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Will Israeli natural gas flow in Egypt’s pipelines? - Daily News Egypt

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Will Israeli natural gas flow in Egypt’s pipelines?

A recent visit by Egypt’s Foreign Minister could signal potential cooperation between Israel and Egypt in the eastern Mediterranean gas fields. However, given domestic market needs mixed with a complicated history in Egypt-Israel business relations in the energy sector, the future remains unclear


In a rare trip, Egypt’s Foreign Minister Sameh Shoukry paid Israel a visit on Sunday, marking Egypt’s first high-level official visit in almost a decade. While pundits antagonise whether this may be a sign of warmer relations between Israel and Egypt, the latter continues to face an ongoing energy crisis.
While Egypt’s energy crisis may be a domestic concern, a long history of cooperation between Israel and Egypt over gas imports and exports raises questions of whether such a topic was broached during conversations between Shoukry and the Israelis.

In recent decades, Egypt has been the one exporting gas to Israel, despite often shaky political relations. Two things changed this: turmoil following the aftermath of the 2011 revolution, which led to pipelines transporting gas through Sinai to Israel becoming the target of explosions, and Israel becoming a pioneer with its recent discovery of gas fields off its coastline.

Egypt’s energy crisis in recent years coupled with Israel’s recent discoveries for a moment looked as though it would shift power in Mediterranean gas, but in a twist, Egypt was dealt a new deck of cards following a big discovery of a “super giant” field by Eni in 2015.

Now, Israel, Egypt and other neighbours are all claiming their stake in the eastern Mediterranean gas hunt, with the potential for more discoveries being inevitable. This regional power game could prove beneficial for all, but how Egypt will benefit also depends on the needs of its domestic market.

Egypt’s power generation infrastructure is dependent on natural gas. More than 75% of the electricity generated in Egypt comes from natural gas plants. Egypt currently produces about 3.9bn cubic feet of gas per day and imports another 1-1.1bn cubic feet per day with an estimated cost of $300mn per month, in order to meet the growing needs of the electricity sector.

 

Egypt’s energy challenges

Although Egypt is a hydrocarbon rich country, it faces numerous energy challenges. Ensuring reliable, affordable, and sustainable energy is still a major challenge for the Egyptian state, especially after the country’s shift in recent years from being an exporter of natural gas to an importer.

Egypt’s gas exports to Jordan and Israel began in 2003, soon after which it began exporting gas through two liquefied natural gas (LNG) facilities to different markets. By fiscal year (FY) 2007/2008, Egypt’s earning from gas exports reached $3.2bn.

 

In the period between 1995 and 2010, Egypt’s proven reserves more than tripled from 22.8tn cubic feet (TCF) to 78 TCF. Since 2010, the remaining reserves have declined, until the recent exploration of Zohr field, which has an estimated reserve of 30 TCF.

 

Egypt’s supply and demand balance followed a similar path. The production rate started to increase in 1999. While 2004 marked only a slight increase in production, it was the first time in years where the amount of produced gas was greater than the amount of consumed gas. This triggered a turning point in 2005, as production increased by around 28% compared to 2004, and peaked in 2009, followed by a drop in 2013.

 

On the other hand, energy consumption increased in the first decade of the 21st century, and gas demand grew by almost 9%. Gas became the main source for Egypt’s energy needs, reaching 50% of the total energy supply, compared to 35% in 2000.

Gas feeds a myriad of different sectors. Between 55% to 60% goes into electricity, and the remainder is split between industrial, residential, and commercial usage.

 

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The demand for natural gas is expected to grow, especially after Siemens signed an €8bn deal with the Egyptian government to establish three high-efficiency natural gas power plants at a capacity of 14.4GW. Regarding the residential sector, Egypt has secured a $1.5bn project to connect 1.5 million households to natural gas.

Egypt’s Ministry of Petroleum forecasts a drop of gas production by 3.6% to 4.85 billion cubic feet per day (bcf/day) in FY 2017/2018, compared to 5.03 bcf/day in FY 2014/2015. This is expected to lead to curtailed production at factories. The Egyptian Natural Gas Holding Company (EGAS) announced in June that the natural gas supplied will be diverted away from industrial plants in August to accommodate for the increased demand from the electric power plants.

 

However, the discovery of Zohr gas field—the largest gas field in the Mediterranean Sea—will help to serve the Egyptian domestic market’s demands. EGAS claims that the field will produce 900m cubic feet of gas per day by the end of 2017, and is estimated to produce 2.7bn cubic feet per day by 2020.

 

Can Israeli/Cypriot gas imports have a share in Egypt’s market?

 

As a result of Egypt’s struggle to meet its domestic demands, the country started to import LNG in 2015, after installing two floating storage and regasification units (FSRU) leased for five years. Accordingly, EGAS signed contracts to import 80 LNG shipments in 2016, with a net worth between $2.5bn and $3bn, to supply the domestic market with 1.2bn cubic feet. The imported gas bills are estimated at $300m a month.

 

Moreover EGAS announced in 2015 that it signed a memorandum of understanding (MOU) for gas imports with the United States (US) firm Noble Energy. No details regarding the origin of the gas were announced, although some reports suggested it would come from Cyprus, where Noble Energy holds a 70% stake in the Aphrodite field. Yet, Noble Energy also holds a 36% stake in the Tamar field, as well as 40% of the nearby Leviathan field offshore Israel.

