Identifier
Created
Classification
Origin
05CAIRO5484
2005-07-18 16:09:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Cairo
Cable title:  

EGYPTIAN GAS PRODUCTION EXPANDING

Tags:  ENRG EPET ETRD EINV EG 
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UNCLAS SECTION 01 OF 04 CAIRO 005484 

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ENRG EPET ETRD EINV EG
SUBJECT: EGYPTIAN GAS PRODUCTION EXPANDING

REF: CAIRO 4972 (NOTAL)

This message is sensitive but unclassified. Please handle
accordingly.

-------
Summary
-------

UNCLAS SECTION 01 OF 04 CAIRO 005484

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ENRG EPET ETRD EINV EG
SUBJECT: EGYPTIAN GAS PRODUCTION EXPANDING

REF: CAIRO 4972 (NOTAL)

This message is sensitive but unclassified. Please handle
accordingly.

--------------
Summary
--------------


1. (SBU) Egypt's ambition to become a major player in the
gas sector is starting to be realized. With upstream and
downstream production levels increasing and progressive
policy makers thinking decades ahead, Egypt is on track to
become a global gas producer, provided it sustains its
exploration and production pace. The need for hard currency
and the steady decrease in Egyptian crude oil exports drove
rapid liquid natural gas (LNG) development over the last few
years. Egypt began exporting LNG in early 2005 with a new
"LNG highway" between Egypt and Spain. The first shipment of
136,000 cubic meters of LNG departed from the Egyptian plant
at Damietta in January, headed for the Spanish
re-gasification terminal at Palos de la Frontera in Huelva.
Additional shipments are already in the pipeline for the next
few years. The British Gas (BG) Group will soon be Egypt's
largest LNG buyer with the opening of a second LNG facility
in Idku. The success of the Damietta and Idku LNG projects
give incentive to Egyptian and multinational companies to
expand gas exploration efforts, especially into the
potentially large gas reserves in the Mediterranean. Some
exports of Egyptian LNG will go to the U.S., but the majority
will go to Mediterranean countries, namely Spain, Italy, and
France. Foreign exports will remain high in the short-term,
but may decrease in the long term as oil reserves shrink and
domestic energy demand increases. End summary.

--------------
Gas in Egypt
--------------


2. (U) As of December 2004, proven (discovered and
confirmed) gas reserves amounted to about 66 trillion cubic
feet (TCF) with an additional 100 TCF of
probable/undiscovered gas reserves, ranking Egypt 25th world
wide and 8th among Arab countries in terms of proven
reserves. Most gas discoveries made in the 1990s were
located just off the Nile Delta in the Mediterranean and in
the northern part of the Western Desert. A few smaller
fields were also found in the Gulf of Suez oil concessions.


3. (U) The government hopes that these impressive gas
reserves will compensate for declining oil reserves and

provide much needed foreign currency. Crude oil production
has been falling for a decade, from a high of more than
920,000 barrels per day (bpd) in 1995, to an average of
slightly less than 600,000 bpd in 2004. Proven crude oil
reserves declined from about 4 billion barrels in the early
1980's to less than 3 billion in 2001, but have stabilized
this year due to recent small discoveries. Meanwhile,
domestic consumption grew steadily through the 1990's to
reach 460,000 bpd in 2001, squeezing Egypt's exports of oil
and petroleum products. Domestic consumption has remained
steady over the last three years at about 475,000 bpd as
Egypt's economy slowed, but as the economy grows (present
rate of growth is between 4-5%),consumption levels will rise
again, with a probable simultaneous fall in oil exports.


4. (U) In contrast to oil, production of natural gas is
expanding rapidly. Over the last five years, natural gas
production has increased by approximately 75%, reaching about
3.3 billion cubic feet per day (bcf/d). Production is
expected to rise to around 5.0 bcf/d by 2007, with a
significant portion of the production exported as LNG. The
majority of the gas produced presently is consumed in the
increasingly demanding domestic market, with 62% going to
Egypt's thermal power plants to meet the country's growing
demand for electricity. About 500 industrial factories,
55,000 CNG vehicles, 13,000 commercial customers, and more
than 2 million residents consume the remaining 38%.


