London — Italy's Eni said Thursday that Egypt's 5 million mt/year capacity Damietta LNG export facility -- idled since 2012 -- is expected to resume operations by June following a series of agreements with its partners in Cairo.
The restart of the Damietta plant will provide a much-needed additional export option for Egypt, which is currently producing gas at a surplus due to weak domestic demand and limited export options.
Damietta LNG -- which is operated by Union Fenosa Gas, a 50-50 joint venture between Eni and Spain's Naturgy -- was idled in November 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 seeking compensation.
But the agreements signed Thursday in Cairo provide for the resolution of all the outstanding disputes, allowing the plant to restart.
"Eni signed today a series of agreements with Egypt, the Egyptian General Petroleum Corporation (EGPC), the Egyptian Natural Gas Holding Company (EGAS) and Naturgy, which pave the way for the restart the Damietta liquefaction plant in Egypt by June 2020," the Italian company said.
The liquefaction plant's owner is SEGAS, which is 80% owned by UFG.
"The agreements provide for the amicable resolution of the pending disputes of UFG and SEGAS with EGAS and Egypt," Eni said.
Eni said that the speed of bringing its new Egyptian gas discoveries online, especially at the Zohr and Nooros fields, meant Egypt had regained its "full capacity to meet domestic gas demand and can allocate surplus production for export through its LNG plants."
The agreements also provide for a corporate restructuring of UFG, whose assets will be divided between Eni and Naturgy.
UFG's 80% share in Damietta will be divided between Eni (50%) and EGAS (30%).
"The resulting shareholding of SEGAS will therefore be Eni 50%, EGAS 40% and EGPC 10%," Eni said.
Eni will also take over the contract for the purchase of gas for the plant and will receive corresponding liquefaction rights, thus increasing the volumes of LNG in its portfolio by 3.78 Bcm/year.
The volumes will be available on an FOB basis, with no destination restrictions.
The changes mean Naturgy will also exit Egypt.
"The completion of the transaction will result in Naturgy's departure from Egypt and the end of its joint venture with Eni, having no obligation in the future to buy LNG from the country," Naturgy said in a separate statement.
"This is an important step to gradually reduce the company's exposure to gas procurement contracts, and solves a complex situation which had lingered since 2012," it said.
Under the deals, Naturgy will receive $600 million in cash and most of UFG's assets outside of Egypt, excluding UFG's commercial activities in Spain that Eni will take.
The agreement values UFG at a total consideration of $1.5 billion of which $1.2 billion relate to its Egyptian assets (including the outstanding legal proceedings), and the remaining $0.3 billion for the assets outside of Egypt.
"We are simplifying Naturgy's geographical presence to focus on those areas that maximize the creation of long-term value of our main businesses with the company's stakeholders in mind," Naturgy executive president Francisco Reynes said.
Analysts believe the restart of Damietta is critical for Egypt to balance its domestic market.
"It is oversupply, an embarrassment of riches if you will, that has plagued Egypt's domestic balance," Samer Mosis, leading LNG analyst at S&P Global Platts Analytics, said Thursday.
"With Eni's Zohr field holding as much as 10-12 million cu m/d of latent production capacity, it will not be hard for Egypt to find a use for Damietta's returning capacity," Mosis said.
The next struggle Egypt has to face, Mosis said, is being able to export LNG profitably.
"EGAS faces prohibitively expensive breakeven costs out of Egypt's other export facility, Idku, and the costs it faces out of Damietta will likely face the same challenge," he said.
"Nonetheless, through cooperation with its upstream IOC partners, it is likely we will see a resurgence of Egyptian LNG exports through the second half of 2020."
Platts Analytics currently believes Egypt will export roughly 20 million cu m/d through the second half of the year, more than 60% higher year on year.
"Given how fast Damietta ramps up, we could see this increase by as much as 10 million cu m/d," Mosis said, with the most likely vehicle for this being Eni marketing its equity share itself, leaning on its global portfolio to bypass the increasingly weak spot market.