Egyptian LNG Works On 3rd Train As BG Group Consolidates East-West Marketing.

Egyptian LNG (ELNG), led by BG Group of the UK, is in an advanced stage of negotiations with international oil companies (ICOs) for supply and offtake agreements on a third LNG train to be built at Idku, just east of Alexandria, which is being turned into one of five gas hubs the British major is developing around the world. For its part, BG Gas Marketing is consolidating its network on both sides of Suez, while BG is stepping up exploration off Egypt to find the reserves needed for the third train.

BG BG Group, having made the biggest gas discoveries in Egypt since 1996, is quickly turning itself into an integrated energy giant delivering gas and power directly to customers. It is targeting attractive markets in Europe, America, and Asia.

Idku, meanwhile, is being developed to site six LNG trains which, in BG's impressive model, could catapult Egypt into the top rank of world LNG exporters. Each train will have its own venture company, with a different ownership structure from the others as it will include a main buyer of the liquefied methane.

The first two trains are relatively small, with each to have a capacity of 3.6 million tons/year. The third train is likely to be bigger, as is expected of the other three trains which BG Group is planning for Idku. The size of each train will depend on the natural gas reserves to be found and proven and on the offtake agreements to be secured.

BG signed the final deal for the ELNG venture with the state-owned Egyptian General Petroleum Corp. (EGPC) in April 2001, before the state created the Egyptian Natural Gas Holding Co. (Egas) which now is in charge of the gas sector. The first of its LNG trains will be on stream in October 2005. The second 3.6m t/y train will be on stream in mid-2006. BG and its partners have been discussing the third train since late 2003.

There is now an operating company, ELNG, owned 35.5% by BG, 35.5% by Petronas (having bought Edison's Egypt assets in April 2003), 12% by EGPC, 12% by Egas, and 5% by Gas de France (GdF) which is committed to buy the entire output of Train 1 under a 20-year contract starting from early October 2005. Train 1 Co. is owned in the same way as ELNG.

Train 2 Co. is owned 38% by each of BG and Petronas of Malaysia and 12% by each of EGPC and Egas. BG says there is enough room at Idku for other offshore operators in Egypt who have found sufficient gas not far from this zone and may add trains to the complex, such as Apache and any of the BP-led partnerships.

BG Group is a prime contender for the main partnership and offtake agreements for the proposed Train 3 Co. It has ready markets in America and Europe for up to 5m t/y of LNG by 2008 over and above its existing capacity and Train 2's 3.6m t/y output. All it needs are the reserves. BG is stepping up exploration in the gas-rich offshore West Delta Deep Marine (WDDM) concession, 60 km off the Nile Delta. Is it to drill four more wells in this area next year, with BG confident it will find major reserves.

The Idku liquefaction centre has been modelled after Atlantic LNG of Trinidad & Tobago in which BG is the leader and largest shareholder (26%). Like that plant and its three additional trains, ELNG will use the optimised cascade process developed by Phillips Petroleum of the US (now ConocoPhillips). The FEED work for ELNG has been done by Bechtel which has the $900m EPC contract for Train 1 and the $550m EPC job for Train 2. Bechtel, the main contractor for the Atlantic LNG venture, has been part of the project management team for the development of the Scarab/Saffron fields in the WDDM block. BG calls WDDM as the "jewel in the crown" of its Egypt exploration portfolio.

On Sept. 25, 2003, the Train 2 partners signed the sale and purchase agreements (SPAs) for the entire 3.6m t/y output of Train 2 to BG Gas Marketing. This will be supplied from mid-2006 to BG LNG Service for the Lake Charles import terminal in Louisiana. The SPAs provide for LNG volumes to be switched in 2007 to a 6m t/y import terminal in Brindisi (Italy) on the Adriatic which is being built as a 50-50 venture for BG and the Italian power utility Enel. The Italian market will need about 30 BCM per annum of additional gas within the next eight years.

Societe Generale is the financial adviser for ELNG. The French bank won the contract for this in 2001 against competition from other major banks. It has overseen impressive financing arrangements by Egyptian and international banks for the two trains.

BG has been the most active player on the spot market for LNG west of Suez. In 2003 it traded in more than 3.5 BCM of spot LNG and sold most of this to the US market. The spot market for LNG in 2003 rose by more than the 6% growth rate registered in each of 2002 and 2001 to 12.1 BCM. That was about 8% of total LNG trade worldwide of almost 157.7 BCM, compared to 7.8% of 146 BCM in 2002. The biggest importers of spot LNG in 2003, as in 2002, were Spain and the US. The volume of LNG in spot trading this year is expected to exceed 5 BCM.

