Can gas exports boost Egypt’s ties with Israel?

The June discoveries in the Noor field should further strengthen Egypt’s hand as an exporter.
Sunday 12/08/2018
Economic boon. A view of an Israeli gas platform in the Mediterranean sea, some 24km west of Ashdod. (Reuters)
Economic boon. A view of an Israeli gas platform in the Mediterranean sea, some 24km west of Ashdod. (Reuters)

A matter of years after suffering severe daily power cuts, recent gas discoveries look to turn Egypt into a regional energy exporting hub, a development that may bolster economic ties with Israel, which is keen to tap into its neighbour’s energy distribution potential.

Both countries have expressed enthusiasm over prospective energy cooperation but analysts have pointed out that Egypt’s discovery of additional gas reserves raises questions about the extent to which Israel — an emerging gas producer with few export options — might benefit from its neighbour’s ambitions to become a regional hub.

Egypt could be self-sufficient in gas by the end of the year as production from its Zohr field, the largest in the eastern Mediterranean, ramps up. That would allow Cairo to start exporting early next year through liquefied natural gas (LNG) plants at Idku and Damietta.

The June discoveries in the Noor field should further strengthen Egypt’s hand as an exporter.

Egypt’s neighbours, Cyprus and Israel, both of which have substantial offshore fields, are keen to send their output to Egypt for export because neither has LNG capacity and plans for a pipeline linking the region to Greece and Italy to serve European markets have been overshadowed by cost and logistical issues. A proposed pipeline to Turkey also looks unlikely due to Ankara’s fraught relations with Jerusalem and the former’s sovereignty dispute with Nicosia over Turkey-occupied northern Cyprus.

Egypt’s exporting ambitions moved a step closer this year when Israel agreed to supply gas from its Tamar and Leviathan fields over a 10-year period in a $15 billion deal, with supplies earmarked mostly for export via Egypt’s LNG plants.

Israeli Energy Minister Yuval Steinitz described it as the most significant export agreement with Cairo since the two sides made peace nearly 40 years ago. Egyptian President Abdel Fattah al-Sisi said the deal would help fulfil his dream of Egypt becoming an energy hub.

Moves are also afoot to work with Cyprus on building a pipeline to transport gas from the island’s Aphrodite field to Egypt’s liquefaction facilities.

Egypt is investing in hub infrastructure. It has built a wharf on the Gulf of Suez for gas and petroleum product tankers, refinery capacity has been expanded, there are new fuelling depots for ships along the Suez Canal as well as additional oil storage tanks and loading and offloading facilities. New legislation allows private firms to make use of state infrastructure to import and trade gas.

However, given its recent discoveries, some industry analysts questioned whether Egypt would need to import gas, arguing that it will probably have more than enough of its own to service Idku and Diametta as Zohr extraction expands and Noor output comes on stream.

Doubts have also been expressed about the viability of importing and then exporting Israeli and Cypriot gas competitively at a time of low world prices. Israeli energy stocks took a tumble on news of the Noor reserves.

Notwithstanding these concerns, to be an effective hub in the long term, Egypt will need diverse sources of gas to serve its own rapidly growing consumer market and rising demand in the Gulf and Asia as well as Europe, which has seen a decline in North Sea production and is wary of relying too heavily on Russian supplies.

For Sisi, the prospect of his country becoming an energy hub could not have come at a more opportune time, as export revenues and anticipated foreign investment — Cairo expects some $10 billion of capital inflows this year and next into the oil and gas industry — will bolster his efforts to reboot the Egyptian economy.

In 2014, the country was hit by crippling power cuts due in part to dwindling gas production reducing supplies to gas-fired plants, Egypt’s main source of electricity. This, along with imports of expensive LNG shipments to compensate for domestic shortages, exacerbated the country’s economic problems.

Should an energy partnership with Israel come to fruition, it would add an economic dimension to ties that have been primarily security-focused since the two countries made peace, a common goal of countering Islamic extremism, their principal area of cooperation. The Israelis need a viable way of exporting gas surplus to local requirements, not least to encourage more investment in the Leviathan field, which until the discovery of Zohr in 2015 was the biggest in the east Mediterranean region.

The $15 billion gas deal signalled the two countries’ desire to work for mutual economic benefit, although there is one matter that will first require resolution. Just a few years ago, Egypt was exporting cheap gas to Israel via a Sinai pipeline that was often the target of sabotage by Islamists. The Egyptians stopped the supplies in 2012 after an upsurge in the attacks and the gas was diverted to domestic markets. An international arbitration court ruled in 2015 that Israel should be compensated.

The dispute reportedly needs to be resolved for the $15 billion Israeli supply deal to proceed. At the time the latter was struck, reports suggested efforts were under way to settle the arbitration case and another related to the Sinai pipeline, whose operator is demanding damages for the cut in supplies. Out of several options for exporting Israeli gas to Egypt, the pipeline is seen as the most cost-effective.

Egypt’s and Israel’s economic interests clearly coalesce with the emergence of the former as a significant export hub. Politics could yet get in the way — the Egyptian public remains largely hostile towards Israel — but, for now, the new willingness to cooperate over natural resource wealth could prove to be the key to better relations.