Egypt Gas, Window of Opportunity or Empty Bell?
by Cyril Widdershoven

    Last month visit of US Energy Secretary Bill Richardson to the Middle East was largely focused on the developments between OPEC members and the intrinsic results for international oil markets. However, one important aspect did not get snowed under in  the media frenzy with the OPEC cartel power politics. Israel and Egypt are becoming major players in the regional gas market, the first until now largely as a major consumer, the latter as a major producer and exporter. Richardson urged both parties to push ahead with a long-planned natural gas pipeline project, saying international energy cooperation would lead to warmer ties. In the same speech Richardson encouraged Israel to use high tech technology to develop alternative energy sources, particularly solar energy, and lessen dependence on oil imports. Israel and Egypt have been talking about a natural gas pipeline for years. But setbacks in Middle East peace making have hampered the progress. The line is planned to run under the Mediterranean from Egypt to Israel, then to Lebanon and Turkey. “It makes sense … to do things together”, Richardson stated. However, regional politics and new exploration and development issue can change the situation rather dramatically.

    On the 28 of February, Israel announced the discovery of several major gas discoveries, after which it had to reconsider old commitments and agreements. Israel’s oil and natural gas commissioner said that newfound reserves off Israeli shores could be developed within two years, precluding an immediate need for Egyptian or other imports. “israeli natural gas sources will break into the market within two years,” Yehezkel Druckman told Reuters. “The country’s natural gas potential is very real and we are very happy about it.” No commercial quantities of natural gas have been produced from Israeli reserves to date and the government studied importing from various countries. Neighboring Egypt was Israel’s first and cheapest choice, but talks have faltered. “Since that proposal was not put into practice for all the years the Israeli energy sector sought natural gas sources. I assume now it will be somewhat late for the proposal.” A consortium including Israeli companies Avner and Delek Drilling reported the most promising indicators of an Israeli offshore natural gas reserve to date. US-based Samedan Corp and Reading & Bates are also partners to the test drills. Druckman estimated the Mary 1 offshore site could hold as much as 30 billion cubic meters (BCM) of recoverable gas, compared with the consortium’s last natural gas find at the Noa 1 test site estimated to contain 9.5 bcm. Earlier that month, a consortium led by BG Group’s BG International and Israel’s Isramco said initial tests showed their Or-1 offshore site holds reserves of 107 billion cubic feet of natural gas. Current test drills show Israeli natural gas reserves contain at least 40 bcm combined, enough to supply Israel for 10 to 15 years at the current consumers level.

    All these developments have led to a break off in contacts between the Israelis and Egypt. “During the next few months we will examine the true potential of the recently discovered fields. Until we have done that we will freeze contacts with Egypt,’ Israeli energy minister Eli Suissa said in a statement.

    All the above will have its direct repercussions for the overall profitability of Egypt’s natural gas reserves, and its financial prospects in the export markets of the region. What will be the direct results and financial impact of it? For three years now, Egypt has appeared to be keen to enter the export markets, especially in the Mediterranean and European regions, with full force. Turning the gas resources into a major hard-currency source for the Egyptian balance of payments and as a major financial influx for it’s sometimes fledging budget, is obvious a certain and predictable choice. The question remains how? Customers abroad are not really breaking down the door, and marketing remains an urgent priority. The possibilities to export gas have been studied and marketed since 1996, with a full promotion of this idea during the Middle East and North Africa (MENA) conference. A memorandum of understanding with Turkey was signed to export natural gas to this developing market on the east-shores of the Mediterranean. Nothing however has until now materialized. Recently, there have been attempts to revive the old memorandum. Minister of Petroleum Sameh Fahmi signed a new protocol during his last visit to Turkey. A tender procedure was agreed for a contract to supply Turkey with eight billion cbm of natural gas, half of this quantity would be in liquid form. Bids from other countries will however be competing with Egypt. Leading producers such as Algeria, Nigeria, Qatar and Yemen are expected. British Gas (BG) International and BP Amoco are expected to be the Egyptian governments main partners in the deal, if Egypt wins the bid. Both oil/gas companies are already major forces in the semi-privatized Turkish market environment.  Plans according to the major Egyptian media sources are hopefully the start of a prosperous beginning of Egypt’s so-called gas-wealth. 

    The latest protocol has revived hopes that a liquification plant – a joint venture between the EGPC, Agip (Italy) and BP Amoco – will finally be constructed, though this will take another 3 years before being put into full action. Pipeline transport, as already stated will be under major restrictions, especially if the Israeli deals won’t go through. Though major foreign concessionaires in Egypt have the right to export part of their quotas, most of it will depend of the Israeli developments, as Agip already has stated this month. Concessions also have to be re-examined and rewritten to give export facilities a better and friendlier environment. Recent surveys have placed Egypt’s natural gas reserves at 42 trillion cubic feet (tcf), though some have stated that probable reserves can reach 100 tcf. The Egyptian ministry of Petroleum even stated in February that there could be 260 tcf in total. These figures have to be confirmed and could change the picture totally. Exports will enhance Egypt’s position. However, major developments will require a huge amount of hard currency investment, largely needed to be provided by outside sources AKA foreign investors and E&P companies. Concession agreements signed with foreign companies typically require Egypt to buy a percentage of its partner’s share of gas at world gas market prices. These purchases are counted as petroleum imports in Egypt’s current account, and contribute to a deficit in the sector that one analyst placed at $80 million in 1999 and projected would grow to $600 million in 2001. Until now there is no real guarantee that Egypt’s exports will result in export profit. Even that it is a fact that Egypt’s domestic markets wont need total reserves that are until now known.

Not economical reasons will have to be considered. Political considerations are already playing a major role in each deliberations. 

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