5. (U) Since the 1980,s, the GOE has mandated that foreign
exploration for oil and gas must be carried out under a
legally binding contract called a Production Sharing
Agreement (PSA) between the foreign oil company and the state
owned Egyptian General Petroleum Corporation (EGPC).
According to the PSA, the foreign company covers the total
cost of any exploration activities (i.e., is solely
responsible for the exploration risks). For example, if the
exploration wells in a specified concession under a PSA are
dry or the discovery is not advantageous, then EGPC does not
share the losses and the foreign company simply stops
exploration. However, if oil/gas is discovered, then EGPC
and the foreign oil company form a joint venture company
which then initiates production. The foreign partner would
recover its investment by receiving an agreed upon percentage
of the profit from selling the oil or gas abroad or to the
GOE.


6. (U) The GOE formed an entity similar to EGPC, called the
Egyptian Natural Gas Holding Company (EGAS) in August 2001 to
focus on gas. EGAS objectives are to (a) manage the sales of
gas transmission and distribution systems and coordinate all
related activities including the management of the more than
3,000 kilometers (km) of national gas pipelines; (b) develop
gas projects with national and international partners, and
(c) participate in exploration, development, and production
from gas discoveries.


7. (U) The major players in gas exploration and production
in Egypt are BG, British Petroleum (BP),ENI-Agip, Apache,
and Shell. A total of four gas export projects are currently
planned or active; the Damietta LNG facility and the pipeline
to Jordan are in operation, the Idku LNG facility has had a
soft opening, and construction on the Israeli pipeline is
expected to begin this October.

--------------
Gas Pipeline - Jordan
--------------


8. (U) Egypt started its first gas export operations by
piping gas to Jordan in late July 2003. The project began in
early 2001 with the construction of a 264 km pipeline from
existing pipeline terminals at El-Arish in northern Sinai, to
Taba at the tip of the Gulf of Aqaba, and finally across the
border to the Jordanian port of Aqaba. During the first
year, gas exports to Jordan generated gross revenues of
approximately USD 70 million. Revenues from this facility
are expected to increase to USD 200 million by the end of

2005.


9. (U) The second phase of the project, at an estimated cost
of USD 300 million, entails construction of a 370 km of
pipeline to transport the natural gas delivered at Aqaba to
the Samra and Rehab power stations in northern Jordan. The
pipeline was laid down by an Egyptian-Jordanian joint venture
company and is part of a broader plan to distribute Egyptian
natural gas to the region, including to the Zahrani refinery
in northern Lebanon and to the Syrian port of Banias and
possibly on to Cyprus.

--------------
Gas Pipeline - Israel
--------------


10. (SBU) On June 30, Israeli Infrastructure Minister
Binyamin Ben Eliezer and Egyptian Oil Minister Sameh Fahmi
publicly signed a memorandum of understanding for Egyptian
gas sales to Israel. The GOE encouraged the formation in
2000 of the Egyptian Eastern Mediterranean Gas joint venture
company, owned by Israeli businessman Yossi Mieman's Merhav
Group (25%),Egyptian businessman Hussein Salem (65%),and
the GOE's Egyptian Gas Holding Company (10%),to negotiate
the deal with the Israel Electric Corporation. The parties
concluded an agreement in principle in early summer 2004 and
concluded a framework agreement in February 2005. The
agreement signed was a political understanding between the
two governments; the signing in Cairo, witnessed by Egyptian
Prime Minister Nazif, was the most high-profile public
recognition of the deal to date. A commercial agreement
laying out the precise terms of the operation remains pending.


11. (SBU) According to the agreement, an offshore pipeline
will be constructed from El Arish in Sinai up to the coast of
Israel, bypassing Gaza. Construction could begin as early as
October 2005 with Egyptian gas possibly flowing to Israel by
the second half of 2006. Under the agreement, Egypt would
provide approximately 1.7 billion cubic meters of gas per
year for 15 years for a total amount of USD 2.5 billion,
making this Egypt's most lucrative gas deal ever.
--------------
LNG - Damietta
--------------


12. (U) The first LNG facility in Egypt is located in
Damietta, on the Mediterranean shore. It is owned and
operated by the Spanish Egyptian Gas Company (SEGAS),a
special purpose operating company 80% owned by Union Fenosa
Gas (50% Union Fenosa of Spain and 50% ENI of Italy),10% by
EGAS, and 10% by EGPC. The $1.3 billion LNG facility awarded
the engineering, procurement, and construction contract for
the project to the joint venture of Halliburton KBR, JGC
Corporation of Japan, and Tecnicas Reunidas (TR) of Spain.
The LNG facility is located in the duty free zone of the
recently modernized Damietta port. The SEGAS facility was
completed record time for a grassroots LNG facility - less
than 4 1/2 years from signing the project in August 2000 to
"Ready For Start Up" in November 2004, almost two years
faster than the previous industry benchmark.


