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APG Flaring in Egypt: Addressing Regulatory Constraints

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APG Flaring in Egypt: Addressing Regulatory Constraints APG Flaring in Egypt: Addressing Regulatory Constraints Final Options Report November 2017 Submitted to EBRD by: Economic Consulting Associates Environics Carbon Counts Economic Consulting Associates Limited 41 Lonsdale Road, London NW6 6RA, UK tel: +44 20 7604 4546, fax: +44 20 7604 4547 Egypt_Gaswww.eca Flaring_Options-uk.com Report_Final_Clean 11/12/2017 Disclaimer Disclaimer This report is prepared from sources and data which Economic Consulting Associates Limited believes to be reliable, but Economic Consulting Associates Limited makes no representation as to its accuracy or completeness. The report is provided for informational purposes and is not to be construed as providing endorsements, representations or warranties of any kind whatsoever. Economic Consulting Associates Limited accepts no liability for any consequences whatsoever of pursuing any of the recommendations provided in this report, either singularly or altogether. Opinions and information provided are made as of the date of the report issue and are subject to change without notice. ECA - Final Options Report i Contents Contents Abbreviations and acronyms v Executive Summary 6 1 Introduction 12 2 Gas flaring in Egypt 15 2.1 Background: gas market 15 2.2 Gas flaring levels and location 20 2.3 Production Sharing Contracts 23 2.4 Regulatory framework 26 2.5 Institutional framework 30 3 Constraints to gas flaring reduction investments 35 3.1 PSC constraints 35 3.2 Regulatory constraints 37 3.3 Wider investment constraints 40 3.4 Institutional constraints 42 3.5 Summary of constraints 44 4 International lessons 48 4.1 Regulation and policy 49 4.2 Institutional framework 52 4.3 Oversight and enforcement 54 5 Reform options evaluation 57 5.1 Approach 57 5.2 Regulatory reform options 60 5.3 Wider gas sector reforms 84 6 Prioritised regulatory reform options 87 6.1 Core reform options 87 6.2 Roadmap of implementation 88 A1 Annex: case studies 95 A1.1 Country case study 1: Alberta 95 A1.2 Country case study 2: Norway 113 ECA - Final Options Report ii Contents A1.3 Country case study 3: United Kingdom 127 A1.4 Country case study 4: Nigeria 142 A1.5 Country case study 5: Kazakhstan 149 ECA - Final Options Report iii Figures Figures Figure 1 Summary of reform options 7 Figure 2 Schematic of Gas Flaring Reduction Roadmap 12 Figure 3 Methodological approach to tasks 13 Figure 4 Egyptian gas market overview 16 Figure 5 Egypt Supply-Demand forecast, 2016-2024 17 Figure 6 Gas pricing and volumes – July 2014 reforms* 18 Figure 7 Illustration of new gas market and sector structure 20 Figure 8 Location of gas flaring 21 Figure 9 Institutional structure of Egyptian oil and gas sector 32 Figure 10 Main constraints to gas flare reduction investments 45 Figure 11 Overview of international lessons learned 49 Figure 12 Building blocks and reform areas 58 Figure 13 Criteria for assessment and key questions 60 Figure 14 Schematic of Gas Flaring Reduction Roadmap 94 Figure 15 Associated gas conserved, flared and vented in Alberta. 1990-2014 96 Figure 16 Associated gas flaring/venting decision tree 99 Figure 17 Gas flaring on the NCS 114 Figure 18 NPD interaction with stakeholders 124 Figure 19 UK crude oil and natural gas production (1970-2013) 128 Figure 20 UK oil production and UKCS gas flaring (1970-2013) 129 Figure 21 Flared gas to oil produced ratio, 1994-2010 142 Figure 22 Oil production and gas flaring in Nigeria, 2004-2014 143 Figure 23 Flaring and oil production in Kazakhstan, 1994-2010 149 ECA - Final Options Report iv Egypt_Gas Flaring_Options Report_Final_Clean 11/12/2017 Abbreviations and acronyms Abbreviations and acronyms APG Associated Petroleum Gas bbl Barrel of crude oil Bcm Billion Cubic Metres CAPEX Capital expenditure ECA Economic Consulting Associates ECHEM Egyptian Petrochemicals Holding Company EEAA Egyptian Environmental Affairs Agency EGAS Egyptian Natural Gas Holding Company EGPC Egyptian General Petroleum Company EIA Environmental Impact Assessment GANOPE Ganoub El-Wadi Holding Company GoE Government of Egypt GoR Gas to oil ratio GRA Gas Regulatory Authority IOC International Oil Company JV Joint Venture KEC Kuwait Energy Company LDC Licenced distribution company LPG Liquefied petroleum gas mmBtu Million British Thermal Units mmcm Million Cubic Metres mmscfd Million standard cubic feet per day MoP Ministry of Petroleum MRV Monitoring, reporting and verification MW MegaWatt NOAA National Oceanic and Atmospheric Administration OPEX Operating expenditure PSC Production Sharing Contract RA Regulatory Authority SEC Supreme Energy Council ECA - Final Options Report v Executive Summary Executive Summary This Options Report is the main deliverable of the assignment