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Tuesday, 28 December 2021

Egypt scores second major oil agreement in less than a week

Apache-Sinopec JV inks new USD 3.5 bn, 20-year production agreement with the Oil Ministry: The Egyptian joint venture between Nasdaq-listed American oil and gas giant APA Corporation (commonly known as Apache) and its Chinese partner in Egypt, Sinopec, has signed what APA is calling a “modernized” production sharing agreement that will make Egypt the “most economic investment opportunity” in the company’s portfolio.

FAST FACT- APA’s JV here is Egypt’s largest oil producer.

What’s in the agreement for Egypt? Apache says it accounted for c. 40% of all oil production in Egypt this year as it deployed more rigs in anticipation of this agreement. APA will bring more rigs into service in 2022 and aim to increase well completions 3x, a move it says will help drive a c. 8-10% CAGR in total production in Egypt. The company projects it will produce 47% of all oil here by 2025, according to an investor deck released yesterday (pdf). APA says its total gas production will remain stable at around 550-600 mmcf/d through 2025. It is also promising to spend USD 235 mn here in 2022 and will pay EGPC a USD 100 mn signing bonus.

What’s in it for APA? Egypt is a lot more profitable — and is much less likely to be a drain on cashflows in the future. The new contract gives APA a 20-year term for existing development leases and five years during which it can explore for new reserves. Critically, it fixes both APA’s profit share and cost recovery percentage from Egypt at the high end of what was previously a range. This should make Egypt more profitable for the JV — and help ensure it’s not going out of pocket funding operations. On that note, APA in Egypt will be allowed over the next five years to recover some USD 900 mn in “unrecovered costs” that the company could not previously claim because it wasn’t generating enough revenue from its Egypt concessions.

A new profitability floor for Egyptian operations? The new contract’s structure and a tweak to how the cost-recovery pool is calculated should mean operations won’t result in “backlogged costs” provided the price of Brent crude stays above c.USD 45 / barrel.

Uh, how does a production sharing agreement work? A PSA (sometimes called a “production sharing contract” or “PSC”) outlines how partners in oil ventures make their money. For Egypt’s new PSA with APA:

  • 40% of gross production is claimed by APA to cover its costs in drilling for and producing oil, including 100% of opex quarterly, capex (quarterly over four years) and the company’s backlogged costs;
  • 60% of gross production is allocated to a profitshare that is split at a fixed 70% to state-owned EGPC and 30% APA;
  • If there’s money left over on the cost recovery side, then it’s split 70-30 by EGPC and APA.

BACKGROUND- You can find the Oil Ministry’s statement here and APA’s announcement here. President Abdel Fattah El Sisi signed off on the agreement yesterday.

The investments come as the two sides look to merge Western Desert concessions: Apache and Sinpec’s JVs with EGPC, Khalda Petroleum and Qarun Petroleum, will merge their concession areas in the Western Desert in a bid to increase efficiency and maximize production, according to the statement. Khalda Petroleum and Qarun Petroleum said in April that they planned to spend USD 1.1 bn on exploration and development at their Western Desert concessions during the current fiscal year.

This is the second major exploration agreement signed in a week: Italian energy firm Eni signed an agreement with EGPC earlier this week, committing Eni to spending a minimum USD 1 bn on exploration and extraction in the Gulf of Suez and Nile Delta regions.

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