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Deal to restart Egypt's Damietta LNG plant falls through

Highlights

February agreement terminated after conditions not met

5 million mt/year plant was due to restart in June

Facility was idled in 2012 due to feedgas diversion

London — A deal designed to allow the restart of Egypt's idled Damietta LNG export facility, operated by a partnership between Italy's Eni and Spain's Naturgy, has fallen through.

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The collapse of the deal, reached in February between the companies, the Egyptian government and state-owned EGAS, means a targeted restart of the 5 million mt/year plant by June looks unlikely.

The restart of Damietta, which has been idled since 2012, 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.

"The February agreement was subject to certain conditions and milestones that have not been met, so the agreement has fallen through," Naturgy said in a regulatory filing.

Damietta LNG is operated by Union Fenosa Gas, a 50-50 joint venture between Eni and Naturgy.

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

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

Egypt currently only exports from the 7.2 million mt/year Idku facility operated by Shell, and weak prices have led to a collapse in shipments even from there, with a halving of cargoes shipped in the first quarter compared with a year earlier.

Damietta LNG was idled in 2012 after feedgas to the plant was diverted for use on the domestic market. Efforts to restart it were complicated by a lawsuit filed by UFG against Egypt in 2014.

UFG was awarded $2 billion by the World Bank's International Centre for Settlement of Investment Disputes, and Naturgy said Thursday it would continue to pursue the claim.

The February agreements would have provided for the resolution of all outstanding disputes.

Naturgy said it still hoped to reach a new deal. "Naturgy reiterates its openness to reach agreements with all the parties that would amicably and definitively resolve the disputes that affect UFG," it said.

Eni also said it would seek a new agreement. "In February we reached an agreement with Naturgy and EGAS for the restart of Damietta liquefaction plant, the settlement of outstanding disputes and some M&A transactions," an Eni spokesman said. "Eni is in touch with the counterparties and willing to set the frame of a possible new agreement."

Under the agreement to split UFG, the company was valued at $1.5 billion, of which $1.2 billion related to its Egyptian assets.

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.

HIGH UPSTREAM COSTS

S&P Global Platts Analytics said Friday it had long held the view that the proposed Damietta restart faced an uphill battle, regardless of Eni's struggle to find an outlet for gas from its supergiant Zohr field, which has been producing below capacity.

In the first quarter of 2020, Eni cuts its gas production in Egypt due to low demand, with output averaging 1.217 Bcf/d, down by 15% compared with production of 1.434 Bcf/d in Q1 2019.

"The breakdown of the deal further bolsters our view that it's highly unlikely that Damietta will see a 2020 restart," Platts Analytics LNG analyst Samer Mosis said Friday.

"This is not just because of the global gas glut, but more importantly, because that glut increasingly complicates negotiations between Eni and EGAS over the details of Damietta's utilization, especially given EGAS faces prohibitively high upstream costs," Mosis said.

Further complicating the picture, the oil price collapse has put many of Eni's Middle East capital expenditure plans in the crosshairs, he said.

"At the end of the day, Damietta just doesn't seem to be anyone's priority right now."