US embassy cable - 05CAIRO5484

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. 
 
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Summary 
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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. 
 
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Gas in Egypt 
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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. 
 
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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. 
 
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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. 
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LNG - Damietta 
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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. 
 
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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