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THE BIG SQUEEZE
Sky-high energy prices have sparked a modern day oil rush. Everyone from blue-chip majors to upstart wildcatters is on the hunt for black gold. The easy oil in Egypt may be gone, but upstream companies are still sinking billions of dollars worth of investments, and using the latest technology, to explore virgin territory and mature fields. They hope their ingenuity can stem a decade-long decline in oil production.
BY GEOFFREY CRAIG
With crude oil prices hovering around $90 a barrel, oil companies are aggressively scouring the planet for new plays and revisiting old fields. With most of the accessible fields already tapped, exploration is moving into more volatile regions and challenging physical environments, including the Arctic Circle and Darfur.
As such, stable countries with proven reserves such as Egypt have emerged as attractive destinations. The likelihood of striking a major field in this mature market is low, experts concede, but crude oil prices, which have quadrupled since 2002, justify greater exploration and production. “When oil prices increase, you see more companies exploring. Instead of drilling two to three wells, they’re drilling 10 to 20,” says Hisham Ghanem, exploration manager at Merlon Petroleum, a US-based upstream oil and gas company with concessions in the Nile Delta.
Oil companies eager to cash in on record high oil prices have upped their investment in the country, increasing FDI in Egypt’s oil sector to $2.1 billion in 2006, up from an annual average of $170 million between 1997 and 2001, when oil prices were in the doldrums. Zainul Rahim, chairman of Shell Egypt, describes Egypt as a “cash cow” on the back of high oil prices and successful drilling in the Western Desert. Shell has held four concessions in the Western Desert since the 1980s, but Rahim says the Dutch oil giant didn’t really invest seriously in the fields until two years ago.
Skeptics, however, regard Egypt as a petro-dinosaur, with aging oil fields expected to run dry by 2020 unless sizeable new reserves are found. And that seems unlikely. “In the Gulf of Suez, we have explored every inch,” says Abdel Sattar Dahab, an engineering professor at Cairo University. “If we could maintain the same production rate, we’d be very lucky, but I think it will go down.”
Annual oil production has declined each year since peaking in 1996 at 922,000 barrels per day (bpd). In 2006, production sank to 678,000 bpd, its lowest level since 1982. While proven oil reserves stand at 3.7 billion barrels, the big question on everybody’s mind is whether this oil is accessible. And at what cost.
Geographical shift
The decline in overall production has been offset by the emergence of the Western Desert as an oil-producing region. The giant fields of the Suez Gulf accounted for over 80 percent of total production before entering a period of natural decline beginning in the 1990s. The remaining oil is now deeper and more difficult to extract.
The Western Desert was the site of pioneering oil exploration in the past. But the unsophisticated technologies meant these early wildcatters never made a big enough discovery to warrant sustained interest, so they packed up their drilling rigs and headed to other fields.
Now, aided by three-dimensional seismic imaging, survey teams on the hunt for hydrocarbons have been able to discover that oil is in fact lying beneath the sand and rocks of the Western Desert, trapped inside fractures of watertight limestone. But finding these cracks has proven difficult compared to the Gulf of Suez, where oil has migrated through layers of porous and permeable sandstone to form huge pools.
The Western Desert’s geology means the likelihood of striking a giant field is low, as are production rates and the reservoir’s life expectancy. Nonetheless, the region has considerably cheaper recovery rates compared to offshore drilling, where daily rig rates cost five times as much.
As a result, international oil companies have purchased new concessions in the Western Desert or pumped investment into existing ones. Production today is double that of seven years ago. It now accounts for about 45 percent of total daily production, at par with the oil flowing out of the Gulf of Suez, says Omar Bebers, head of production at state-owned Egyptian General Petroleum Corporation (EGPC).
And production is slated to increase. Apache, for instance, set a goal in 2005 of doubling oil and gas production from its concessions through increased exploration and drilling. Shell, Rally Energy and Melrose Resources have also announced their intention to increase production. This falls neatly in line with the Egyptian government’s goal of increasing national oil production, currently 678,000 bpd, by 100,000 bpd, of which Western Desert fields are expected to contribute 40,000 bpd.
