SDX Energy, the international exploration and production company, is gaining momentum in its key markets of Egypt and Morocco. Paul Welch, chief executive officer, discusses the company’s upcoming plans with Pipeline Magazine’s Nadia Saleem at the sidelines of Egypt Petroleum Show (EGYPS)
SDX Energy focuses on North Africa, and has three active concessions in Egypt – the North West Gemsa, the West Gharib and South Disouq. Meanwhile in Morocco, it has the Sebou Permit and Lalla Mimouna.
Egypt is a country with five basins that are not mature and contains a lot of remaining exploration and development potential, says Welch. “It is also one of the few countries in the Middle East that is open to the private sector so that’s what makes it interesting for us.”
Although the country in recent years has seen political and social turmoil as fallout of the Arab Spring and saw a revolution, the latest leadership under President Abdel Fattah El Sisi, the country agreed with the International Monetary Fund for a $12 billion loan, on the condition of significant economic reforms.
Some of the major changes undertaken that have had a positive impact on the energy sector included reducing fuel subsidies and removing currency controls. As these took place, the Ministry of Petroleum was able to gradually reduce arrears in payments to international oil and gas companies from around $7 billion to less than $1 billion.
“The steadily improving payment position has given us a lot of confidence. Egypt is determined to fix the receivable problem. It’s that willingness to pay everyone back on the investments that have been made, that has definitely made it far more interesting to be here and has had an impact on most companies,” Welch said, while adding that currency flexibility has also increased and the company is able to take payments in Egyptian pounds or U.S. dollars.
Additionally, Egypt has been taking strides to develop its oil and gas market and aims to become a regional energy trading hub to eventually supply gas to Europe and Africa.
A game changer was the discovery in 2015 of Zohr, the super-giant gas field in the Mediterranean Sea that has reserves estimated at 30 trillion cubic feet. This has encouraged the country to launch several new exploration and production bidding rounds for oil and gas.
SDX Energy has been successful in some bids and also made its own discoveries. It also acquired a competitor in the Egypt market as pricing became attractive during the downturn, which gave it more assets in the country.
“We’re definitely looking at bid rounds and more assets in Egypt and tie ups with partners to strengthen our portfolio. We’re going to be adding a significant amount of production in Egypt in 2019,” he said.
SDX Energy plans to hit a production growth target in 2019 of around 10,000 barrels of oil equivalent per day.
“Most of our growth in 2019 will be from Egypt but we do also plan to increase our production in Morocco by 50 per cent - 2019 will be the year in which we develop and place on production discoveries that we made in previous years, the biggest of which was South Disouq in the Nile Delta basin of Egypt,” Welch said.
The company also plans to continue to look for new opportunities throughout the rest of North Africa and has already started to look slightly further afield to places like Turkey.
“Nine out 10, the opportunities we review are in Egypt. It’s such a big market. However, our main focus this year will be on developing Egypt’s South Disouq field, which has 60 million cfpd target by mid-2019. We have 55 per cent in that field, so that’s where we see the growth in 2019, which will double our production from where we are the moment.”
Additionally, SDX Energy is developing a pipeline capacity offtake of 140,000 cfpd, starting in July. Welch has set an objective to get that filled by the end of 2020.
The company will also pursue other opportunities in the South Disouq block. This is what will drive our reserves and volumes in the near to medium term,” he said.
Morocco drilling campaign
Meanwhile in Morocco, the company recently acquired a new licence in the Gharb basin’s Moulay Bouchta West licence and has started planning for a 12 well drilling campaign there beginning in 2019.
That 12 well program will commence in Q3 2019 and then continue into Q1 2020. “We’ve basically leased the entire basin and we have built a lot of infrastructure that we own, unlike in Egypt.
In Morocco, we drill wells, produce gas and transport it through our own pipeline where we then sell it directly to our customers - so we own the entire value chain,” Welch said.
The next campaign could increase up to 16 wells, he said as there are good opportunities in Morocco. “We’re trying to fill our pipeline that currently has a capacity of 20 (cfpd). We currently have contracts to sell approximately 8 million cfpd, which we’re expecting to increase by year-end 2019 to 9-11 million cfpd. That’s our production target for 2019 in Morocco.”
“So we do see growth in Morocco in 2019 as well but not at the same level as what we anticipate in Egypt - 2019 will be a big year for us in Egypt which is why we were excited to take part in EGYPS,” he said.
Egypt competition and regulations
Although Egypt represents a high-growth market for many IOCs, the success brings with it a touch of caution.
“As the number of companies increase, the competition has increased. You see the majors coming back with the likes of BP, Eni, Shell and ExxonMobil. The ministry has done a good job in promoting this sector and you see increased activity as a result. So competition will be one challenge,” Welch said.
Meanwhile, another issue is the fiscal framework of selling gas, which has already seen some changes recently.
In Egypt, the pricing for oil fluctuates with the international market – so an uptick in international prices, filters through to the local prices immediately. However, the gas market is local and although it is developing rapidly the pricing model is still not that interesting – with prices being relatively low, Welch said.
“If the gas market opens up, as it is expected to, then you will see some more interest in gas onshore and offshore. If pricing doesn’t change then that interest may be slightly subdued,” he added.
Increasing supply from the local market will be one factor to determine prices going forward, but this factor will be balanced against imported gas that is expected to enter Egypt as the North Africa country moves to become a regional energy hub by connecting piped gas from neighbouring countries such as Cyprus and Greece.
“As Egypt becomes an energy trading hub - and the credit for this goes to the Ministry, we’re going to see gas come into Egypt from outside, either for domestic demand or to be exported. So rather than Egypt being a gas importer, you will see it increasingly becoming a gas exporter,” Welch said.
One of the deciding factors on local pricing will be the balance of gas coming versus how much is going to be sent out.
“Another aspect of local pricing will be how much local demand there is - when you have heavily subsidised fuel competing with natural gas, a lot of demand will be taken away but as this subsidy is removed we anticipate gas demand to increase over time,” he said.
“We don’t have a good grasp of the local demand presently given the importance of these subsidised fuel volumes. Egyptian domestic gas production is around 7 million cfpd, and where this gas is utilised will also impact what the domestic prices are. If more is exported, then gas prices here will be lifted. So the global LNG pricing will play a role,” Welch added.
Additionally, taxation is another issue, but not a major hurdle, the CEO of the oil and gas producer company said.
In SDX Energy’s South Disouq concession and most others, the state pays the tax as part of the agreement. “When we start selling gas to the end user directly then we have to pay the tax so the effective tax rate essentially doubles. At the moment, it’s not advantageous enough to sell directly because we don’t get a high-enough price to justify the increase in tax,” he said.
Welch said that aspect of the fiscal terms hasn’t been fully developed yet. “The Ministry has definitely started work on that but it just needs a few more tweaks. We see this happening in the near-term,” he added.
Welch said the company will continue to focus its operations in North Africa in the immediate future. “We’ve been North Africa focused for the last five years we’re happy with the opportunities to growth here. For SDX North Africa is essentially Morocco, Tunisia and Egypt, the majority of the opportunity set we see is in Egypt so that’s where our focus is.”
“However, there are a number of assets outside the region for sale (Turkey being one area) and we are looking at these for inorganic growth opportunities as well. We presently have no exploration or production activities outside of Morocco and Egypt but who knows what the future holds?” he said.