Acreage, technology drive Apache's growth in Egypt

Reports
Third Quarter 2006 Update

Egypt, a part of Apache’s global portfolio for 12 years, is the prime example of our model for incremental growth through the development of core areas in hydrocarbon-rich regions that can provide sustained reserve and production growth over the long term.

Beginning with the farm-in of a 25 percent non-operated interest in the Western Desert’s Qarun Concession in 1994, Apache today has become Egypt’s third-largest producer of hydrocarbons, contributing daily operated volumes of approximately 116,000 barrels of oil and 520 million cubic feet (MMcf) of gas for the benefit of Egypt and Apache’s shareholders. In support of our strategic objectives, we have amalgamated the company’s largest single leasehold position: over 10 million acres in 11 exploration concessions and 42 development leases.

Based on the company’s belief that long-term growth would best be secured by broadening its reach beyond the United States, Apache Corporation decided in the late 1980s to begin the process of international diversification. Acting on an increasingly refined “core-area” model that recognized the need for large acreage positions with considerable exploratory running room, Apache’s international operations gradually began to take the shape they reflect today.

Apache entered Australia in 1991 and elevated it to a core area with the acquisition of Hadson Energy Resources in 1993. Egypt followed. Today, Apache’s international operations also include Canada, the North Sea and Argentina.

Apache had studied Egypt for several years and concluded that the country’s multiple producing basins, spread over an area equal to that of Texas and New Mexico and largely under-explored, offered the necessary high-reserves, low-cost relationship and potential. Furthermore, Apache determined that over time it could accumulate significant acreage in a market deemed ripe for the growth of its domestic oil and gas industry.

Egypt was not without its challenges. Many of the majors had dabbled there; most felt it was only a sideshow, offering limited reserves often long distances apart. Some broke their picks in the Western Desert and moved on to other opportunities. Apache, within the context of its own operating model and through the anticipated application of newer, evolving technologies, saw greater potential. In addition, part of Apache’s international strategy was to find places where it could be a significant player without having to compete head-to-head against the majors.

Apache entered Egypt in 1994 by acquiring a 25 percent non-operated interest in the Western Desert’s 2-million-acre Qarun Concession alongside the Phoenix Resource Companies. A discovery that produced 12,000 barrels per day soon followed. Eager to step up the pace of operations and increase its access to the country’s numerous producing basins, in 1996 Apache proposed a merger with Phoenix that elevated Egypt to the status of core area and added a 40 percent non-operated interest in several concessions, including the prolific, four-million-acre Khalda complex.

From 1996 to 2001, Khalda’s operator, Repsol YPF, Spain’s largest oil company, added new reserves at approximately the same pace as annual production depleted them. Apache’s geoscientists and engineers assigned to work the complex soon recognized its tremendous untapped potential and the corresponding importance of securing operational control in order to exploit it. In March 2001, Apache acquired Repsol’s 50 percent interest and, before the year was out, purchased the remaining 10 percent previously owned by Novus Bukha Limited.

Aggressive drilling at Khalda and Apache’s other concessions yielded not only increased production and reserves but also an evolving understanding of Western Desert geology, characterized by overlapping Upper Cretaceous (Bahariya), Lower Cretaceous (Alam el Bueib or AEB), and Jurassic formations that contain up to 50 identified productive intervals. Conventional in the sense that hydrocarbons are found in structural traps, the Western Desert assumed many of the characteristics of a resource play: Higher-risk, higher-reward exploratory drilling became relatively predictable for the high probability that almost any well would add reserves in commercial quantities.

The heart of the Khalda complex is a geologic structure known as the Khalda Ridge. The site of some of the Western Desert’s most prolific oil and gas fields, Khalda Ridge production in general is characterized by Jurassic gas and condensate from depths between 10,500 feet and 13,000 feet and Cretaceous oil from depths between 5,000 feet and 11,000 feet.

Following the Repsol acquisition, Apache’s geoscientists and petroleum engineers undertook an in-depth study of Khalda Ridge reservoirs and the best ways to identify and exploit them. They gained a vastly improved understanding of Western Desert reservoir architecture and an increasing sense of how exploration and production technology commonly applied in North America could, for the first time, be utilized in Egypt.

Implementation of water-flood, fracture-stimulation and horizontal-drilling technologies breathed new life into many old fields, not only at the Khalda complex but also at Apache’s other Egyptian concessions, as well.

The figurative home run, however, came through the application of 3-D seismic technology to the deeper and less-well-understood Jurassic sands. Historically elusive if not downright invisible, Jurassic intervals had proven to be prolific when found. Over a two-year period, Apache’s geophysicists and seismic service-company personnel worked in concert to better image Jurassic structures.

If any one well exemplifies that team’s success, it is the Qasr discovery well. Drilled in July 2003, it yielded a Jurassic gas and condensate reservoir approximately 700 feet thick. With estimated recoverable reserves of more than 2 trillion cubic feet of gas and 50 million to 70 million barrels of condensate, it is a world-class discovery and the largest in Apache’s history. With a productive interval that rivals the height of the Washington Monument, it set up a development program that has doubled Apache’s Egyptian gas production, underscored the immense potential of the relatively unexplored Jurassic sands, and solidified Egypt’s role as a significant driver of Apache Corporation’s future growth.