13. (U) The production capacity of this facility, 5.5 m
tons/yr, has already been committed for the next 25 years.
Union Fenosa, as the principle, guarantees to purchase 3.2 m
tons/yr of the facility's overall 5.5 m tons/yr capacity. In
addition, EGAS signed an agreement with SEGAS in June 2003
whereby EGAS will guarantee to provide/sell the remaining 2.3
m tons/yr of spare capacity to other international buyers.


14. (U) The BG Group will soon be Egypt's largest LNG buyer.
Among the first of BG's transactions with SEGAS was a 60,000
ton LNG shipment that was originally headed to the U.S., but
changed direction midstream and went to Europe. In addition,
BP, EGPC and EGAS negotiated an agreement to provide up to
310 m tcf/day to the plant starting in 2008. BP may also be
in the final phase of negotiations with SEGAS to use the LNG
facility to export gas to the U.S. market.


15. (U) The Damietta LNG facility is currently the largest
single LNG train facility ever built, with a capacity of
approximately 5.5 m tons/yr. The export capacity of the
Damietta project moves Egypt to the rank of thirteenth among
nations in terms of LNG exports. Moreover, SEGAS may be
considering plans for a second train of 5.5 m tons/yr
capacity at the Damietta complex, after securing a joint
off-take and feed-stock agreement for Train 1 with Union
Fenosa. The decision to construct another train will not be
finalized before mid-2005. However, SEGAS is already raising
investment capital for the second train.

--------------
LNG ) Idku
--------------


16. (U) The second LNG project, located in the Idku area 50
km east of Alexandria, is controlled by the Egyptian
Liquefied Natural Gas Company (ELNG) consortium. Bechtel and
Halliburton are constructing the two LNG trains at Idku for
about USD 2 billion. Beheira Natural Gas Liquefaction
Company owns the first train (Train 1),which will have a
capacity of 3.6 million t/yr. The main shareholders of Train
1 are BG (35.5%),Malaysian PetroNAS (35.5%),Gaz de France
(GdF 5%),and the GOE (24%). This first train expects to
begin exports by the last quarter of 2005. GdF bought the
entire gas output of Train 1 for 20 years starting from 2002.



17. (U) Idku Natural Gas Liquefaction Company owns the
second natural gas liquefaction train (Train 2) which will
have a capacity of 3.6 million t/yr. The main shareholders of
Train 2 are BG (38%),Malaysian PetroNAS (38%),and the GOE
(24%). Train 2 expects to begin exports by the end of 2005
or early 2006. A sale and purchase agreement was signed on
24 September 2003 for BG to export the entire production from
Train 2 to the U.S. and Italy. The BG-operated Simian/Sienna
gas fields will supply feed-stock for the project. By the
beginning of 2008 BG will buy 3.2 bcm/year from Idku for sale
to the Italian electricity company ENEL with delivery at the
Brindisi LNG terminal in southern Italy. This supply will
initially be sourced from Train 2. Until Brindisi LNG is
operational the production from Train 2 will be supplied
primarily to the Lake Charles LNG importation terminal in
Louisiana.

-------------- ---
Future of Gas in Egypt: Analysis and Conclusion
-------------- ---

18. (SBU) The GOE is eager to bring these projects online
quickly because Egypt needs (a) hard currency in order to
compensate for the losses from declining exports of crude
oil; (b) to create employment; and (c) to convince
multinationals to keep investing in Egypt's emerging gas
industry.


19. (SBU) Some Egyptian gas experts argue investors should
export as much gas as possible now because Egypt's domestic
gas demand is expected to rise rapidly, dampening exports.
The GOE recently announced a policy that calls for a balance
between medium term export commitments, local needs, and long
term strategic requirements. The GOE believes it can strike
this balance if it keeps export commitments below one-third
of proven gas reserves at any time.


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CORBIN