 

According to an oil and gas expert, who spoke on the condition of anonymity, Shoukry’s visit could be the beginning for finalising negotiations between both Egypt and Israel to resolve any remaining issues in order to open the door for the private sector to start importing gas from Israel.

 

On the other hand, former petroleum minister Osama Kamal said: “Egyptian authorities never prohibited the private sector from importing gas from Israel in the first place.” Kamal added that he thinks the visit is of a diplomatic nature, not of a trade one.

 

Meanwhile Dolphinus, an Egyptian gas-trading company, had been in non-binding negotiations with partners in Leviathan to negotiate the export of as much as 4bn cubic metres of gas annually for 10-15 years. In June 2014, the Leviathan partners signed a letter of intent for the 15-year supply of 105bn cubic metres to the empty British Gas liquefaction plant in Idku.

 

Taking that into consideration, Israeli prime minister Benjamin Netanyahu announced during a June press conference that Leviathan could supply both the Egyptian market, in addition to the Turkish market in an effort to assure the Egyptian side.

 

In regards to the Tamar gas field—Israel’s second largest reserve—Dolphinus also signed a deal last year to import gas from the field, which was approved by Israel’s energy minister Yuval Steinitz in December 2015. In addition to signing a letter of intent in 2014 between Tamar partners and the Spanish Union Fenosa LNG production plant in Damietta, Egypt is to provide 440mn cubic feet a day (mcf/day) for a 15-year period.

 

However, Egypt has frozen all negotiations after an international arbitration court ordered Egypt to pay Israel $1.73bn in fines in December 2015 for violating a contract to supply Israel Electric with Egyptian gas. In recent months, reports fueled by anonymous sources have emerged that claim Israel may be willing to compromise on the fine and settle for half of its value to be paid over a 14-year period.

 

A new era for eastern Mediterranean energy cooperation?

 

Egypt’s current LNG facilities in Edco and Damietta are being underutilised. While their use remains stagnant, the facilities could be used to export any quantities from the Zohr field, in addition to Israeli and Cypriot gas, to foreign markets, as long as such exports do not interfere with domestic demand.

The proximity of Zohr to the gas fields in Cyprus and Israel (90km away from Aphrodite, which in turn is only 7km from Leviathan) could allow for the development of joint fields, which could lead way to the creation of an integrated regional energy infrastructure network.

Given Egypt’s growing domestic demand, it could be assumed that some export capacity would be left for Israeli and Cypriot gas, as both LNG plants can be expanded, thus giving Israeli and Cypriot developers a flexible outlet.

Egyptian LNG exports reached a peak of 235bn cubic feet in 2012, declining to 130bn in 2014. Exports were sold at $7 per million cubic feet (mcf) from 2012-2014, when oil prices were around $100 per barrel, proving that they may be commercially viable, though oil and gas prices are currently lower.

While Egypt’s gas imports may prove more costly than local production, the new prices that Egypt is offering, which range between $4 to $5.87/mcf, may be sufficient to develop not only the Zohr field, but it would also ensure that the eastern Mediterranean as a whole could have access to the gas, and economies of scale would bring down the development costs for all parties involved.

The additional cost of piping gas from Israel or Cyprus to Egypt could add between $0.5/mcf to $1/mcf to the initial cost, so that gas could be delivered to Egypt for $6 to $6.5/mcf. Egyptian authorities also might face price fluctuations, dependent on changing market conditions.

In 2015, the Egyptian General Petroleum Corporation (EGPC) announced a budget of $2.5bn in FY 2015/2016 for LNG imports, although soon thereafter the number rose to $3.55bn. After the price decrease, the initial budget would be sufficient, with prices around $7 to $10/mcf, but any increase in demand might increase prices quickly.

The drawback with pipelines is that they are assets with long-term risks. They require sizable investments both upstream (field) and midstream (pipelines). If all the preliminary sales agreements were concluded, Israel and Cyprus could export over 2 bcf/day to Egypt, of which 1.1 bcf/day would be re-exported.

 

Overall, at least $7bn to $10bn might be needed, in additional upstream investment in the eastern Mediterranean, to enable exports of this scale, including the development of Zohr field, in addition to the Israeli and Cypriot fields.

Building a pipeline network would cost $1bn to $3bn, the offshore fields of Israel and Cyprus are approximately 350km from BG Group’s Idku LNG facility in Egypt, and 250km from the Damietta port where the LNG facility owned by Union Fenosa Gas is located.

While in theory reversing the flow of the pipeline that previously delivered Egyptian gas to Israel could lessen the need for additional investment, it might prove difficult and not very attractive. Since East Mediterranean Gas Company, which owns the pipeline, has taken Egypt to arbitration, and is itself in arbitration proceedings with Israel Electric (IEC).

Nevertheless, leveraging the massive scale and the infrastructure associated with the Zohr field’s development could help boost returns and mitigate risk at the Leviathan, Aphrodite, and another stalled regional project, the West Delta Deep Marine in Egypt. Additionally, creating a regional gas hub could help boost the returns on investments for all fields.

Egypt could act as the cornerstone for creating a regional gas hub, which could thus unlock the country’s untapped regional potential.

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https://dailynewsegypt.com/2016/07/14/will-israeli-natural-gas-flow-in-egypts-pipelines/
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