After more than a decade of a rollercoaster ride of Egypt’s gas sector, leading even to importing LNG for years, Cairo seems now to be heading to a more brighter future. The extreme success stories offshore Mediterranean, as represented by Italian oil major ENI’s production on the Zohr gas field and possible Noor reserves, only show that Egypt is fully able to rejoin the gas export market again in full very soon.

Ongoing discussions with other East Mediterranean countries, such as Israel and Cyprus, only will support the overall potential of the country the coming years, analysts state. Still, Egypt’s gas officials are still showing a tendency to be confused, as in addition to the large LNG export potential available, discussions are continuing on a much more risky venture, the Egypt/Israel-Cyprus/Greece deep-water gas pipeline project. Some clarification is still needed here, while commercial risks already show that a more rational pure LNG export strategy is needed.

The last days, Egypt’s Minister of Petroleum Tarek El Molla has stated that the ENI’s huge Zohr gas field offshore Egypt has increased its production six-fold since it started production in January 2018. Total production at present is said to be around 2 Bcf per day, a staggering increase from the 350 mcf per day in January. For 2019 a production platform is targeted by ENI of around 2.7 Bcf per day.  The production increase during 2018 has already resulted in a situation that no more LNG imports are needed at present. Cairo has already anticipated these developments, as it stated in June that no more new LNG import tenders would be published. Egypt expects that first LNG volumes could be hitting the market early 2019.  With the support of the IMF, Cairo has been able to set up a strategy in which Egypt could become a major energy trading hub in the region. Gas production the coming years is expected to increase substantially, not only by already anticipated volumes offshore Mediterranean but also due to production increases or new discoveries in the Western Desert.

At the same time, Egypt is currently successfully removing some financial stumble-blocks and left-overs from the Arab Spring instability. The Egyptian Ministry of Petroleum and Union Fenosa Gas (UFG), the operator of the Damietta LNG project in the Nile Delta, have agreed to restart exports from the plant. Egypt’s second LNG export plant Idku already has been partly opened in 2016.  UFG, owned 50/50 by ENI and Naturgy Energy Group, is 80 percent owner of the Damietta LNG liquefaction plant and export facilities. Damietta was opened after that Cairo reached an agreement with UFG on the $2 billion fine to be paid to the latter. The World Bank’s International Center for Settlement of Investment Disputes (ICSID) has awarded to UFG. The latter has filed a case to ICSIS several years ago complaining about Cairo’s decision to cut of gas supply to Damietta.  Sources have indicated that the $2 billion fine is most probably being settled via renewed gas supplies by Egypt.

Egypt’s success story still has not put another dream of East Mediterranean countries on ice yet.  Cairo is still in discussion with Greece, Cyprus and Israel, on a possible offshore deep-water gas pipeline project, which would connect the offshore finds of all parties to the European market. Israeli news sources reported that Israel’s Prime Minister Binyamin Netanyahu has held a trilateral meeting with Greek Foreign Minister Nikos Kotzias and Cypriot Foreign Minister Nikos Christodoulides. The main discussion point was the progress on the so-called Israel-Cyprus-Greece East-Med gas pipeline. The feasibility of this project, especially without a full Egyptian cooperation, is highly questionable. Technical and commercial challenges identified by a multitude of parties indicate that at present this project is not feasible. The staggering costs of laying a deep-water gas pipeline, in combination with issues of geopolitical nature (Turkey) and commercial constraints, seem already to sunk the ship before it is leaving the port. Still, the Greeks and Israelis still seem to have an appetite for it. Looking at the real situation on the ground, the project is not feasible. Connecting the reserves of Israel and Cyprus to the European/Greek natural gas transport infrastructure will not a commercially attractive option.  Competition with Russian or Central Asian pipeline supply is high, price settings are much more attractive than could be possibly be offered from the Israeli-Cypriot side.

The only way to bring East Med gas volumes to the European or Global markets will be to enter into the LNG conundrum. A combined East-Med-Egypt LNG approach is the most feasible, as long as Cyprus-Israel are not able or willing to access the Turkish market or approach global markets via a small-scale LNG approach. The latter is still an option to consider, looking at the growing energy demand in the Mediterranean itself, when focusing on the vast amount of Greek islands or small ports in the Adriatic and Italian side. If there are larger dreams to be targeted than these, than the only way to enter into a commercial attractive European market will be to combine their resources with the ongoing efforts in Egypt. The latter North African country has not only its own vast onshore and offshore gas reserves available but holds an up-to-date LNG liquefaction capacity to be utilized. Incremental investment costs are to be considered low, as most costs already have been sunk into the plants at the end of the 1990s or beginning of the 21st century.

For Egypt is now time to push forward its energy hub strategy, while addressing its commercial and regional position to the other main players. Geopolitics are also an asset, as all are not yet willing or politically constrained to bring their gas to the Turkish markets. Combining one large player (Egypt) with the smaller ones (Cyprus-Israel) is not only the right commercial option but also will increase stability and security for all parties involved. Go it alone is definitely not the right choice.

It also will give all parties the right poker position when dealing with potential European parties and the European Union. A combined approach, locking in demand and supply at the same time, could be delivering the right push for a more brighter future in the East Med. Security wise it also will be the right approach, as a combined energy infrastructure and security strategy will constrain adversaries to take unilateral action. The immense amount of offshore infrastructure to be build and protected necessitates a new energy security strategy of all. An East Med energy union, based on commercial and security considerations, maybe taking into account the lessons learned from the European Coal and Steel Union in Europe in the 1950s, could be the first step to an integrated economic and security based structure protecting current members but maybe include future parties too.  In this Cairo is holding the best cards, pushing the Pharaohs to lead a new regional cooperation based on energy and security, with a high potential for increased trade and prosperity with the European Union in the coming years.

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