Higher costs sink in
A recent study by consulting firms John S. Herold and Harrison Lovegrove concluded that discovery and development costs tripled from 1999 to 2006 to nearly $15 a barrel. “The high costs are starting to have an erosion effect on the approvals and going ahead of certain projects,” states Richard Ward, a senior director at Cambridge Energy Research Associates. “Large projects that may have seemed like a good idea economically 12 to 18 to 24 months ago, when they were initially approved at the much lower cost levels [are being reassessed]. As they’re starting to reach the point of making firm commitments for spending, [companies are] reevaluating the economics of the projects and delaying or even canceling some of these projects.”
The rising rate of drilling rigs is often cited as a prime culprit behind the overall price increase. The daily rate for onshore rigs has gone up by over 30 percent to reach $24,000, says Ghanem of Merlon. That’s still a bargain compared to an offshore jack-up rig at $120,000, let alone a deepwater rig, which can fetch double the price.
Analysts say that when oil prices began to climb in 2002, rig makers initially waited before building new rigs to determine first whether high demand levels would persist. Those concerns passed, and a certain amount of supply has now started coming into markets, relieving price pressure. Nonetheless, high costs have threatened to undermine the economic viability of many projects.
The tug-of-war between oil prices and costs has particular relevance for Egypt, where production will depend mostly on mature fields. “Exploration is not that promising because the major exploration was in the past,” says Bebers of EGPC. “We will not have the chance again to find the big discoveries. The main effort should be focused on the existing fields, [which] still have a lot of potential. If we have taken 35 percent, then we still have 65 percent left in the ground. Our efforts will concentrate on that.”
Searching for oil where it’s known to already exist is less risky compared to a greenfield. However, drilling in a mature oil field is not as simple as turning on a tap. As the pressure underground subsides, oil no longer flows to the surface by “natural lift” and must be pumped out. Eventually, this technique must also be replaced by more costly “secondary” and “tertiary” production methods, which provide an “artificial lift.”
New technologies to revive aging fields
Any prognosis about future production levels, therefore, must consider whether the oil that remains is accessible. It’s not simply a matter of reserves. In fact, about one-third of existing oil cannot be extracted from a field because it’s captured in the rocks, says Helmy Sayyouh, an expert in petroleum engineering.
“You cannot overcome the force, even with very high pressure. The oil is there, but you cannot theoretically get it. You’re only after the two-thirds.”
About half of this accessible oil has already been extracted. But new technologies have created opportunities to reverse production decline in brownfields and to make new discoveries. “There are as many opportunities today as there ever were, but they are different, lying in more remote and harsh and mature areas, as well as deep and ultra-deep waters, and requiring huge investments,” oil minister Sameh Fahmy told an industry conference last September. “These opportunities can’t be explored without applying the state-of-the-art technologies.”
Typically, an oil field produces for five to 10 years through natural lift and simple pumps. About 25 percent of the original resevoir’s oil is recovered this way, while secondary methods such as water flooding capture another 10 percent. Finally, tertiary or “enhanced oil recovery” methods may extract up to 65 percent through the use of steam, carbon dioxide and other dissolved gases, or chemicals.
Primary methods account for 60 percent of oil produced in Egypt, Bebers says. He reckons that 95 percent of the Western Desert is still in primary production mode, with the remaining 5 percent undergoing water flooding. By contrast, he figures that 60 percent of the oil being recovered from the Gulf of Suez is forced into the drill shaft using gas injection and water flooding.
When oil prices were around $15-20 a barrel, the incentive didn’t exist to try new expensive tertiary techniques such as thermal recovery, in which steam injected into the well heats the oil to reduce its viscosity, allowing it to flow more freely to the surface. The technique is currently being applied by Canadian oil firm Scimitar in Suez’s offshore Issaran field, where oil production had slowed to less than 100 barrels a day. Steam injection has increased production to over 7,000 barrels a day, according to Bebers.
A similar technique where carbon dioxide captured from natural gas production is injected to free trapped oil in the rock, is still untested in Egypt. The natural gas stock exists, but the technique is costly and requires constructing the facilities to transport carbon dioxide to oil fields. Bebers estimates at least a billion dollars would be needed to put the infrastructure in place for Egypt’s fields.
