Apache Sees Growth in Egypt With New Wells Amid Unrest

Apache Corp. (APA), the largest crude producer in Egypt, is expanding its drilling program in the country even as social unrest rattles some investors.

Apache received government approvals for a record 20 new development leases in 2013, and has two more pending, the Houston-based company said in a statement today. Apache is adding horizontal drilling and hydraulic fracturing to its portfolio of traditional wells as it targets new layers of dense rock in its Egypt oilfields. The company has 27 rigs at work drilling wells in the country, up from an average 26 last year, according to the statement.

Apache’s relationship with its partners and Egypt’s Ministry of Petroleum hasn’t changed since political upheaval began in 2011 with an uprising against longtime President Hosni Mubarak, said Thomas Maher, the company’s vice president and general manager in Egypt. Apache’s production, drilling opportunities and payments from the government have been largely unaffected, and the company sees growth continuing, Maher said in a telephone interview.

“We’re in a sweet spot now in Egypt,” Maher said. “All through the three years of the revolution, it hasn’t affected our operations.”

Apache and other Egypt producers such as BG Group Plc (BG/) have lagged peers as waves of violent protests swept the Middle East and Africa in the past three years, toppling dictators and stirring turmoil. BG shares fell 14 percent after the company said Jan. 27 it plans to write down $1.3 billion in Egypt assets. BG reported a decline in 2013 profit of about 33 percent.

Disruption Fears

Investors have been spooked by the potential for continued disruptions, and by the possibility of the government seizing assets, John Herrlin, an analyst with Societe Generale SA (GLE), said in an Aug. 30 note to investors.

Apache shares have declined more than 30 percent since the beginning of 2011, compared to an average gain of more than 20 percent for the 44 members in the S&P 500 Energy Sector Index.

Apache reduced its interests in Egypt last year, selling a third of its business to China Petrochemical Corp., or Sinopec, for $3.1 billion, in a deal completed in the fourth quarter. The assets produced the equivalent of about 350,000 barrels of oil a day in the third quarter of 2013, according to Apache’s statement. Apache’s portion, after the Sinopec deal and other asset sales, would have amounted to about 16 percent of the company’s total output, said Bill Mintz, an Apache spokesman.

Remote Oilfields

Executives at Apache and Royal Dutch Shell Plc (RDSA) have said they’ve been able to continue in Egypt without significant interruptions, since most of their oilfields are in remote locations in the Sahara Desert far from urban unrest.

Government payments for oil and natural gas have been one of the biggest issues for companies. The Egyptian government has accumulated debts to producers of more than $5 billion, according to London-based consultant GlobalData. The new government, established after a coup in July overthrew Islamist President Mohamed Mursi, has diverted natural gas intended for export toward domestic use, where it’s sold at a lower price.

About 60 percent of Apache’s production in Egypt is oil, most of which it exports. The natural gas it produces already was largely sold within Egypt, so the company has seen no change there. Government payments to Apache have continued at the same pace for the last five or six years, Maher said.

“Our situation is good,” he said. “It’s not a big concern of ours, I’ll leave it at that.”

Fracking Program

Apache’s expanded drilling program includes new horizontal wells, the first of which began producing in December with an average output equivalent to 2,000 barrels of oil a day, according to the statement. Egypt’s geology compares to that of the Permian Basin region in West Texas, where Apache is a leading producer, since there are some rock layers exploited easily with conventional methods and others that require newer techniques, Maher said.

The company has found that it can increase production from some fields by using traditional vertical wells to tap conventional reservoirs, then adding horizontal drilling and hydraulic fracturing to tap denser, so-called unconventional layers of rock.

“That’s where we’re heading now, dedicating a portion of our budget and our rigs to starting to look at the unconventionals,” Maher said.

To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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