BG in May 2001 signed a 22-year agreement with CMS Energy Corp., which operates the Lake Charles LNG terminal in Louisiana, to take over the facility. This is the largest LNG terminal in the US. From Jan. 1, 2002 BG took 80% of the terminal's capacity, as the remaining 20% had already been contracted out. The 20% will be handed over to BG on Sept. 1, 2005. BG is using this terminal to market its LNG in the US from Trinidad and Egypt.

The terminal can receive 4.6m t/y of LNG, store, vaporise LNG and deliver an average send-out of 630 MCF/day of gas. It has access to 15 major inter-state gas pipelines, with BG having several options for use of the terminal including physical trading of LNG cargoes. It will use its own LNG shipping resources for LNG from Egypt.

(Some experts in May 2001 said BG paid too much for the use of Lake Charles and that the British company then assumed the price of natural gas in the US will remain in the $4.50-5/m BTU range for many years. BG has been proven right. With the exception of several months after the Sept. 11, 2001 terrorist attacks against the US, the price of natural gas on the American market has been quite high. The past week ended on Dec. 10 with the Henry Hub spot price of natural gas closing at $6.3/m BTU, while the futures price of natural gas at NYMEX was $6.84/m BTU and the New York City Gate price was $6.92/m BTU - see OMT of this week).

In mid-2001 BG ordered two new 138,000 m3 LNG tankers from Samsung Heavy Industries Co. of South Korea for delivery in the second and third quarters of 2004, respectively. In addition, it has secured options with the same shipbuilder for another six LNG vessels, three for delivery in 2005 and the other three in 2006.

Petronas, the Malaysian NOC which is becoming a global player and having the world's largest LNG complex at Bintulu, Sarawak, was the first Asian company to enter the Egyptian gas E&P and LNG businesses in April 2003, when it bought the assets of Edison Int'l of Italy for about $1.75 bn.

The WDDM concession is held by Burullus Gas Co. (BGC), a JV of BG Group, Petronas and EGPC/Egas. BGC is responsible for drilling and field development in the WDDM concession. First awarded to the group in 1995, the WDDM concession has so far yielded 16 consecutive discoveries of gas and condensates, with BG having made the first discovery in late 1997. Holding some 370 BCM (13 TCF) of proven reserves of natural gas, it is now the largest offshore integrated gas project in the Mediterranean. BGC was formed in 1999.

Nine gas fields have been identified so far: Scarab, Saffron, Simian, Sienna, Sapphire, Serpent, Saurus, Seqouia and Solar. Burullus is working on the subsea development of the Scarab/Saffron and Simian/Sienna fields, which have proved a reliable supplier to the domestic market. Contracted volumes of gas supply from Scarab/Saffron rose on Jan. 1, 2004, 586 MCF/day, but the twin fields have proved capable of producing at a sustainable rate of about 750 MCF/day. Rising domestic demand - driven largely by a pressing need for new electricity generation capacity - has played its part in the upstream expansion plans of BG and other IOCs.

What is driving the WDDM exploration effort, however, is the international market for LNG and the consolidation of BG's gas marketing strategy on both sides of Suez. Gas from the Simian/Sienna fields will feed Train 1. Sapphire gas will feed Train 2. Simian and Sienna are due to be on stream in the second quarter of 2005. First gas from Sapphire is expected in early 2006.

The Egyptian government has made great strides in opening up the upstream sector to foreign investors. But BG says the growing sophistication of the international gas market is throwing up new challenges to companies like the UK group. The government is taking its time in understanding the need for BG and Petronas to have better E&P terms in the WDDM concession area, where drilling a well is very costly.

Cairo is too slow in understanding the complexity of tying gas E&P terms to LNG export markets. BG and Petronas want the terms to be improved and, equally as important, are pressing the government to approve the dedication of WDDM gas reserves to LNG trains in addition to the first two; and this is taking a long time.

BG went through a long process to amend the WDDM agreement as there were originally no provisions to export gas from the concession. But that in itself has set a precedent and BG now is seeing an improvement in the award times for normal concession agreements. Yet BG says the gas business is "a complicated beast, and it is growing in complexity all the time".

Sapphire 3, the 12th of the 16 BG discoveries on the WDDM block, in October 2001 confirmed the largest gas column found in Egypt. The well, 20 km north of the offshore block Rosetta, was drilled to 2,900 metres in 450 metres of water. The first target was the previously undrilled Saffron Channel C, in the Scarab/Saffron complex. The well proved pressure communication between Channel C and Saffron, indicating a gas column in excess of 575 metres. A second target was the Sapphire sands. The well penetrated all sands present in Sapphire 1 and Sapphire 2, located 15 km west of Sapphire 3. Pressure data and geochemical analysis indicated that all three wells were in communication. The 13th find, Saurus-1 in a water depth of 630 metres, was announced in November 2001 and continued BG's 100% drilling record on the block. It tested 30.89 MCF/day.