ITALY’S state-controlled oil and gas company, ENI, has been in Egypt since it signed deals with Gamal Abdel Nasser, the country’s then dictator, in 1954. Now one of the world’s biggest oil firms and the largest foreign oil and gas producer in Africa, ENI said on August 30th that it had discovered a vast gasfield off the Egyptian coast. The Zohr field is thought to contain 30 trillion cubic feet of gas, equivalent to 5.5 billion barrels of oil. If so, Zohr will almost double Egypt’s reserves, and be the largest gas discovery in the Mediterranean. More may be found on further exploration.
The find is a boon for ENI at a time of plunging oil prices, and for Egypt, which has gone from being an exporter to an importer of gas. It may prove positive for other energy firms operating in Egypt, though it undermines Israel’s plans to develop its own fields and export gas to its neighbour.
Claudio Descalzi, ENI’s boss, says the discovery vindicates the firm’s strategy of focusing on developing markets in which it has long been present, and on conventional production rather than newer methods such as the fracking of shale beds. He expects production at the new field to offset the negative impact on ENI of weak oil prices, which are troubling companies and governments across the Middle East (see article).
ENI’s last big find was in Mozambique in 2011. That contains 85 trillion cubic feet, but developing it is a much costlier endeavour because all the infrastructure needs to be built from scratch. Egypt, by contrast, already has an established oil and gas industry and cheap, skilled labour. Drilling is expected to start early next year, and production should begin in 2017.
At first, most production will be for domestic use. Demand for gas has soared as Egypt’s population has grown, and as the government has lured industrial firms to the country with cheap energy prices. But production has not kept up, and Egyptians have had to get used to power cuts.
If all goes to plan, Egypt’s gas production may surpass its consumption by 2020, according to some estimates, leaving a surplus for export. ENI will then be able to make use of its dormant liquefied natural gas (LNG) terminal in Damietta. BG, a British firm being taken over by Shell, may also be able to restart its LNG terminal at Idku, east of Alexandria.
That said, Egypt has been in political tumult for several years, and successive governments have repeatedly sought to renegotiate contracts with oil firms, while failing to make agreed payments. Elsewhere in Africa ENI has become entangled in two corruption scandals—in Nigeria and Algeria. The firm denies any wrongdoing. Still, Mediobanca, an investment bank, believes ENI may be better placed than many rivals to ride out the current storm in the oil industry. In March ENI became the first big oil company to cut its dividend. Investors accepted this as a sensible move, and now they are cheered by hopes that it can be raised again in 2016.
Even as ENI’s shares rose on news of its big gas find, those of Israeli gas firms plunged. Investors in Israel’s aptly named Leviathan field have been pinning their hopes on preliminary agreements to supply gas to Egypt and Jordan. Those could now fall through. Francesco Galietti of Policy Sonar, a political-risk consultant, nonetheless suggests Israelis should be pleased at their neighbour’s good fortune. In the long run Israel may gain more from a financially secure Egypt that is not dependent on Saudi funding than it would have done from selling the Egyptians gas.
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