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Egypt's gas paradox

Importing gas may seem counterintuitive, but a deal to do just that is part of the country's gas renaissance

Last year a private company, Dolphinus Holdings, signed a $15bn deal to buy Israeli gas. The 10-year contract will see the gas from offshore Israel — from the US' Noble Energy and Israel's Delek Drilling — sold for both domestic consumption and possibly for export via Egypt's two LNG plants, Damietta and Idku.

The origins of the deal lie in the chaotic aftermath of Egypt's Arab Spring revolution, when gas production fell below ever-rising consumption. Prior to 2011, Egypt was a gas exporter, selling to Israel via the East Mediterranean Gas (EMG) pipeline. But in 2014, post-revolutionary chaos saw production fall. Prioritising the domestic market, Egypt ceased exports, with the two LNG plants mothballed. Deliveries to Israel had already stopped in 2012 after a string of terrorist attacks on the pipeline.

As gas production stuttered, power cuts became common and the government began importing LNG as a stop-gap solution. Searching for a cheaper source of imported gas, it found it in its former export destination.

Israel's gas boom began in 2009 with the discovery of the offshore Tamar gas field, with 10.8tn ft³ of gas in place. A year later, a bigger field, Leviathan, was found, with reserves of 22tn ft3. A year after that, Cyprus discovered the Aphrodite field, with an estimated 4.5tn ft³. The discoveries left Israel with enough gas to meet its needs for more than 50 years, Cyprus 100. Or, more practically, with more gas than either knew what to do with.

Exporting the gas to Europe was the obvious answer, but the most obvious route, through Turkey, was a non-starter for Cyprus. Turkey is demanding a share of Cyprus' gas wealth for North Cyprus, a state recognised only by the Turkish government. Meanwhile, Turkey's relations with Israel, which had improved after the 2010 Mavi Marmara incident off Gaza — mainly because of the hope of an inter-state gas deal-deteriorated again in May 2018 after renewed violence in Gaza.

Cyprus and Israel joined forces to consider other export options. But a pipeline to Europe via Italy would cost an estimated $7bn, and even building an LNG terminal, at $2-3bn, could be too expensive to make their gas competitive.

$15bn — value of deal for Israeli gas imports

The only LNG plants in the region were in Egypt, and so negotiations began in November 2015 to reverse the flow in the EMG, with the aim of selling some gas to the Egyptian domestic market and shipping the rest through its ports.

For Egypt, the attraction of the deal was cheap gas. The cost of importing it could be partly offset by fees set for Cyprus and Israeli gas to transit its pipelines and LNG plants — if commercial terms can be agreed. Even Eni's discovery of Zohr gas field in May 2015, with its 30tn ft³ gas in place did not dent the equation: much of its production, set to reach 2.7bn ft³/d by the end of 2019, will serve an ever growing domestic market, the balance possibly sharing space with Cypriot and Israeli gas at the two LNG plants.

Gas galore

But the logic of the arrangement may be starting to fray, following fresh Egyptian gas discoveries. Eni and Cairo are refusing to comment on rumours that a new offshore field, Nour, is larger still than Zohr. Other fields are, though, coming online, raising expectations that in a few years, Egypt will have enough gas for both domestic demand and to fill the capacity of its LNG plants.

What happens then is unclear, although Egypt's liberalisation of its gas market means the government will not have the final say. Dolphinus Holdings, as one of the new private gas companies, is entitled to buy and sell gas on the open market — and to sell it through LNG plants. In part, this arrangement is welcomed by Cairo. Egyptian public opinion is not favourable towards Israel, and politically it is easier for the country to import gas through a private company than through the state.

But when, as seems likely, Egypt has more gas available for export than its LNG terminals can handle, options for stranded Mediterranean gas are unclear. Conceivably, changes in Mid-East politics will see Turkey relent, tempted by the big fees it could gain by allowing Israeli, Cypriot and even Egyptian volumes to transit its territory. Potentially economics of scale mean a third Egyptian LNG plant is affordable, but the liquefaction cost would be considerably higher than for the amortised trains. That said, the issue of what to do with all their extra gas is one that many states would like to have.

Import opportunity: Israel's gas fields and production leases Source: Petroleum Economist
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