Egypt’s gas find a regional game changer
The discovery of natural gas in the Eastern Mediterranean raised much interest, not because this is one of the few areas in the hydrocarbon-rich Middle East and North Africa with little, if any, reserves, but because of the much needed new wealth for the countries of the region, the chronic political hostilities and armed conflicts among the neighbouring states and the proximity of the gas reserves to European markets.
Egypt was the first to discover commercial gas reserves in the East-Med. The findings were close to Alexandria and Port Said and the gas was dedicated to meet rising domestic energy demand.
The East-Med discoveries added to the country’s associated gas from the Gulf of Suez and the associated and free Western desert gas. Egypt relies heavily on gas as a major source of energy for the country. More than 90% of the country’s power stations use gas to generate electricity. Public transportation uses gas as fuel. Gas is also the main fuel source for heavy industries, such as petrochemical, iron, steel and cement.
Egypt’s energy consumption rose approximately 5.6% annually from 2000-12. Gas demand increased during the same period around 8.7% annually. Gas was meeting more than 50% of Egypt’s energy consumption in 2012, compared to 35% in 2000. The use of gas also increased rapidly because of state subsidies.
With the advent of the 21st century, Egypt launched several gas-export projects, including liquefied natural gas (LNG) to Europe and two regional pipeline projects. The Arab Gas Pipeline supplying Jordan, Syria and Lebanon with plans to extend to Turkey and Austria and the pipeline dedicated to the Israeli market, extending from al-Arish in the Sinai peninsula to Ashkelon on the Israeli coast.
Egypt encountered a series of problems with the export projects following the overthrow of the Mubarak regime in 2011. Exports ceased in early 2015. The pumping station at al-Arish was sabotaged repeatedly. Price formulas for gas sales proved to be uneconomical. The sales price of about $3 per million British thermal units (mBTU) was much less than international gas prices and, more importantly, less than the cost of production. The Egyptian parliament and the media criticised, both during the Mubarak regime and during the revolution, corruption and mismanagement.
Egypt’s gas industry experienced a major setback in 2014-15. In a rare experience in international gas industry, Egypt encountered a shortfall of supplies. Not only was Cairo unable to meet the country’s local demand, it also failed to meet its obligations to provide gas for the multi-billion-dollar export projects.
The shortfall of gas supplies led to repeated domestic power failures and the legal complaints of international oil companies that invested billions of dollars to build the LNG facilities and pipelines. Legal cases were raised, suing Egypt for not meeting its contractual obligations. Egypt spent the first half of 2015 negotiating to import gas from Russia, Algeria, Cyprus and Israel to defray the shortages and meet domestic and international obligations.
The Egyptian gas scene changed dramatically with Italy’s Eni statement of the discovery of the Zohr Prospect in the Shorouk gas field. With reserves of about 30 trillion cubic feet of gas (TCF), it is the largest gas field discovered in the Mediterranean.
Shorouk is projected to help meet Egypt’s gas demand for several decades, along with the associated gas from the Gulf of Suez and the Western desert gas.
Eni Chief Executive Officer Claude Descalzi added a major geopolitical perspective for the development of Shorouk. He told the Italian parliament in mid-September that Eni intends to use Egypt as a hub for East-Med gas exports. Shorouk would be an anchor for an underwater gas pipeline grid to Italy for transmission further into Europe.
The geopolitics of the project will be enhanced as Eni intends to connect its offshore gas discoveries in Egypt and Cyprus with the pipeline grid. Gas will also be added from two fields already producing offshore Libya.
Eni plans to talk with other international oil companies to supply gas from their fields, most probably from small stranded reserves that are uneconomical for dedicated export projects.
This will involve negotiations with neighbouring countries and international oil firms. The pipeline will lie 4,500-6,000 metres under sea level. The political, commercial and technical aspects of the project will take several years before reaching the export stage. The ambitious project is envisioned to put Egypt in the centre of the East-Med gas industry, once more.
The discovery of Shorouk and the turning of Egypt into a regional gas hub should provide the initiative to Cairo. Israel has been trying to capture this leading role for both security and financial reasons.
Israel focused on security advantages for being the main gas supplier to Arab countries that have signed peace agreements with Israel, Egypt and Jordan, as well as the Palestinian Authority to enhance long-term relations and to make their industries and power stations dependent on Israeli gas imports and prices.
The short-range exports were also to serve the operating companies in the Israeli offshore to find the necessary collateral to their loans from international banks to finance Israel’s Leviathan and Tamar gas fields. It is estimated that the first-stage development cost of the Leviathan alone is more than $6 billion.