Coronavirus, asset devaluation put paid to Egypt LNG plant deal: source

The collapse of a deal designed to allow the restart of Egypt's idled Damietta LNG export facility was triggered by an inability of workers to access the plant due to the coronavirus and a significant devaluation of the asset due to falling prices, according to a source with knowledge of the matter.

The 5 million mt/year capacity Damietta LNG plant is operated and 80% owned by Union Fenosa Gas, a 50-50 joint venture between Italy's Eni and Spain's Naturgy.

Under a deal reached in February between the companies, the Egyptian government and its state-owned gas company EGAS, the plant was set to resume operations in June and Naturgy then exit the venture.

The source told S&P Global Platts that one of the main conditions to advance the February agreement was for the plant to start operating before the deal could complete.

"Due to the COVID-19 situation, the plant technicians have not even been able to go [to the facility]," the source said.

Work to bring the idled facility back to normal operation is expected to take three months, meaning a June deadline for restarting the plant would not have been met.

The companies said only that some conditions of the deal were not fulfilled, without commenting further.

Arbitration award

Another major stumbling block was the drop in oil and gas prices, which has caused the value of the asset to fall too.

Spot LNG prices have fallen to record lows, with the S&P Global Platts benchmark JKM Asian spot LNG price assessed last week at below $2/MMBtu for the first time.

This means that the assets in the agreement "have been considerably devalued," the source said.

Both Eni and Naturgy said they remained open to reaching a deal on Damietta in the future.

However, in the meantime, Naturgy said it would pursue its claim for $1 billion in compensation from the Egyptian government stemming from a World Bank arbitration award related to the diversion of feedgas for Damietta LNG to the Egyptian domestic market in 2012.

That led to the plant being idled.

The total $2 billion award -- with Eni awarded the other $1 billion -- would have been part of the deal reached in February by all the parties.

However, now, the award -- which does not depreciate in value -- is thought to be worth more than the assets themselves.

Egypt has been hit hard by the impact of the coronavirus, with the International Monetary Fund saying Monday that the government and Egypt's central bank had requested financial assistance under the IMF's Rapid Financing Instrument.

"The emergency financing under the RFI will allow the government to address any immediate balance of payments needs and support the most affected sectors and vulnerable groups of people," IMF managing director Kristalina Georgieva said in a statement.

"I expect the request for the RFI to be presented to the IMF's Executive Board within the next few weeks," she said.

Export option

The restart of Damietta would have provided a much-needed additional export option for Egypt, which currently has a surplus of gas.

However, with spot LNG prices currently at record lows, the plant may have struggled to be economic in the current market environment.

Under the agreement in February, UFG was to be restructured with assets to be divided between Eni and Naturgy.

Naturgy was to receive $600 million in cash and most of UFG's assets outside of Egypt, excluding UFG's commercial activities in Spain that Eni was to take.

UFG's 80% share in Damietta was to be divided between Eni (50%) and EGAS (30%), meaning Damietta's shareholders would have been Eni (50%), EGAS (40%) and state-owned oil company EGPC (10%).

Eni was also to take over the contract for the purchase of gas for the plant and would have received corresponding liquefaction rights, thus increasing the volumes of LNG in its portfolio by 3.78 Bcm per year.

Egypt currently only exports from the 7.2 million mt/year Idku facility operated by Shell.

Weak prices have led to a collapse in shipments even from Idku, with a halving in the number of cargoes shipped in the first quarter compared with a year earlier.