Oil major Royal/Dutch Shell's unsuccessful start in Egypt's deepwater drilling is likely to set back Egyptian licensing exploration bids even further, industry sources said yesterday. They told Reuters that Shell hit two dry wells in succession at the start of its drilling programme in its North East Mediterranean Deepwater (Nemed) concession. ExxonMobil has a 25 per cent stake in the block.

Shell, which has yet to announce the drilling results, confirmed two wells had been drilled and operations completed but a spokesman declined further comment. "Everyone, from the (Egyptian) president to the oil minister was expecting good news to get the ball rolling. This is a bit of a blow," said a source in Egypt. Egypt's exploration licensing rounds - which used to run twice yearly - have been on a backburner for at least two years as the country amended an oil-indexed gas formula and reshuffled its state-owned oil company.

"There have already been delays to the licensing rounds and that drilling business will hold things up a bit more," said the source, who asked not to be identified. Industry sources said Shell's first well, Shorouk I - which means sunrise in Arabic - spudded on December 20 followed by Leil or "night" in the North-East Mediterranean Deepwater (Nemed) concession were drilled to water depths of 1,400 and 1,700 metres at a cost in excess of $30 million.

They said the rig hired for a two-well plus programme had left the area and was heading towards the North Sea. "A third well is certainly not imminent," said one. "It looks like they will have to go back to the drawing board and reassess and re-evaluate their findings." This will come as a blow to state-run Egyptian General Petroleum Corp (EGPC) which has postponed since 1999 an offshore deepwater licensing round.

The latest delay to June this year was partly to await the Shell drilling results which would have provided a selling point to the acreage which lies adjacent to Shell's. "We have to wait and see what the next step will be and what the orders will be," said an Egyptian source. Egypt has been trumpeting its ability to triple its gas reserves to around 120 trillion cubic feet, particularly after Shell's three-dimensional seismic programme indicated potential reserves in Nemed in excess of one billion barrels of oil and 15 trillion cubic feet of gas.

Shell pipped BP Amoco, TotalfinaElf and Exxon to acquire the 10 million acre block in 1999, paying a signature bonus of $25 million. It was committed to spending $140 million in the initial exploration period of five years during which it should drill five wells. The second phase covered four years with a price tag of $50 million and $40 million in the third phase. Apart from the deepwater concession, Shell has been entrenching its gas presence in Egypt, producing 600 million standard cubic feet of gas per day last year to make it the second biggest producer behind Agip.

It also expected by July to have in place plans for the export of liquified natural gas (LNG) to southern Europe. Shell has proposed exporting gas fed through its Shell Middle Distillates Synthesis (SMDS) gas-to-liquid process as well as LNG. The project would start with the building of a $1 billion LNG plant followed later by a $2.8 billion SMDS plant.