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Egypt Boosts French Gas Major's Role In Brand LNG Trade; 3rd Train Go Ahead.

Gaz de France (GdF) has joined the ranks of brand LNG traders, selling the liquefied methane to European and US markets. This role, begun a few years ago, has been boosted by LNG supplies from Egypt, where it has a 20-year contract to lift 3.6 million tons (4.8 BCM) of LNG per annum. APS is also informed that BG Group of the UK is shortly to have the go-ahead for a third LNG train to be built at Idku, just east of Alexandria, where the first train supplies GdF.

The French company's press release said GdF on Nov. 30 officially inaugurated its loading of LNG from the Idku plant's first train, which was completed in late June. Its 20-year LNG purchase contract, signed in October 2002, is the largest economic transaction ever closed between France and Egypt. It makes Egypt a major exporter to GdF, accounting for about 10% of its overall supplies in 2006-2007.

An initial LNG delivery from Idku arrived at the terminal and re-gasification centre of Montoir de Bretagne in July. This came from the first train of Egyptian LNG (ELNG), a JV led by BG Group. GdF has 5% in ELNG.

Signature of the French LNG purchase deal had led to construction in France of a reception and re-gasification terminal in Fos Cavaou and to the building of three LNG tankers in the Chantiers de l'Atlantique's shipyard at Saint Nazaire (Alstom Marine).

The three vessels are: a 74,000m3 ship (GdF Energy), a 153,500m3 tanker, and a 153,500m3 tanker owned by NYK Armateur (a unit of GdF and of the Japanese shipping giant NYK Line, owned 40/60%, respectively).

The Fos Cavaou LNG terminal will receive Egyptian LNG starting in the second half of 2007. Before then, tanker shipments will be offloaded mainly at Montoir in order to saturate re-gasification capacity in France and guarantee its supplies.

The large quantities of LNG from Egypt allows GdF to ensure deliveries to Spain (Carthagena and Huelva) and to the US terminals at Lake Charles and Elba Island. As a result, GdF now is an active player in the short-term LNG market, a segment which accounted for about 19 BCM in 2004, or 11.6% of international LNG trade.

The agreement signed with Egypt both illustrates the strategy pursued by GdF to diversify its sources of supply and further consolidates its position as a front-ranking European player in the LNG market.

BG Group on Sept. 5 said it had started up the second LNG train nine months ahead of schedule. Stuart Fysh, BG's managing director for the Mediterranean Basin and Africa, said the early start-up would have a "very substantial" financial impact.

Fysh said: "We are commencing production at a time of historically high American gas prices so the benefit is not just getting the cash earlier, it actually turns out we're also getting a hell of a lot more cash than we expected". US gas prices have been very high since late August.

BG Group had taken its initial decision on the third LNG train at Idku in December 2004. What delayed the final go-ahead was the need for BG to prove up the reserves of natural gas needed for the third train. The British major has since stepped up exploration for natural gas off Egypt. Having made the biggest gas discoveries in Egypt since 1996, now BG says it is close to proving up the reserves.

Egypt's proven reserves of natural gas rose to about 65 TCF in mid-2005. Cairo hopes this would be doubled through exploration and new licencing rounds in the gas-rich Nile Delta and its Mediterranean offshore. (Egypt's domestic consumption of natural gas has in the past few years grown by 7% per annum - a slowdown from 15% in the 1990s, fuelled by the needs of the country's rapidly expanding power generation sector. Egypt has been adding about 5 TCF of gas per annum).

Idku is being turned into one of five gas hubs BG Group is developing around the world. For its part, BG Gas Marketing is consolidating its network on both sides of Suez. BG Group 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 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 having a capacity of 3.6 million tons/year. The third train is likely to be bigger, as is expected of the other three trains on which BG Group is counting 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 was originally planned to be on stream in October 2005 and the second 3.6m t/y train was to be on stream in mid-2006. The first train was completed in late June 2005. BG and its partners had been discussing the third train since late 2003.

ELNG is owned 35.5% by BG, 35.5% by Petronas (of Malaysia - having bought Edison's Egypt assets in April 2003), 12% by EGPC, 12% by Egas, and 5% by GdF. GdF is committed to buy the entire output of Train 1. Train 1 Company is owned in the same way as ELNG.

Train 2 Co. is owned 38% by each of BG and Petronas 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. It has drilled four more wells in this area this year and has made important discoveries.

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 is using the optimised cascade process developed by Phillips Petroleum of the US (now ConocoPhillips). The FEED work for ELNG had been done by Bechtel which had 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 began lifting LNG in September, with the liquid methane now being supplied 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 seven years.

Societe Generale has been 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. Now it is trading in more than 5 BCM of spot LNG, up from 3.5 BCM in 2003, and is selling most of this to the US market.

