Eni makes major gas discovery

Eni has made a major discovery in the eastern Mediterranean that it claims has the potential to produce up to 30tn cf of gas (5.5bn boe). The largest discovery in the region to date, the Zohr field will complement Eni’s already large position in Egypt, which contributed about 13% of its global production in 2014 and recently included a $5bn exploration commitment in the country.

It is reported that the Zohr development could be fast-tracked to come onstream in a few years using existing infrastructure, adding reserves and cash flow in a relatively short timeframe compared with typical large deepwater developments. Eni’s stepped up investment in Egypt could also ‘position the company favourably in future negotiations with the government for higher priced gas sales contracts’, and ‘possibly help accelerate the payment of past due gas sales receivables from state-owned companies, which totalled €966mn as of 30 June 2015’, according to Moody’s Investors Service.

Eni reports that after full development, the field ‘will be able to satisfy Egypt’s natural gas demand for decades’. After peaking in 2009, Egypt’s domestic natural gas production has declined, even as consumption rose until 2012. This has resulted in supply shortages that have led to power cuts and an increased reliance on imported gas.

‘As part of its energy reform programme to stimulate domestic production and sector investment, the Egyptian government has raised the prices it pays to international oil companies and aims to clear arrears on payments to those companies by the end of 2016,’  says Moody’s Thomas Coleman, Senior Vice President. ‘According to news reports, as part of an agreement struck in March, Eni will receive prices ranging from $4 to $5.88/mn Btu, up from $2.65/mn Btu. In addition, during the Egypt Economic Development Conference held in March, major energy companies including Eni agreed on oil- and gas-related investments totalling more than $20bn over the next four to five years. These agreements, along with an improved outlook for power generation, will underpin Egypt’s access to energy and recovery in real GDP growth and will ultimately bolster government revenues.’

‘At the same time, for Eni, the longer-term benefits will be tempered by the inherent execution and development risk of a large offshore project that could be subject to delays related to low commodity prices, financing and political risk. One government source estimated the development’s price tag at $7bn. As the 100% owner in the discovery, Eni would need to rank and phase that development within its current €48bn strategic plan for 2015–2018. That plan faces the risk of lower prices as the company undertakes asset sales and other moves to support its capital spending without increasing financial leverage. A related and unresolved question is whether Eni would ‘sell down a portion of the Zohr interest to diversify its political and geographic risk and mitigate leverage effects’, notes Coleman.

The Zohr field has prompted much excitement in the European energy market, which has struggled with international competition and uncertainty around pricing. But how will European energy companies benefit from this discovery, and what legal considerations need to be understood before they proceed? asks Mayer Brown’s Sam Webster.

‘Although foreign investment in Egypt has been running at lower levels in recent years as a result of the disruptive influence of the Arab Spring causing much political risk and instability, the legal framework surrounding the production of oil and gas is well developed. The Egyptian Ministry of Petroleum is responsible at a government level for the regulation and development of the oil and gas fields, acting through the Egyptian General Petroleum Corporation and the Egyptian Natural Gas Holding Company. ‘

‘The state owns all oil and gas resources and so only the state is allowed to grant the rights for exploration and exploitation of these resources for interested investors – through a concession agreement which is legally binding. The concession is divided into the exploration phase and the exploitation phase – so now that the discovery of the Zohr gas field has been made, the area will be converted into a development lease running for 20 years from the date of discovery. To enable both the state and the contractor to benefit from the discovery, a joint venture company is formed between the contractor and the EGAS or EGPC to undertake the exploitation activities.’

‘As production gets underway, various provisions will apply regarding issues like exports, pricing, royalties and the distribution of the gas. Foreign investors will also need to comply with labour restrictions and anti-corruption provisions, although these are likely to be less comprehensive than the requirements of their home jurisdictions.’