Will Egypt Finally Embrace Israeli Gas?

Opinion Articles

In the search for export options for its new-found natural gas discoveries, Israel has kept things local in recent months with new agreements with Jordan and even a West Bank utility in January of this year. However, the country’s ability to rebuild – and reverse – a gas trade route to Egypt has been hampered by political resentment and logistical hurdles. This all appeared to change late last month with the news that production partners in Israel’s Leviathan offshore gas field has signed a non-binding agreement with the BG Group to export gas from a “floating production, storage and offloading [vessel]” and connected to an LNG facility through a subsea pipeline.

For BG, a link to the field’s estimated 18 trillion cubic feet of gas would help ease pressure from the significant drop in gas output from Egyptian projects that has occurred over the last three years. The letter of intent comes shortly after a similar deal was struck to export 2.5 trillion cubic feet of gas over 15 years from Israel’s Tamar field through the Damietta LNG plant in Egypt, which is operated by Union Fenosa Gas.

However, before either project can be approved, Cairo has made it clear that some of the reserves will have to be set aside for domestic consumption.

“Things are different in Egypt now and we see no issue in this deal if it is beneficial for the country,” a senior Egyptian oil official told The Wall Street Journal this week. “We will give our approval on the deal if some of the gas is fed to the domestic market and is reasonably priced.”

Facing fuel shortages throughout the country due to a decline in local production, daunting foreign debt and a subsidy program that has proven to be politically poisonous, Cairo has searched for ways to increase access to new, affordable resources. Despite early opposition to restarting energy trade with Israel, Cairo now appears willing to explore the possibility of Israeli gas through Egyptian ports, but not without certain criteria in place.

“Both deals will not go ahead if the Egyptian government is against them and the companies know that very well. So these deals have to work out for everyone involved,” the official told The Wall Street Journal, calling on BG to reserve some of the exports for Egyptian demand.

Egypt’s energy sector has struggled with a series of significant challenges, most notably keeping up with the country’s demand, while trying to draw down a substantial debt to foreign oil and gas providers. The debt has lingered around $6 billion despite government efforts to reduce it. The lack of progress has been linked to a slowing economy following the collapse of government of Hosni Mubarak in 2011 and the instability that followed, as well as an unsustainable fuel subsidy program. According to Sherif El Diwany, Executive Director of the Egyptian Center for Economic Studies in Cairo, government subsidies currently make up about one-third of the government’s current budget and 75% of that amount is set aside for energy sector subsidies. Despite calls for reform both domestically and internationally, reducing that support system has been especially difficult.

Egypt’s demands could ultimately slow both projects and reroute some natural gas to local consumers. However, their position is likely weakened by the fact that much of their foreign energy sector debt is owed to the BG Group, the very company it is pressuring to act.

Israel Keeps It Local

Israel and its production partners in the offshore Tamar natural gas field announced a $500 million, 15 year plan to sell gas to two Jordanian chemical companies. Marking the first time Israeli gas has been designated for sale beyond its own borders, the deal with supply 66 billion cubic feet to Jordan, according to Reuters. The deal provides some gas relief for Jordan, which has seen its imports threatened on several occasions over the last three years. Partially dependent on Egyptian gas to meet its domestic demands, Jordan experienced shortages beginning just after the collapse of Mubarak government. With state forces focused elsewhere, militant attacks increased in the country’s eastern Sinai Peninsula, including nearly 20 on eastbound gas pipelines.

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