With increased output, Egypt set to become a regional LNG hub

In its push to become a regional LNG trading hub, Cairo has been pursuing supply and processing agreements with several eastern Mediterranean countries.
Sunday 13/01/2019
Ambitions and challenges. Cypriot President Nicos Anastasiades (L) talks with Egyptian Oil Minister Tarek el-Molla (R) during a meeting at the presidential palace in Nicosia.                                                               (AP)
Ambitions and challenges. Cypriot President Nicos Anastasiades (L) talks with Egyptian Oil Minister Tarek el-Molla (R) during a meeting at the presidential palace in Nicosia. (AP)

Egypt is poised to become a regional liquefied natural gas (LNG) trading hub thanks to booming natural gas production from recent discoveries, existing LNG infrastructure and strategic agreements it is seeking with eastern Mediterranean countries to import gas for processing and re-export.

However, economic and technical challenges could delay that hub from being created and, despite having eliminated its own need for LNG imports in the last quarter of 2018 due to surging domestic gas output, Cairo’s budget is hurting from costly imports of other fuels.

Egyptian Oil Minister Tarek el-Molla announced in September that Cairo had received its last LNG shipment dedicated for domestic consumption, making the country self-sufficient in natural gas, an achievement expected to save the Egyptian government approximately $2 billion annually and help finance a budget deficit exacerbated by higher crude prices that raised the costs of importing fuels such as benzene, diesel and butane. Those imported fuels cost Cairo as much as $450 million a month.

Egypt is enjoying a natural gas boom in part due to the rapid development of its giant offshore Zohr gas field, discovered in 2015. Zohr, which began production in January 2018, saw output expand six-fold in its first nine months of operation, reaching 2 billion cubic feet per day (bcfd) in September. The field’s operator, Italian energy firm Eni, anticipates the Zohr field reaching its plateau production in excess of 2.7 bcfd by the end of 2019.

Zohr — with gas reserves of 30 trillion cubic feet — is considered the largest gas discovery in the Mediterranean. As impressive as the Zohr field has proved to be, there is heightened interest in the nearby offshore Noor field, which was discovered by Eni last summer and could hold larger reserves than Zohr. The potential of the Noor field enticed European oil giant BP and Abu Dhabi state fund Mubadala to buy 25% and 20% stakes, respectively, from concession holder Eni in December.

The expected output increase from Zohr as well as higher production from the North Alexandria field will help push Egyptian natural gas production from the current 6.6 bcfd to 7.8 bcfd in the 2019-20 fiscal year. Cairo could become a net gas exporter by the end of 2019, following a 3-year period during which domestic gas consumption outpaced production.

In its push to become a regional LNG trading hub, Cairo has been pursuing supply and processing agreements with several eastern Mediterranean countries with the goal of linking their gas fields through pipelines to Egypt’s coastal liquefaction plants. Egypt, Greece and Cyprus recently established a forum for eastern Mediterranean gas-producing countries to capitalise on new discoveries.

Cairo signed a more specific agreement with Cyprus in September to link the Cypriot Aphrodite gas field to Egyptian liquefaction terminals in Idku and Damietta through a proposed undersea pipeline, with the goal of processing and re-exporting the gas to Europe and other markets.

However, high gas prices make it uneconomical to build the line for just the Aphrodite volumes so Cyprus would likely have to develop more fields to make an underwater pipeline viable.

A plan to pipe Israeli gas to Egypt is further along. Last February, Israeli oil and natural gas firm Delek Drilling signed a $15 billion deal with the Egyptian private company Dolphinus Holdings to supply 64 billion cubic metres of gas from Israel’s offshore Tamar and Leviathan fields over a 10-year period. Delek and its US partner in the two Israeli fields, Noble Energy, subsequently bought a 39% stake with Egyptian East Gas Company in the East Mediterranean Gas Company (EMG) pipeline to facilitate that deal.

The EMG pipeline had been used to supply Israel with Egyptian gas. In 2012, that arrangement ended after repeated attacks on the line by militants in the Sinai forced its closure and EMG sued the Egyptian government for damages. Egypt and Israel reportedly reached an arbitration settlement in November, clearing a path for the EMG pipeline to be operational again, even though the northern Sinai continues to show instability.

The EMG line is being inspected and, if there are no technical issues, Israeli gas could begin flowing to Egypt as early as March.

Delek Drilling CEO Yossi Abu has poured cold water on that scenario, however, suggesting in November that Israeli gas may initially be piped to Egypt through the Arab Gas pipeline that connects Jordan and Egypt, with the EMG line to be used later.

Abu said Israeli gas would begin flowing to Egypt once Israel’s gas network is linked to the Arab Gas line in May, with the EMG pipeline being tapped into in December. Concern is that the EMG line would not have the capacity to meet contracted volumes when the Leviathan field becomes operational this year.

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