Dubai-based Dana Gas is one of the leading foreign investors in the oil and gas industry in Egypt. In this interview, Donald Dorn-Lopez gives his insight into the sector, discusses Egypt’s potential to become a regional energy hub, and explains some of Dana Gas’ operations in the country.
As a leader of the private sector, what is your view on the impact of the economic reforms put in place since 2016, and what is your general outlook for the country moving forward in terms of job creation and private investment?
Let me just start with a little information about Dana Gas because Dana gas actually is a direct foreign investment company. We are currently the fifth largest gas producer in Egypt. In Dana Gas Egypt itself, both directly and indirectly, we employ somewhere in the range of 750 people, only 6 of those are expatriates, all the rest are Egyptians. I think I’m the only American. So that just gives you a flavor of the company.
Currently our largest production share comes from Egypt; closely followed by the Kurdish region of Iraq, but Egypt is still our largest. The nature of gas fields is once you develop them and put them into production they start to decline immediately because as the pressure goes down, the amount of gas produced goes down as well. The way a company sustains and grows its production is by adding fields. We currently operate 15 gas fields in Egypt. We have also had one oil field, which is in the part we call Upper Egypt, near Aswan, that was sold a few years ago.
I suppose we have knowledge of and perhaps some tolerance of the volatility that you can see in various parts of the Arab world because we’re an Arab company. So that just sets tone a little bit for where Dana Gas is coming from. We are a direct foreign investor, but we’re not American direct foreign investors.
In terms of what I’ve seen from the economic reforms not really a lot yet. I know that there have been quite a few steps made by the government both in the terms of the subsidies that are being reduced and in terms of how markets are being opened up, and also in terms of payments which have been in arrears to the foreign international companies.
From the view of our industry, there is some up and down depending on government payments to the industry, but through the end of 2017 we have not yet had a year where the balance owed to Dana Gas was less than $200 million. So in that sense we still struggle, and the government is showing its willingness to work with us, but willingness and actual results are not always in line.
One question about the sector as a whole: as you said the government is showing willingness. The results are a little bit slow to materialize. A lot of the ability of the government should be able to put itself up to date for success of the sector as a whole. How do you see that possibility? How do you see the sector evolving in becoming a net exporter and becoming a hub for re-exporting of cash as well?
I think the government is on to a very good project. I think the minister has very good leadership in that respect. I think there are a number of key projects that have come on production, and those are currently keeping the amount of supply equal to the amount of demand in the country. We forecast an increasing demand. So the supply has to increase as well in order to satisfy that demand. I think what’s really going to facilitate the country becoming an energy hub and export of LNG is going to be the import of stranded gas resources from the Cypriot and Israeli fields.
The exploration project that we have is also potentially large enough to be economic in its own right, and it’s also well located in the pathway that’s expected to bring gas from the Israeli fields. So we might have some chances to share infrastructure and improve the economics. I think the idea of having an energy hub is a very good one. Concrete steps have been taken to make it a reality. I give the government a lot of credit for that. I think it’s a forward-looking vision, something that Egypt is uniquely positioned to accomplish. There is a competing possibility to develop a regional gas hub in the Turkish region and then export both liquid and gas from Iraq, particularly northern Iraq through that area. That idea is still alive and may happen, but I think Egypt is well on that road to becoming that regional hub.
What is the government doing to diversify the energy market to renewable energy to perhaps alleviate the demand for gas by the domestic market?
I don’t expect that the renewables sector in Egypt will make much of an impact really on natural gas demand. There are a couple of big solar energy projects under development. Egypt is a great place for solar, but then, we have to solve the same problem that you have today in California where the amount of electricity generated during the peak day light hours exceeds the demand. To maximize solar power generation in Egypt, you’re going to need an energy storage solution either intermittent gas fired generation or some kind of battery technology.
Both of those are a little bit difficult. Intermittent gas generation may work if you’re also exporting gas, but as a gas producer, you don’t want to have intermittent demand. You want to be able to run your wells always at an efficient rate, and then that gas goes either to consumers or for export. Once LNG export is running, then that’s a potential off take solution that can take the gas when it is not needed for power generation. But until gas export ramps up, it’s very difficult for renewables to have a stronger foothold. Don’t get me wrong, projects will be built; investors will put money into it, but it’s difficult to see how that works on a large scale without storage.
How do you see the investment outlook for new investments looking to participate in some of the forthcoming international tenders?
Speaking from oil and gas perspective because I don’t know much about the other international tenders, but we have three opportunities this year for investment in oil and gas. There’s the exploration concession round by EGAS, which is coming up very soon. The EGPC bid round in the western desert, and the GANOPE bid round in the Red Sea. The GANOPE bid round in the Red Sea for the first time has introduced commercial terms that are more like a tax royalty system than a government share and cost recovery. This is a very significant development. I think it will spur interest particularly from the larger companies in the Red Sea region. If that is successful, then I expect the model to be exported to the other regions potentially to the Mediterranean and maybe even to the western desert.
The cost recovery mechanism is a struggle here because every expense item is scrutinized. The contractor wants to recover his costs and the government has an economic incentive to disallow them. So it’s been a struggle, but I think again that the oil minister has wisely recognized that a change to that system would be very beneficial, where companies are basically tasked with getting on with their business in the best way that they know and the most economical way. The government’s take comes through taxes and royalties. This model has been very successful for a long time; it’s what you have in the North Sea, in the Gulf of Mexico, and pretty much around the world. I think that the advice that the ministry of petroleum got in that respect was very good, and it will be very interesting to see what happens with that change in the Red Sea.
What is your personal ambition for the company in Egypt?
Well clearly this opportunity for organic growth is very important, so everyone in the company right now is focused on delivering this offshore exploration well. Exploration can have two outcomes, they’re either dry holes or they’re successful. Once they’re successful they deliver certain reserves, but it’s imperative on all of our employees now to make sure that this happens and happens properly. Beyond that, we’re always looking at opportunities that may arise in order to grow. So there may be some new business development opportunities coming as well. For now, we are focused on organic growth through the drilling of the offshore block. This first well is one of several prospects that we have, and some of them are quite large. In the event that we are successful in the first one, then we’ll be off to drill the others as well. If we’re not successful in the first one, then we’ll probably still look to develop some of the others, but it may be down the road; it may not be immediate.