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Sunday, 26 April 2020

Breakdown in Naturgy, Eni and EGPC Damietta dispute resolution

DISPUTE WATCH- The resolution of a long-simmering dispute over a shuttered Damietta LNG plant has fallen apart despite an agreement reached last month, according to a cabinet statement. Parties to the dispute include Spanish gas firm Naturgy Energy Group, Italy’s Eni, and the Egyptian government.

Why does this matter? First, the dispute was closely followed by investors in Egypt’s energy sector, though that concern was largely swept away as the Sisi administration reached a settlement with all parties. More importantly, the Damietta plant is a key part of Egypt’s strategy to grow its natural gas exports as it emerges as the Eastern Mediterranean’s premier energy hub. The plant has been closed since 2012, when supply of gas was shut off amid disruptions in the wake of the political events of the previous year. Its reopening would have expanded Egypt’s ability to export natural gas to European markets.

What happened? A number of unspecified conditions outlined in the agreement remain unmet, Naturgy said in a Madrid bourse statement (Spanish) (pdf). Chief among them, it seems, is that the reopening of the LNG plant has stalled because of covid-19 restrictions on business operations, a source familiar with the matter told Reuters.

Naturgy will now resume its claim in a USD 2 bn arbitration case against the Egyptian government but says it is still open to an “amicable” settlement. The World Bank’s International Center for Settlement of Investment Disputes had already ruled in Naturgy’s favor in the case in 2018.

What was the latest before things fell apart? Eni and Naturgy had reached an agreement last month with the Egyptian government that would have seen Naturgy exit Union Fenosa Gas (UFG), its joint venture with Eni. Naturgy would have taken USD 600 mn for most of UFG’s assets outside Egypt and its equity in the Damietta LNG, with the equity passing to the remaining stakeholders in the plant. Following Naturgy’s exit, the plant would be 50% owned by Eni, 40% by Egyptian Natural Gas Holding Co. (EGAS) and 10% by the Egyptian General Petroleum Company (EGPC).

S&P Global Platts Analytics had long been pessimistic about restarting operations at the Damietta plant, even if Eni were to find an export market for its Zohr gas production, it said. It argued that the global gas glut had made it increasingly complicated to negotiate the terms between Eni and EGAS on the utilization of the plant. “The breakdown of the [agreement] further bolsters our view that it's highly unlikely that Damietta will see a 2020 restart," Platts Analytics LNG analyst Samer Mosis said.

Meanwhile, Eni is planning to cut back spending across its footprint after it reported a 94% drop in 1Q2020 profits to EUR 59 mn as demand collapsed thanks to the covid-19 pandemic. The energy giant will slash its capital expenditure across its markets by a further 30% after it cut spending plans in March and canceled a EUR 400 mn share buyback. The company will slash its exploration and production budget with cuts in Egypt, the UAE, and Indonesia (as well as oil fields in Iraq and LNG projects in Angola), CEO Claudio Descalzi said on a conference call, according to Bloomberg.

Eni had increased its investment in its JV Agiba in March by USD 60 mn to USD 430 mn to increase exploration and development operations in the Western Desert and the Gulf of Suez this year. It was also set to begin commercial operations on the Zohr natural gas field’s 15th well last month, Oil Minister Tarek El Molla said in February.

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