with deep pockets. Eni also faced a cash flow decline of approximately 19% during the recent oil price collapse, prompting it to share the gas field risk and capital expenditure with shares valued at $2.1 billion.
Eni owns and operates the Shorouk concession containing Zohr field. It once had 90% equity in Zohr but this has shrunk to 60%. There are plans for further divestment of Eni’s stake with Rosneft and BP as each offered an option of an additional 5%.
Egypt is one of the largest gas consumers in the eastern Mediterranean. Only Turkey’s needs are comparable. Egypt’s gas consumption is expected to increase at a relatively high rate of approximately 5% per year. The discovery of major fields is key to meeting Egypt’s rising demand.
Zohr, which is expected to contribute 39.6 million cubic metres per day by next year, is expected to help meet some of the demand. Other new fields projected to come online include BP’s West Nile Delta (34 million cubic metres per day) and Italy’s Edison Abu Qir gas field (5.7 million cubic metres per day).
Egyptian demand for gas is not limited to the domestic market. The country is contractually obliged to supply European markets with liquefied natural gas (LNG) from its two Mediterranean shore LNG plants, Idku and Damietta. The two plants have suspended delivery due to a lack of supplies. Egypt needs new gas supplies to restart exports.
The discovery of Zohr in 2015 and Eni’s commitment to its fast-track development challenges Israel’s major gas field, Leviathan. The latter has 595 billion cubic metres of reserves and a first-stage development cost of more than $6.5 billion.
The consortium developing Leviathan encountered several obstacles, including difficulties raising sufficient funds during the 2014-16 oil price crash. Israel’s Antitrust Authority looked into the role of developers, the Noble Energy-led consortium and Israel’s Delek. Political tension with neighbours delayed the signing of export agreements.
The major challenges Zohr poses to Leviathan are Eni’s fast-track development of the field, its decision to seek help to defray capital expenditure costs and its ability to capitalise on Zohr’s proximity to stranded regional fields and export gas through an underwater pipeline from Egypt to Italy. The Egypt-to-Italy export would utilise a gas pipeline Eni owns and operates from offshore Libyan fields to Italy. The pipeline connects with the European gas grid.
The energy sector in the eastern Mediterranean has several challenges. Gas faces global competition and renewable energy, such as wind and solar and carbon reduction policies, especially in Europe, is also an issue.
The global gas industry has strong competitors, not least from the United States where shale production increased in recent years. The industry is experiencing rising short-term and spot trading, which are lowering gas prices for the long term. This makes it difficult for east Mediterranean LNG to secure long-term export contracts, which are essential to develop deep offshore fields (6,000 metres below sea level).
Finally, the commercialisation of eastern Mediterranean gas is difficult as prices are at a low point.