Apache Corp., the largest crude producer in Egypt, is expanding its drilling program in the country even as social unrest rattles some investors.
Apache is adding horizontal drilling and hydraulic fracturing to its roster of traditional wells as it targets new layers of dense rock, the Houston-based company said in a statement today. It has applied for additional licenses in the country, where it already has approval to develop about 2 million acres.
Energy producers in Egypt, including Apache and BG Group Plc, have lagged peers as waves of violent protests swept the Middle East and North Africa in the past three years, toppling dictators and stirring turmoil. Apache last year sold a one-third stake in its Egypt operations to China Petrochemical Corp. for $3.1 billion. Egypt was the largest source of revenue after the U.S. for Apache in 2012.
“Horizontal drilling, hydraulic fracturing, whatever, holds huge promise,” Fadel Gheit, a New York-based analyst for Oppenheimer & Co. who rates the company the equivalent of buy, said today in an phone interview. “You could unlock the resources and increase its market value for Chinese companies and then get the hell out of there.”
Apache rose 0.3 percent to $81.28 at the close in New York. The shares have fallen 3.7 percent in the past year, trailing the 13 percent average gain for companies in the Standard & Poor’s 500 Oil & Gas index.
Investors have been spooked by the potential for continued disruptions in Egypt and by the possibility of the government seizing assets, John Herrlin, an analyst with Societe Generale SA, said in an Aug. 30 note to investors.
BG fell 14 percent after the company said Jan. 27 it plans to write down $1.3 billion in Egypt assets. The British company reported a decline in 2013 profit of about 33 percent.
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. Production, drilling opportunities and payments from the government have been largely unaffected and the company sees growth continuing, Maher said in a phone interview yesterday.
“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.”
Egypt’s geology compares to that of the Permian Basin 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, said Maher
The company has found 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 in a phone interview yesterday.
Apache drilled more than 250 wells in Egypt last year and gross output averaged the equivalent of 346,530 barrels of oil a day in the third quarter, the company said.
Apache received government approvals for a record 20 new development leases in 2013 and has two more pending, according to today’s statement. The company has 27 rigs at work in the country, including four drilling horizontally.
Apache’s Egyptian output, after the Sinopec deal and other asset sales, would have amounted to about 16 percent of the company’s total production, said Bill Mintz, an Apache spokesman.
“Egypt is their most profitable area,” said Gheit. “It is not an easy situation. Do you leave?”
Executives at Apache and Royal Dutch Shell Plc have said they’ve been able to continue in Egypt without significant interruptions, since most of their oil fields 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 President Mohamed Mursi, has diverted 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 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.”