Eng. Hassan Bishr – VP & Operations Manager, Sigma Petroleum Services, Egypt
Eng. Hassan Bishr, VP and Operations Manager of Sigma Petroleum Services, tells us why he set up the company back in 2001, how Sigma’s value proposition is to accelerate cash flow generation for oil and gas operators, and his ambitions to expand Sigma into offshore production, second-stage gas processing and regional markets.
Eng. Hassan, can you tell us the story of how you came to found Sigma Petroleum Services?
“Combining market knowledge and technical expertise is key. It means that we have enough experience to anticipate what is usually produced in the various basins in Egypt and to predict the market demand.”
Back in 2001, we found that there was a huge gap in the market for a service company that could help oil and gas producers convert their discoveries into cash flow quickly. Operators would discover oil and then have to invest significant amounts of money and time into producing it before they could actually sell it and generate revenues. We decided to start by building our own ready-made facility so that it could be installed in any oilfield in a very short amount of time.
The initial capital investment for us was not too big, but it was not the easiest to get the business going. We built our first train and we had it in stock sitting idle for eight months without a client. Luckily, after eight months, we won our first client, a Chilean E&P company that was desperate to produce their first oil. They had commissioned a study to see how much the facility they needed would cost, and the conclusion was that it would take them USD 150 million and around three years. We came in with a zero down payment offer where they simply needed to pay the daily rental rate – a huge cost savings for them – and we delivered the required components in four months. We built four oil production facilities and one receiving terminal for them, and also brought in a trucking company to transport the oil the 120 kilometers between the production facilities and the receiving terminal.
Subsequently, we won a contract with a client in Oman facing a similar problem. They needed to develop facilities in various locations and connect everything by pipeline, which would have been an investment of USD 200 million over two to three years. The problem was that they were not certain of the reserves and therefore reluctant to invest that sum of money. We did the same for them and produced around 18,000 barrels per day (bpd) for them, and in the end, they actually came to us and said they wanted to buy the facilities from us! It was a huge win-win partnership between us and today we continue to work for them in a slightly different capacity.
Our value proposition is that we save our clients the initial time and capital expenditure (capex) because they do not need to build their own production facilities from scratch, which in terms of the entire design and engineering stages to the fabrication and commission usually take at least two to three years. We have a stock of pipelines, facilities and other necessary equipment to lease or sell to our customers. This has so many advantages for the discovery own: quick cash flow, accelerated production, more capex to spend on other more productive activities like more drilling and lower risk. Just as a small example, sometimes a huge facility is designed and built but the expected production rate is not achieved, which is a waste of resources. With Sigma, our clients simply have to pay only as long as they are producing.
From a rather difficult eight months in the beginning to a now successful mid-sized company, what do you attribute Sigma’s success to?
To succeed with a business model like this, you would have to start with either a strong investment or enough time to amass the cash flow required to invest in the facilities. You also need to have a profound understanding of the market and what it needs. For instance, I have been in the industry for over three decades so I know all the locations of the fields, the receiving areas, the terminals, the pipelines, etc. I know all the actors in the business. The day before a discovery is announced, I am already at the company to offer our services!
The technical engineering element is also very important. As your facilities are pre-built and not custom-made, they need to be flexible enough to accommodate different oil or gas types, for instance, whether it is sweet or sour oil, sweet or sour gas.
Combining market knowledge and technical expertise is key. It means that we have enough experience to anticipate what is usually produced in the various basins in Egypt and to predict the market demand. For instance, we would know that a gas well in the Western Desert usually starts with 20 million standard cubic feet (scf) while a gas well in the Delta will start at 50 million scf but with a higher decline rate. This means that we can develop facilities that better fit the generalized needs of wells in a particular area. You cannot simply build a facility and push it onto the market. You need to understand what the market needs are and who your potential clients are.
We also have over 350 people with significant technical expertise working for us. We further supplement that by bringing in consultants from international engineering companies. Furthermore, all our equipment is imported from the US; our clients can have full trust in the quality and reliability of our equipment because they recognize the brand. This gives us a reputational boost as well.
After over a decade in this sector, we have also built up a track record of success and good relationships with the main actors in Egypt. This helps us win repeat business – and we are also the only company in Egypt working on this scale and also providing these services in the gas sector.