APG Flaring in Egypt: Addressing Regulatory Constraints and combines the results and analyses of all previous tasks. The report makes recommendation on gas flaring regulatory reform options that would help to improve the existing regulatory framework and thereby increase levels of APG utilisation. The approach firstly assesses the existing regulatory landscape in Egypt, secondly reviews international lessons learned from gas flaring regulations and thirdly analyses the merits of different reform options for Egypt. Major constraints to APG investments The main constraint for investment in gas flaring reduction is the marginal economics of APG utilisation projects. This was presented in detail in the previous EBRD funded study1 and is largely due to low gas prices, small and scattered volumes of gas flares, and high capital expenditure requirements for such investments. Consequently, only a small number of associated gas utilisation projects have been realised in Egypt over the past decade. The current market and policy conditions in Egypt are therefore not adequate to bring gas flaring levels down and provide crucial new gas supply sources for Egypt. Hence additional incentives are needed if gas flaring levels are to be reduced. Besides the marginal economics of APG utilisation, we identify other constraints related to the regulation of gas flaring in Egypt. From our findings and stakeholder consultations the following factors limiting APG flare investments can be highlighted: Constraint 1: Lack of a transparent and well defined regulatory framework supported through secondary legislation - While regulatory arrangements exist for gas flare limits and oversight responsibility, these are not formalised creating uncertainty and a lack of transparency for operators. This includes no transparent and enforced maximum flare levels, no gas flare permits system that could create direct accountability and no penalisation and enforcement mechanism. Constraint 2: no transparent monitoring, evaluation and validation process to ensure flare levels are within allowed quota. Although operators are currently required to report gas flare levels to EGPC on a daily basis, no guidelines or requirements are in place that ensure consistent and accurate measurement. Constraint 3: insufficient ‘pull factors’ and economic incentives to improve the economics of gas flare reduction projects. Whilst the regulatory framework can be considered a ‘push factor’, economic incentives can act as pull factors incentivising investments for operators. Most notable missing pull factors include no wholesale market mechanism to ensure gas prices are cost reflective and no third party access arrangements which would allow operators to sell APG directly to offtakers. 1 Associated Petroleum Gas Flaring Study for Egypt, Carbon Limits, EBRD, 2016 ECA - Final Options Report 6 Executive Summary Constraint 4: no formalised process for appraisal and approval of flaring reduction investments. Operators currently face uncertainty on the steps and administrative procedures that need to be taken to implement APG flaring reduction projects. As gas flaring reduction investments can be lengthy and costly to obtain approval for, streamlining the approval process and creating a transparent step- by step guide to be adhered to by operators, would incentivise investments. Constraint 5: lack of clarity on the institutional responsibility for the implementation of gas flaring reduction. Whilst EGPC has been nominated to monitor gas flare levels and enforce restrictions, this is not formalised in any form of legislation, creating uncertainty on the scope of EGPC’s regulatory responsibilities. Additionally, EGPC’s dual role of commercial joint venture partner as well as regulatory agency creates conflict of interest. Constraint 6: no formalised and GoE endorsed gas flaring policy. Despite GoE commitment to reducing gas flaring, no clearly defined gas flaring policy exists. The policy can define the framework within which a regulatory framework can exist. Regulatory framework reforms To overcome the investment constraints and facilitate more APG utilisation, the GoE can adopt a set of reform options that would help redefine the regulatory framework. We assess a number of different reform options on the basis of international best practice and a set of policy criteria. The full set of reforms are summarised in the table below. Implementing all of these reforms would be onerous and results are only likely to emerge in the medium- to long-term. Our recommendation therefore focuses on a core set of reforms that can be adopted by GoE over the short- to medium-term and that could have significant direct impacts on gas flaring levels. These are highlighted in the table. Figure 1 Summary of reform options Regulation & Targets Industry-wide target acting as a medium
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