Dana Gas has struck a deal with Egypt’s government that it expects will help it recover hundreds of millions of US dollars in back payments for gas and related products which it has been owed since the Arab Spring turmoil in 2011.
However, the Sharjah-based company must first finalise details on the financing of a new drilling programme, and the results will not show up in the company’s cash flow until the year after next.
Nevertheless, the Dana Gas chief executive, Patrick Allman-Ward, said the deal provides a way for it to invest in a new drilling programme, which in turn will increase production, and eventually enhance its cash flow substantially. A highlight of the deal is that allows Dana Gas to keep a substantially larger share of gas-related products — including LPG — which it can sell on the international markets to generate cash independent of the Egyptian government.
“Since January of 2011, when the political incidents took place, we have not been paid fully for the products that we have been delivering to the Egyptian government,” Mr Allman-Ward, explained, putting the outstanding amount currently at US$300 million. “As a result of that we have had to rein back on the level of investments we have been making in Egypt. This got is into a bit of a ‘do-loop’ with the Egyptian government: they would tell us, ‘please produce more and we will pay you later,’ and we were saying, ‘well if you pay us now then we will make more investments and we will produce more’ … The agreement breaks that logjam.”
Under the terms of the deal, Dana will invest $270m to drill 37 new development wells which it expects to increase its production by 50 per cent and extend plateau production — which is expected to reach 250 standard cubic feet a day — by several years. The deal is contingent on the Egyptian government agreeing to pay the full cost of the drilling programme upfront, Mr Allman-Ward said. He said he expects this imminently so that drilling can begin next month.
Meanwhile, the government has agreed an umbrella deal with companies drilling in Egypt to make a payment of $1.5 billion toward back payments. At the end of last year, Dana Gas’s share of an arrears payment deal was $53 million.
Dana Gas shares have been suffering because of arrears owed both in Egypt and from the Kurdish Regional Government in Iraq, where it has its other major production operations. Recently, it has had some more positive news, winning new concessions in Egypt, finalising funding for its Zora gas development off the coast of the Northern Emirates, and winning an international tribunal decision in a gas dispute with Iran.
The news on the Egyptian deal came after markets closed yesterday. Its shares were unchanged at Dh0.69, still well off their high earlier this year of Dh1.04.
Mr Allman-Ward said the project, if successful, would still not see free cash being released until the middle of 2016, but after that it would result in the $300m of arrears being paid down within two years.
“With the current burn rate, they said at the end of June they had enough cash to last through the middle of next year,” said Alex Stojanovski, an analyst who follows Dana Gas for Deutsche Bank in Dubai. “They will have to make some significant capital expenditure and they are already stuck for cash,” so the “devil will be in the detail” of the financing deal with the Egyptian government, he said.
amcauley@thenational.ae
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