Friday, April 25, 2014

Drew EGC Report
5th Mediterranean Oil and Gas Conference
Karen Cyprus White Paper

Israel Closer to Selling Gas to Egypt

Israel and Egypt are discussing a natural gas deal. An energy collaboration is not new between the two countries except that this time, the natural gas flow will be in the opposite direction, from Israel to Egypt. Historically, Israel has been reliant on Egyptian gas to satisfy 40% of its domestic natural gas needs. An agreement was signed in 2005 stipulating that Egypt would supply Israel with 7 bcm of Egyptian natural gas every year and for a 20 year period. The deal was an economic annex to the 1979 peace treaty between the two countries —the first between Israel and an Arab state. Egypt's state-run gas company terminated this controversial natural gas agreement with Israel in 2012 in the aftermath of the uprising in Egypt that put an end to the Mubarak regime. The pipeline that carried natural gas from Egypt to Israel and Jordan across the Sinai desert was bombed at least 15 times, effectively cutting off supply at normal levels ever since the start of the revolution in Egypt. The disruptions forced Israel to import fuel products with a very high price tag prompting a severe increase in Israel’s energy bill and as a result a jump in electricity prices.

Egypt is rich in natural gas. It has around 70 Tcf in proven gas reserves, an amount that would have been sufficient to supply Egypt’s own gas needs for decades to come. However, due to export commitments, an increased domestic consumption and stalled gas explorations, Egypt is now suffering from a natural gas crisis. Meanwhile offshore Israel, Texas-based Noble Energy and its Israeli partners have made substantial gas discoveries that will allow Israel to achieve energy security and produce substantial revenues from the sales of natural gas to export markets. In October 2013, Israel’s high court of justice ratified a June 2013 cabinet decision to export around 40% of Israel’s natural gas. In light of the regional energy shortfalls in Egypt and Jordan, Israel will start by exporting to immediate neighbours: an Egypt struggling to meet its obligations and a Jordan that suffered from Egyptian gas disruptions too.

Exporting to Egypt would allow Israel to use the Egyptian LNG terminal and avoid investing in its own LNG facility - a very costly multi-billion dollar project. However, an energy collaboration between the two countries remains politically sensitive, just like an Israeli-Jordanian agreement would be considered with apprehension. Israel and Jordan recently signed a water-sharing deal recently but a natural gas deal has not yet reached final stages. The final energy map in the region remains unclear with Cyprus still hoping that Israel will choose to pool costs with the cash-strapped island and export its natural gas to further destinations via an LNG facility that would be built in the Vassiliko coastal site between Larnaca and Limassol.

Karen Ayat is an analyst focused on energy geopolitics in the Eastern Mediterranean. Email Karen on karen.ayat@gmail.com. Follow her on Twitter: @karenayat





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