Why Egypt Would Import Gas from Israel

Natural gas from Israel’s largest offshore fields might be headed to Egypt.

The Leviathan partners recently announced they had signed a letter of intent to supply gas to BG Group’s liquefied natural gas facility in Idku, northern Egypt. The MOU stipulates that the 530 bcm Israeli Leviathan field (19 Tcf) will supply the facility with 7 bcm of natural gas annually for 15 years via an underwater pipeline. The partners in Israel’s 10 Tcf Tamar field are also eying exports to Egypt: they previously signed a letter of intent to export up to 2.5 Tcf of gas over 15 years via the Damietta LNG plant operated by Union Fenosa Gas.

The materialisation of the deals would allow Israel to use Egypt’s unused LNG export facilities to reach export markets. Since Israel’s Supreme Court ratified the Israeli cabinet’s decision to export around 40% of the country’s proven natural gas reserves, Israel has not yet formulated a clear export policy. How the gas will reach export markets in terms of methods of transport and export routes has been the object of mere speculation. Various scenarios and options have been suggested by energy experts; they include a pipeline to Turkey, an onshore LNG, a floating LNG, using Cyprus’ planned onshore LNG terminal, exporting to immediate neighbours via regional pipelines and/or using Egypt’s export terminals.

Israel’s history of natural gas reliance will likely encourage it to adopt a diversified export strategy now that it is on the verge of becoming a net exporter of natural gas. Egypt through its unused export terminals could be one of the routes that Israel will take to transport its gas to future customers. The deals between Israel and Egypt are not yet binding and will be subject to regulatory approval by the Israeli and Egyptian authorities. But what’s in it for Egypt?

Egypt’s hydrocarbon sector is not negligible. Egypt produced 61 bcm of natural gas in 2012 and 18% of natural gas production was exported. In fact, until 2011 Egypt provided a third of the quota allocated for exports to Jordan and Israel via a gas pipeline while the rest was marketed as LNG. In 2011, Egypt energy outlook started deteriorating due to an increase in the consumption and the stagnation of production. In addition, certain natural gas fields reached maturity. According to a BNP Paribas report¹ dated October 2013, natural gas production in 2013 only covered 80% of the country’s domestic needs and export obligations. Domestic needs continue to grow accentuating the gap between production and demand. The political unrest in Egypt has led the authorities to focus on local demand first which led to a failure to commit to export obligations: exports via pipeline have either stopped completely or been reduced substantially, and exports via LNG are either running at low capacity or have been completely shut down². Once a net natural gas exporter, Egypt risks becoming a net natural gas importer. The situation has tremendously affected the country’s trade balance and public accounts and will continue to do so. For Egypt, importing natural gas to make up for the shortfalls and honour export obligations is a must. Sealing the deals with Israel will largely depend on the price agreed by the parties.

Karen Ayat is an analyst and Associate Partner at Natural Gas Europe focused on energy geopolitics.  Email Karen on karen@minoils.com.  Follow her on Twitter: @karenayat

 ^{1- Access the full report here: http://economic-research.bnpparibas.com/Views/DisplayPublication.aspx?type=document&IdPdf=23025}

^{2- See the BNP Paribas report mentioned above}