Can you tell us about a flagship project that showcases Sigma’s expertise?
We are working with Petrobel on the Nidoko fields. The storyline is similar: in four months, we produced the initial target of 200 million scf per day at no upfront cost to the operator when the original estimate was USD 250 million over a minimum of three to four years. We managed this by putting a lot of our own investment into the project, including buying the equipment that we anticipated they would need from our own experience. It was a little risky but the more risk you take, the more profit you make!
Furthermore, our rental costs for the facilities and overall operations ended being less than what his own operating costs would have been had the company built and managed the facilities themselves. This is because Sigma as a company runs more cost-effectively than a JV, which tends to hire more people.
What is critical about the Nidoko project is that it is now producing at 600 million scf and there are plans to increase it to 900 million scf. This enables it to offset any potential delay in the Zohr development. Zohr is of course the current headline project in Egypt and we have actually been planning for it as well. I already have facilities in the area that could work on the project, but the size of the Zohr project means that it is being handled at the international level, from the Milan office, understandably. Nevertheless, with our track record of successful projects with Petrobel, we hope to go on to win some work from Zohr.
In the past decade, Sigma has obviously faced the highs and lows of the industry as well. How has the company managed the fluctuations in oil price?
Our business model can accommodate price fluctuations very well. When the oil price is high, operators face increased urgency for more facilities because they want to produce as much oil as possible to make use of the high oil price fully. Conversely, when the oil price is low, operators may in fact need us even more, because they want to minimize their investment in equipment and construction to save their capex for drilling and other more productive activities! We offer them a temporary facility that still manages to do the job safely, effectively and cost-effectively. Our model thus insulates us pretty well from the volatility of the oil prices.
What is your assessment of the current oil and gas situation in Egypt at the moment?
Egypt is flourishing these days and there are so many untapped discoveries in the Mediterranean, so it is very encouraging. What is even better is that we already have the infrastructure and facilities ready – for instance, we have the second-largest LNG plant in Rashid city, which is currently underutilized because of the domestic gas shortage. Hopefully by 2018, local gas needs will be met and additional gas can be exported. The fact is that Egypt has the gas and the infrastructure, so there should be no reason we cannot exploit it. Compare this with some other countries in the region like Tanzania, which has a lot of gas but no gas infrastructure to transport it, Egypt is in a very fortunate position.
The main issue investors are facing now is the delay in payments, and it affects both international and local companies. Not only do companies need a stable exchange rate generally, but in Egypt, companies increasingly need to have a source of dollar income as well as the flexibility to accommodate payment delays. If the government could modify the production sharing agreements (PSAs) so that whoever makes a discovery can sell at least some of the products overseas, this would improve the overall investment environment.
Politically, however, it is very reassuring that the country seems to be returning to the right track and taking steps to address some key issues. Overall, once you get into the system and you know how it works, Egypt is a good country to invest in with a lot of potential.
What is in the pipeline for Sigma in the future?
The business model for Sigma has worked well so far but we are always looking to improve further. We want to be able to deliver our facilities and services even quicker and even more cost-effectively.
I also want to apply this model offshore. Offshore discoveries are more complicated than onshore projects and currently take at least five years to produce. So many offshore discoveries cannot be fully developed because they are marginal fields: the threshold of the discovery is less than the investment needed to develop it, so companies are hesitant to invest. We are working hard to develop the right facilities that can be used in the same model for offshore projects. This will help investors develop marginal fields by lowering their costs. There are challenges because new types of equipment like floating production storage and offloading (FPSO) units and single buoy mooring (SBMs) are needed.
We also want to expand a little into gas processing, specifically the second stage, to produce products for the petrochemicals sector. As I mentioned, there is so much gas potential in Egypt along the entire value chain. Right now, we are only doing the initial stage of gas processing, which is cleaning it to make it pure enough for the national grid. Further processing will allow us to recover more products of higher value. Egypt also has a huge domestic demand for petroleum products so this will be another helpful initiative for the country.
Finally, we want to internationalize our operations further, though we would like to focus on the domestic market first. After, we would like to go to Iran. We are also currently tendering for a project in Kenya.