The spot market for LNG has been rising rapidly, mostly in the US, having grown by more than 6% per annum since 2001 to reach almost 14 BCM this year. The biggest importers of spot LNG in have been Spain and the US.

BG in May 2001 signed a 22-year agreement with CMS Energy Corp., which operates the Lake Charles LNG terminal, 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% was 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 major 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 more than right, with the spot price of LNG having recently approached $15/m BTU. 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.

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 many consecutive discoveries of gas and condensates, with BG having made the first discovery in late 1997. It is 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 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 feed Train 1. Sapphire gas feeds Train 2. Simian and Sienna went on stream earlier this year.

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 has been still 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 while the risks are still relatively high for the UK major.

BG and Petronas want the E&P terms to be improved further and, equally as important, have been pressing the government to approve the dedication of WDDM gas reserves to LNG trains in addition to the first two. This has taken 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. The well tested about 30.89 MCF/day.

BG Group in November 2004 bought Shell's 20% stake in the offshore Rosetta concession to the south of the WDDM block and thus raised its equity there to 40%. Rosetta's venture, Rasheed Petroleum (Rashpetco), was formed in 1997 to develop and market gas from that offshore block. Rashpetco was previously owned 50% by Egas, 20% by BG (operator), 10.2% by Shell Egypt, 9.8% by Shell Austria, and 10% by Edison Int'l. (Edison is a US unit of Italy's Montedison chemical group). Rosetta block, north of the Delta town of Rasheed, lies between Abu Qir to the west and Baltim to the east and has a giant gas field found in April 1997 with important extensions found subsequently and proven reserves estimated at 2 TCF. The first find was in 200 feet of water 48 km north-east of Alexandria in three net gas zones of over 460 feet of sandstone at about 6,000 feet and tested 60 MCF/day. The second, Rosetta 5, in November 1997 tested over 90 MCF/day which was the highest rate in any gas find made in Egypt. Also in November 1997 Rosetta 6 tested 40 MCF/day. These and subsequent finds in Rosetta went on stream on Jan. 31, 2001. The Rosetta gas is of very high quality with less than 0.5% impurities.

A few months before BG acquired Shell's stake, the latter had announced to the market that, as part of a rationalisation of its regional holdings, it had agreed to sell its share in Rosetta to Kuwait Foreign Petroleum Exploration Co. (KUFPEC). BG exercised its rights to pre-empt the sale as the existing operator of the block.

The first significant upstream investment by BG in Egypt, Rosetta started production in January 2001 and now supplies gas to the domestic market under a 25-year contract signed with the government in 1997. Under a deal with EGPC in 2004, BG moved on the second phase of development, with compression facilities for the fields commissioned in early 2004 in order to maintain production rates. Gas from Phase 2 came on steam earlier this year, taking its contracted supply to 345 MCF/day from 275 MCF/day.

WDDM's giant, the 4 TCF Scarab/Saffron, began producing 530 MCF/day for the local market in early 2003. Development of this complex, which cost $650m, was done by Rashpetco as a contractor on behalf of BGC. The BGC system is a first for Egypt in that it involves subsea technology in water depths reaching 700 metres. It consists of eight production wells controlled from the shore. The gas is processed at the Rosetta onshore plant, which has been expanded for BGC gas.

BG tied its Egyptian gas operations into a global context in June 2004, when the group's gas marketing unit signed two SPAs for the output of train 2. Under the SPAs, the 3.6m t/y of LNG are shipped to Lake Charles. A proportion of Train 2's output will be diverted to the terminal being built at Brindisi.

Under a strategy drawn up in 2004, BG is focusing on the European and US markets in the medium term, with long-term growth prospects identified in South America and India. Within the context of the international LNG market, Egypt and ELNG are within the company's Atlantic and European supply chains.

On Sept. 24, 2004, BG signed agreements with EGPC, Egas, Petronas and the Spanish Egyptian Gas Co. (Segas) which gave BG Gas Marketing 700,000 t/y of LNG from the Damietta plant, where the first 5m t/y train went on stream in late 2004 (see gmt23cDec6-04). The LNG volume is taken for a four-year period, which began in the first quarter of 2005, with supplies in the fifth year to be lower.

This is brand LNG, meaning BG Gas Marketing can sell it anywhere it wants, with BG Gas Marketing acting on behalf of all the ELNG partners. Segas takes its gas feed from the WDDM's Scarab/Saffron fields. To make the 700,000 t/y of LNG available to these partners, the fields are supplying the Damietta plant with 225 MCF/d, and about 150 MCF/d in the fifth year (see gmt24cDec13-04).
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Publication:APS Review Gas Market Trends
Geographic Code:7EGYP
Date:Dec 19, 2005
Words:3099
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