Confidence Returning As BP Eyes Major Investment

BMI View: A victory for el-Sisi at the upcoming Presidential election in Egypt will boost the confidence of investors in the oil and gas sector, with BP expected to initiate a major investment programme. In particular, a focus on the company's West Nile Delta project would see a major boost to domestic gas supply from 2015, curbing the country's energy shortages.

Instability in Egypt over the last few years has kept significant capital investment away from Egypt. This is largely due to the political climate not providing a sufficiently stable environment to mitigate the risk of the billion-dollar investments needed to boost new oil and gas production. Investment has also been dissuaded by delayed payments for gas and the prioritisation of gas away from liquefied natural gas (LNG) exports to the less lucrative domestic market. Our Middle East Country Risk Analysts expect an el-Sisi victory at the upcoming presidential elections at the end of May 2014, which we believe will create a more stable investment environment.

With sentiment improving regarding political stability in Egypt, we have seen a number of smaller oil and gas companies return to the country ( see 'E&P Incentives Boosted As Threat Of Increased Imports Looms', March 7). However, it now appears major oil and gas companies are ready to return with BP reportedly outlining a USD1.5bn investment plan for the country, according to Middle East News Agency (MENA). While Prime Minister Ibrahim Mahlab and BP representatives met in Cairo on May 11, BP has yet to confirm the investment plans.

Exports Snuffed Out
Egypt Natural Gas Production, Consumption & Net Exports (bcm)

Confidence Returning As BP Eyes Major Investment

BMI View: A victory for el-Sisi at the upcoming Presidential election in Egypt will boost the confidence of investors in the oil and gas sector, with BP expected to initiate a major investment programme. In particular, a focus on the company's West Nile Delta project would see a major boost to domestic gas supply from 2015, curbing the country's energy shortages.

Instability in Egypt over the last few years has kept significant capital investment away from Egypt. This is largely due to the political climate not providing a sufficiently stable environment to mitigate the risk of the billion-dollar investments needed to boost new oil and gas production. Investment has also been dissuaded by delayed payments for gas and the prioritisation of gas away from liquefied natural gas (LNG) exports to the less lucrative domestic market. Our Middle East Country Risk Analysts expect an el-Sisi victory at the upcoming presidential elections at the end of May 2014, which we believe will create a more stable investment environment.

With sentiment improving regarding political stability in Egypt, we have seen a number of smaller oil and gas companies return to the country ( see 'E&P Incentives Boosted As Threat Of Increased Imports Looms', March 7). However, it now appears major oil and gas companies are ready to return with BP reportedly outlining a USD1.5bn investment plan for the country, according to Middle East News Agency (MENA). While Prime Minister Ibrahim Mahlab and BP representatives met in Cairo on May 11, BP has yet to confirm the investment plans.

Egypt is facing a significant gas supply crunch with falling production and a high demand, artificially sustained through subsidisation. Blackouts, even over the winter period, have been recurrent as the country struggles to supply sufficient gas to the power sector. Due to the impact of smaller upstream gas projects in Egypt, we are forecast a slight increase in natural gas production in 2014 over 2013. However, this will be rendered insufficient by strong domestic demand, supported by high subsidy rates. We see demand outstripping supply in 2014, with an increase of power disruptions through the high-demand summer period. Although Egypt has reportedly entered an agreement to lease a floating storage and regasification unit (FSRU) from Hoegh LNG by the end of 2014, we do not expect this to impact until 2015.

Exports Snuffed Out
Egypt Natural Gas Production, Consumption & Net Exports (bcm)

El-Sisi is expected to take a cautious approach to subsidy reform following his statement that the current system cannot be changed overnight. Our current view is that subsidy reform will not take place until at least 2015, when the country's international currency reserves are expected to considerably reduce and greater strain is put on the national budget. We expect this to subdue gas demand from 2015, helping to mitigate shortages.

BP's reported investment programme into Egypt and its particular focus on natural gas will be crucial to making a sizable impact on the production side. BP already supplies approximately 40% of the gas consumed in the domestic market, but could play a far greater role with the development of the West Nile Delta project. The project has already been delayed by 1 year, with gas expected in 2015 at the earliest, though a return of significant investment from BP into Egypt will likely see greater focus on reaching first gas production.

That said, with the gas supply contracts agreed at just USD3 per million British thermal unit (mnBTU), the company will have to keep a close eye on costs if it is to profit from the deepwater project. It is also unlikely that BP will make a decision to invest billions in Egyptian oil and gas projects until after the Presidential elections confirm a winner. We will likely adjust our gas production upwards, if El-Sisi wins the election as expected, and BP increase investment in the country.

The longer term below-ground outlook (2017-2023) also looks positive for Egypt with a number of undeveloped discoveries the West Nile Delta area. The East Nile Delta has also shown promise with BP having made major gas discoveries in the North El Burg (2012) and Salamat (2013). However, the process of turning these discoveries into production will be highly dependent on the new leadership in the country maintaining social stability and the interest of foreign oil and gas investors.

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