Q&A: SNOC CEO on the Mahani discovery and the future for Sharjah
Sharjah National Oil Company CEO Hatem El Mosa discusses the company’s first gas discovery in more than three decades, its next steps, and how low oil prices could impact Sharjah.
Tell me about the gas discovery.
This is a wildcat exploration well and it was successful, which is a good thing considering that the rate of success of wildcats is somewhere in the range of 5 to 20 percent, so we are happy we made a discovery on our first attempt. Some of it might be luck, but I think a lot of it was due to the extensive pre-work to choose the location of the well and the seismic work and also the work of the drilling team to overcome all the technical obstacles that they have met during the drilling of the well. At the end of the day, it was a discovery based on the zone that we have encountered, and the gas rates that we have seen during the test.
We do not really know what the reserves are at this moment. The only way you can tell what the reserves are with accuracy is after you have produced for a while and then conduct pressure testing after some production to determine how much the pressure was impacted to estimate the reserves, so it takes a significant amount of time before you can get to that point. Until you get to that point, you are only counting on this well and the seismic reinterpretation of the area, and so far they look positive.
For the next steps, of course, we are going to connect the well to the plants, and the plan is to complete this work by the end of this year. And hopefully we will be able to start production from this well. Once it is tied into the plants, we can start producing.
What are the next steps with SNOC’s wider exploration efforts?
We are reinterpreting the seismic data based on what we have learned from this well, and the vertical seismic shocks that we did in the well to recalibrate the seismic data in the area. Based on this reinterpretation, we will choose where the next well in Mahani will be, to delineate the reservoir. Of course, in order to delineate it we expect that we will need more than one extra well. But you work one well at a time, then you do further reinterpretation, choose another location and so on and so forth. And at the same time, we will be producing Mahani-1, so that after some period of production, that would give us an indication of what the potential reserves could be in the reservoir.
In terms of drilling new wells, we are still at the drawing board, but we expect that a minimum of two wells will be drilled next year; one in Mahani discovery and an exploration well to be drilled by ENI in block A, that would be again a wildcat exploration and hopefully they could also have a discovery. ENI is the operator of area A, we are the operator of area B, where the discovery has happened. That is the minimum that we would expect next year, and I expect following that, and depending on the success of the drilling next year, the following year hopefully would even have more activity than that.
In addition to that, Sharjah, SNOC, and the SPC (Sharjah Petroleum Council) are planning to launch future bids rounds in other areas in Sharjah, which at the moment are at the drawing board, but we expect that you will hear more about them within the next year or so. The timing to start, I would say it is within the next six to 24 months.
How did you overcome complex geology to make this discovery?
Whatever we have said about the complexity of the geology in the northern emirates, this project proved that it is even worse. If I were to summarize the main factor for the success of this well, it was perseverance. The number of difficulties we encountered in drilling this well because of the geology was unprecedented. I have had some people say ‘I would have quit a lot earlier than that’, just because of the number of difficulties we encountered. But we persevered. We kept re-evaluating every step of the way. What is the next step? How we can overcome the problems during the drilling until we reach the payload? We could see the light at the end of the tunnel, but it was a very difficult tunnel.
We shot the seismic at least two years before the signing of the concession agreement with the ENI. At that time, SNOC decided to go on its own expense, with the blessing of the Sharjah government, to conduct the seismic, which is not common in our region.
Typically, national oil companies depend on the [international oil companies] to do this kind of work. But we decided to do it ourselves at our expense. It was a significant amount of money, because we knew that by doing so, we significantly enhanced the possibility of exploration success and the possibility of a big draw success and definitely paid off in both aspects.
How do you expect this discovery to impact Sharjah?
This is not a mega reservoir for sure. For Sharjah, the immediate impact would be a very significant increase in our own current production, only from this well, and hopefully that the delineation of the reservoir and the drilling of further wells will significantly increase production above that amount. That is for SNOC. For Sharjah, this will contribute to filling gas demand, but it would not be the only supplier of gas to Sharjah. Sharjah will continue to depend on a basket of options for gas, many of which are already available, and some of them we are introducing as SNOC to the picture.
Where will SNOC send gas supply from this discovery?
The main customer for the gas we produce from this well will be SEWA. However, SNOC is targeting the full industrial sector of Sharjah and it will also be targeting the industrial sector in the northern emirates at large. Historically, in the past 15 years or so, there has been a shortage of availability of gas in Sharjah and the northern emirates in general. Even when you wanted gas it was not available, regardless of the price.
Now the situation is different, now gas is available and we are preaching basically to the industrial sector that if you have demand, we will meet it, and we will commit to meet it, uninterrupted, according to the demand, based on the agreement. We are trying to basically bring the industrial sector back to understand that gas is available, abundant, and at a reasonable price.
The industrial sector generally needs gas either for heating, like in furnaces and such, for example, the ceramics industry or the cement industry. In certain industrial places where power is not readily available, they use it also for power generation. In most cases, they use diesel or coal to meet demand. Now we are telling this sector that gas is available and it is competitive compared to other sources that they are already using. We are also open to any other opportunities with any other customers with gas demand, and we can meet with our supply. We are, of course, encouraging new industries to come to us, which have been discouraged in the past because they have needed energy that is not available. What we believe is that not only gas will be available and abundant, but we believe that power also will be available and abundant from SEWA, which also was a little bit more difficult in the past due to the same restrictions and issues in terms of the availability of gas.
Will the coronavirus outbreak, low oil prices, and the price war impact SNOC?
The instability is causing chaos in the market, and it is not good for anybody, not for the consumers, not the suppliers, not the economy, not the world in general. This instability is just simply that; instability. However, the impact of this instability on Sharjah is going to be very limited, if at all, and possibly even positive, because Sharjah is a net energy importer, so lower prices actually benefit Sharjah. But at the same time, SNOC is both an importer and an exporter, so one sector is benefiting, one sector is hurting. Overall, the impact to Sharjah is going to be minimal.
We export condensate, which is like oil. And that is all going to the market, and the lower oil prices are going to hit this export very badly. The imports of gas are from Dolphin and other sources. And that is going to have a lower price because it is linked to oil.
Our imports are a much bigger share than the export of condensate. At the same time, we also have an LPG market, we sell all of our LPG to the local market. And LPG generally follows oil prices, so with the lower oil prices, our LPG prices will also drop and we are going to lose revenue from the LPG as SNOC. But overall, it still remains profitable. All of our fields are conventional, so the cost of production is relatively low compared to unconventional. Our operation remains profitable. But yes, some sectors under SNOC will hurt, and some will benefit.
This instability will have to be short lived because the market cannot tolerate it for a long period of time. Something will give, and prices are going to go back up. Shale oil in the US will give very badly because of this. Without shale oil in the US, the rest of the producers cannot meet the demands of the world. So prices are going to climb back up, shale oil is going to come back up, and things will go back to above $50 per barrel within a matter of months, no matter what coronavirus does or the big oil fight that is happening. This is not sustainable for the long term.
I would say the longest that this instability could ever last would be six months with oil prices below $50 per barrel. From the fundamental point of view, prices below $50 are not sustainable, and above $70 are not sustainable, so it is going to go back up between $50 and $70 within a reasonable period of time. Until then, the whole world will be in chaos with energy.