The identification of Jurassic targets such as those at Qasr is not Apache’s only seismic success. Other members of the Apache team applied the technology to the East Bahariya and El Diyur Concessions. The subsequent discovery of 31 new oil fields is directly attributable to the region’s use of 3-D seismic as the primary driver in its exploration efforts.

Today, Apache has acquired over 23,000 square kilometers of 3-D seismic covering approximately 56 percent of the 10.2 million acres under lease. By virtue of its 2006 seismic program in Egypt, the company not only has the largest inventory of 3-D seismic in Egypt, it is also the most active acquirer of onshore 3-D seismic in the world.

With the explosion of onshore activity and potential in the less expensive operating environment of the Western Desert, Apache decided in early 2006 to sell its West Mediterranean Concession deepwater discoveries to Amerada Hess. Some perceived the sale to be a signal that Apache was beginning to reduce its Egyptian position when in reality the company was monetizing a stranded asset and redeploying the capital to purchase producing properties complementary to those already owned in another core area.

West Med, both onshore and offshore, was purchased in 1997 as part of a $7 million package that included Northeast Abu Gharadig and East Bahariya. Onshore exploration and development on all three concessions yielded operated daily production that today averages 16,000 barrels of oil and 30 MMcf of natural gas.

In 2002, Apache commenced its first deepwater operations and made a series of four discoveries at West Med. Whatever the potential reserves might have been, the initial estimates of the capital program required to bring them to market exceeded $500 million to Apache’s interest, with first production still some years in the future. The subsequent sale relieved Apache of an enormous capital obligation and delivered proceeds of $413 million. Of that, $269 million was redirected to the purchase from Amerada Hess of producing properties in the Permian Basin that immediately contributed to Apache’s Central Region asset base, production and cash flow. The two-sided transaction proved to be an example of balancing core-area risk and reward. And it wasn’t a bad return on the original $7 million investment, either.

Apache’s operational success in Egypt would mean nothing if the provisions of its concession agreements and production-sharing and sales contracts with the Egyptian General Petroleum Company (EGPC) did not provide an ample term in which to earn acceptable economic returns.

Under the concession agreements, exploration phases typically run for eight years and are subdivided into an initial exploration period of three years and optional extensions of three years and two years, respectively. Development leases generally have a 20-year life with a single five-year extension, subject to the government’s approval. Additional negotiated extensions are possible.

In mid-2004, 10 years after entering the country, Apache and the government renegotiated extensions to the exploration phase and to four development leases under the Khalda Concession Agreement. In 2005, in return for commitments by Apache to continue its aggressive exploration of the Western Desert, EGPC agreed to restart the clock on exploration phases which were nearing their end under several concession agreements.

Under the production sharing contracts Apache pays all operating and capital expenditure costs for exploration and development. A percentage of the production, usually up to 40 percent, is available to recover operating and capital expenditures. In general, the balance of the production is allocated between Apache and EGPC on a contractually defined basis. Apache’s actual interest in production and reserves approximates 45 percent to 50 percent of its indicated contractor interest.

The marketing of Apache’s natural gas and oil production in Egypt is equally well defined, generally through take-or -pay contracts with EGPC. Pricing under these contracts was originally based on the energy equivalent of 85 percent of Gulf of Suez Blend crude oil, currently equal to $7 to $8 per million British thermal units (MMbtu).

Beginning in 2000, EGPC introduced an alternative natural gas pricing method. This formula is a sliding scale based on Brent crude oil with a minimum of $1.50 per MMbtu and a maximum of $2.65 per MMbtu upon reaching a Brent price of $21.00 per barrel. Generally, this formula applied to all new gas discovered and produced. However, in exchange for an extension of the Khalda Concession lease, Apache preserved the old Gulf of Suez Blend gas price formula until 2013 for up to 100 MMcf per day produced from the South Umbarka Concession and the Khalda, Khalda West, Salam and Tarek
development leases and agreed to accept the alternative pricing formula on all production in excess of that amount. With current Brent prices, our aggregate average price realized in 2006 is $4.65 per thousand cubic feet.

Oil produced from the Khalda Concession, the Qarun Concession and other nearby Western Desert blocks is either sold directly into the Egyptian pipeline grid or exported. That which is presently sold to EGPC is sold on a spot basis at a “Western Desert” price (indexed to the Brent crude oil benchmark price). Exported barrels have been sold at market prices comparable to domestic sales to EGPC.

As the Egyptian oil and gas industry has reaped the rewards of a global tightening of energy supplies, concession agreements, production-sharing contracts and sales agreements have been tightened in favor of the government. With the benefit of hindsight, the timing of Apache’s entry to the Egyptian market, the “running room” of its large acreage position, and the application of technology have been as beneficial to the company as its aggressive operational exploration and development have been to the country. Apache’s Egyptian subsidiary is a win-win for all parties.

Top of Page

Browse Archives