Egypt needs to rethink the joint venture model that has governed its onshore oil industry for the past half century as part of wider reforms to the economy, according to James House, senior region vice president for the country’s largest international oil producer, Apache.
At a conference in Cairo this week, House told journalists Apache would increase its capital spending in Egypt this year from last year’s level, which was around $300 million, as it takes on new concessions and steps up seismic acquisition.
Apache has been at the forefront of the Egyptian oil industry’s expansion into the Western Desert, away from the traditional Gulf of Suez oil province, a trend that has resulted in increased production of light crude.
The latter is often exported from Egypt’s Mediterranean ports as the country’s refineries are for the time being mostly set up to process heavier crude.
House told the conference that the joint venture model, in which international companies collaborate with a local partner, “tethered” in various ways to state agencies, was a “limiter” to progress, and welcomed a recent initiative by the petroleum ministry to look at updating the model.
The current way of doing business serves to block “tough decisions,” and “younger minds” are needed in the industry, he said, adding that more “external resources” would also be helpful in the modernization process.
The joint venture model was “put in for the right reasons,” but “today, even though the joint ventures are delivering what they should, they also are a limiter in the pace…and actually the value creation that this industry should be providing,” House said.
“We need to bring in some external resources and some younger minds here in Egypt to challenge the convention so we can innovate, make decisions quicker and develop and deliver projects in a more timely fashion.”
“You look at the different joint venture companies that are operating: there’s best-in-class performance from some, and others are stagnant or not moving or have trouble making decisions.”
Egypt is attempting wide-ranging reforms in the wake of several years of social and political unrest and amid rapid increases in energy demand.
Much international attention is focused on recent gas finds in the Mediterranean and the debts accumulated by the state for the development of unused gas export capacity. Vast offshore discoveries such as Zohr are subject to a more modern production-sharing business model.
However Apache is among companies focused on the country’s oil production, which currently runs at around 700,000 b/d, including condensate.
Apache is currently producing, with its Egyptian partners, around 340,000-350,000 b/d of oil equivalent in gas and liquids, of which about 200,000 b/d is oil.
The majority of its oil output is produced at the Khalda field south of Marsa Matruh. Exports are sent from Khalda by pipeline to the small port of El Hamra, near El-Alamein.
While some smaller companies in the Suez region are obliged to sell all their oil production to the state, Apache has recently been able to export 80% of its “entitlement” share, House said.
The company was recently awarded two new concessions, North West Rezzak and South Alam El Shawish, and is testing a fractured chalk gas play known as Apollonia. On the exploration front it is starting a 3D seismic acquisition program likely to last a number of years, House said.
Recent cost savings appear to be sticking, meaning the company could add another rig to its current fleet of 12, he said. This year’s spending, to be outlined in a results statement this month, will be a “step up” from last year, he said.
This week’s conference in Cairo heard repeated assurances from Egyptian officials that they are open to new ways of doing business. However Shell’s country chairman, Gasser Hanter, suggested that reforming the joint venture model would be a slow process. Shell is producing 50,000 b/d of oil in an onshore joint venture.
“There are a number of other things that would need to be tackled first in terms of improving efficiency, with activity… but as an end-of-the-day scenario I am sure that eventually you will go through the same journey as all the other markets that went through the deregulation and modernization process,” Hanter said.
For his part, House added that Apache, while not lacking competence in deepwater, demonstrated elsewhere in the world, would remain focused on the onshore in Egypt.
“We’ve got plenty of opportunities onshore to pursue,” he said.
“It’s about staying true to form and playing within your strengths. We’re the biggest acreage holder in the Western Desert and we’ve learned a few things over two decades and so we’ve picked up two concessions that we felt like we could add a lot of value to.”