New drilling techniques have also proven effective in terms of augmenting oil recovery. Companies are experimenting with directional drilling. Rather than just drilling down, the well bore can be directed horizontally to penetrate a greater length of the reservoir. “Horizontal wells began 12 or 15 years ago in Egypt,” explains Cairo University’s Dahab. “If the difference between two wells is 500 meters – you can now go up to 3 or 4 kilometers horizontally and you can cover the oil basin in the whole area by a single well.”
Further innovations led to multilateral drilling in which a well has more than one branch radiating from the main borehole. “From the same well you can go many different directions to recover more oil, which is especially applicable in depleted wells where the pressure is very low,” Dahab says.
Small fish in a big pond
New technologies are also helping smaller companies carve out a niche in the Egyptian market. Newcomers have seized pieces of the big concessions in the Gulf of Suez, which were broken up as some of the major oil companies left to pursue natural gas plays in the Mediterranean.
The Gulf of Suez is an ideal fit, says Salah Hafez, chairman of Petzed, a mid-sized Egyptian upstream oil company with concessions in the Gulf. “The price of oil, the availability of data, the development of technology and the fact that capital investment isn’t high because facilities exist everywhere – this makes companies like us able to find small discoveries and develop them economically.”
A typical concession might yield 5,000 to 10,000 barrels a day, a drop in the bucket for a major oil company, but hardly pocket change for smaller companies. “Large fields are discovered first by large companies, and then there is room for us to come and take the leftovers like vultures,” he says.
Operating in the Gulf of Suez’s relatively calm, warm and shallow water is easier compared to, say, the North Sea, Hafez notes. Also, the fact that oil is proven in the Gulf of Suez makes financing projects cheaper than in a frontier zone, where the uncertainty of striking oil carries a premium from lending institutions.
Much of the Gulf of Suez has already been covered by 3D seismic surveys. But improved imaging technology is able to generate more detailed information about specific areas, giving companies a better idea of where oil might lie. “You may drill a well, and you may have oil beside it, and you will say, ‘there’s no oil because I’ve drilled two or three wells and all of them are dry,’” says Dahab. “But if you have a good picture – a detailed picture – about the subsurface formations, you will be able to detect your target a little bit more accurately.”
As the picture improves, oil companies are finding new opportunities. But the appetite of both junior and veteran players will ultimately depend on the costs and rewards of oil projects in Egypt. Analysts say production cost increases are finally decelerating and may even soon plateau. Record-high crude oil prices are likely to recede soon, though some forecasters predict they could hit $100 a barrel in the near future. But all agree that the next few years will see intense activity both above and below the ground.
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SEARCHING FURTHER AFIELD
An oil field’s potential return on investment depends in part on having good infrastructure to transport the liquid hydrocarbons from the wellhead to a refinery. Egypt’s main oil-producing regions – the Western Desert and Gulf of Suez – are covered by an extensive pipeline network. But poor infrastructure has generally discouraged oil firms from operating in Egypt’s southern region.
However, giddy oil prices have led some exploration companies to head south to Upper Egypt in search of undiscovered oil, despite the relative remoteness.
In early September, Canadian oil firm Centurion made the first discovery of oil in sufficient volume for commercial development in Kom Ombo, about 80 km northwest of Aswan. The company struck oil 1,300 meters below the surface on a concession it had purchased two years earlier. The testing produced the equivalent of 150 barrels of oil per day, though the company believes there could be 8 million barrels’ worth below the surface.
“The results prove the presence of an oil province outside Egypt's conventional producing areas,” proclaimed Rashid Saif Al Jarwan, general manager of Dana Gas, the UAE-based petroleum firm that acquired Centurion last January.
Not everyone is convinced that the discovery will amount to much. After all, the presence of oil had already been established by Repsol over a decade ago. The Spanish company had drilled three exploratory wells in Kom Ombo that yielded oil, but decided the quantity wasn’t sufficient to warrant commercial production so abandoned the site.
Without access to the national grid to pump oil to Cairo, developing fields in Upper Egypt will not be easy, or cheap. But high oil prices have altered the economic fundamentals, and more companies are now willing to give it a shot. Ten companies are currently operating in Upper Egypt, drilling 46 wells with investments worth $282 million.
Dana Gas has said it will transport the oil either by railroad or Nile River barges to the closest refinery in Assiut, 320 kilometers away. The first stage of production is expected to begin soon.
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