By Andrew Callus
LONDON, Sept 27 (Reuters) - An offshore gas find in the NileDelta is strong new evidence that Egypt has the resources to endpower cuts and get export income flowing again. Its challenge isto persuade wary international oil companies to develop them.
In the deepest well ever drilled in the delta, some 7 kmunder the sea bed and in 649 metres of water, BP hasfound a 50 km-long structure with a hydrocarbon column over 180metres deep, the British oil multinational announced on Sept. 9.
With an estimated 1.2 trillion cubic feet or more, the well,named Salamat, will not by itself make a significant dent inEgypt's chronic energy shortage or revive its flagging exports.
But as one of only a handful drilled into Oligocene NileDelta rocks to date, it is suggestive of some very productivegeology at these extreme depths.
"What's significant about this discovery is that it wasreally expensive at about $380 million to drill. Despite thehigh cost, BP clearly believes in the potential of some of thedeeper plays," said analyst Martijn Murphy of Wood Mackenzie.
Deep offshore gas finds cost a lot to develop, and unlikeoil, they do not get developed without an assured market and anagreed price. Political and economic turmoil in Egypt over thepast two years has damaged its capacity to offer a good price aswell as investor confidence that it can pay.
In addition, energy sector investors are less tolerant ofpolitically risky oil and gas spending than they were, evensetting aside the political upheaval that began in Egypt overtwo years ago.
This is partly down to a more uncertain outlook for pricesand rampant cost inflation over recent years, but it isparticularly true of investors in the United States, who have awealth of opportunities in unconventional resources at home.
Apache Corp's sale of a 30 percent stake in a topquality Egyptian oil asset last month is testament to thatchange, even though it secured a good price from the buyer,Chinese state group Sinopec, parent of Sinopec Corp.
Egypt owes about $6 billion to companies working on projectsin the country, the equivalent of over six months worth ofpayments and more in some cases.
As a result, long-term investors such as Britain's BG Group are facing some difficult questions from shareholders asEgypt, which accounts for 15 percent of BG's production,struggles to pay its bills.
On top of the late payments, gas contracted to BG and Frenchgroup GDF Suez for export as liquefied natural gas(LNG) is being diverted for domestic use to keep the lights onand replace expensive fuel imports.
That has left Egypt, the companies, and in turn their LNGcustomers reliant on cargo donations from Qatar.
BG's attempts to boost production at one well this year byadding extra compression succeeded only in pumping out largeramounts of water. New wells need to be drilled regularly in themore established fields, and the latest drilling phase at itsWest Delta Deep Marine offshore project has fallen behindschedule.
THE UNDERLYING ISSUE
All of these production issues are everyday oil and gasindustry problems, but their importance has been magnified inthe eyes of investors by Egypt's instability.
BP made another deep discovery, called Satis, more than ayear ago, and has yet to do anything with it.
"Salamat is a great find too, but until we have an agreementwith the government, it's just a hole in the ground we arerather pleased with," one BP insider said.
Egypt's latest oil minister, Sharif Ismail, is widely seenamong the western oil companies that operate there as someonewho can kick-start an easier working environment for them.
On Sept. 1, Ismail said he was preparing a repaymenttimetable.
Higher prices are also being offered under the later phasesof production-sharing contracts. WoodMac says projects such asTemsah, to which Salamat may eventually be attached, arereceiving prices "north of $5" per million British thermal units(mmBtu), a dollar or so more than companies were getting twoyears ago.
The need to import LNG, which can cost more than twice thatprice, will mean an acceleration of this higher pricing trend,Murphy said.
But a real step change in Egypt's gas productivity will needsomething much more sustainable than a higher price.
Its prospects are simply not as good as that of geologicallyluckier neigbours such as Algeria, analysts and companyexecutives say.
To compensate, what it needs is an investment environment inwhich its deep, far-from-shore gas reserves could be developedon a larger scale, and under an integrated development solutioninvolving co-operation between several big oil companies.
"Improved prices will help, but what's also needed is aprolonged period of stability," Murphy said. "For the companies,what that means is a government with a mandate to make quickerapprovals and an upstream body that's able to pay investors'receivables on time."
BP (BP.)