Wednesday,19 September, 2018
Current issue | Issue 1273, (3 - 9 December 2015)
Wednesday,19 September, 2018
Issue 1273, (3 - 9 December 2015)

Ahram Weekly

New gas deal

Despite Egypt’s recent discovery of a huge natural gas reservoir, the private sector could start importing natural gas from Israel. Niveen Wahish finds out why

New gas deal
New gas deal
Al-Ahram Weekly

A new deal allowing the Egyptian private sector to import natural gas from Israel was announced a week ago. A letter of intent was signed between developers of the Leviathan field, located in the eastern Mediterranean, and Egypt’s Dolphinus Holdings, which represents private, industrial and commercial consumers in Egypt.

The deal would give Dolphinus the go-ahead to import some four billion cubic metres of gas annually for up to 15 years. The gas will be delivered by the existing pipeline owned by East Mediterranean Gas, which previously transported Egyptian gas to Israel. The terms of the final deal are yet to be negotiated by the two sides.

Development of Leviathan, with reserves estimated at 22 trillion cubic feet of gas, is being carried out by US firm Noble Energy and the Israeli Delek Group through its units Delek Drilling and Avner Oil and Gas.

According to a press release issued by Delek Group, the price of gas stipulated in the letter is similar to the price established in other agreements for the export of gas from Israel to regional markets, and is based on a formula that links it to the price of a barrel of Brent oil and includes a “floor price.”

While this deal would normally be contentious, given that it involves Israel, this time around it is even more so because it remains unclear why the private sector would need to import gas when Egypt has discovered its own huge reserve of gas that is expected to start producing ahead of the Leviathan field. Dolphinus could not be reached for comment.

In September 2015, Italian petroleum giant Eni announced the discovery of the deepwater Zohr gas field off the Egyptian coast. The field is estimated to hold 30 trillion cubic feet of gas, accounting for half of Egypt’s proven gas reserves. It is the largest gas deposit in the Mediterranean. Zohr is scheduled to come online in 2017 while the Leviathan field is scheduled to come online in 2019-2020.

Zohr will be sufficient to cover all Egypt’s gas needs for years to come, says Ibrahim Zahran, an energy expert. “The gas in Zohr is almost equivalent to all the Israeli gas fields put together,” Zahran told Al-Ahram Weekly.

Others are concerned that the Egyptian gas discoveries may be overstated. Ramadan Abul Ela, a petroleum engineering expert, remembers the days when Sameh Fahmi, the petroleum minister during the tenure of former president Hosni Mubarak, announced “incredible” numbers of Egypt’s reserves that never materialised.

But this is not how the issue should be viewed, says Khaled Abu Bakr, chairman of the Egyptian Gas Association and regional coordinator for the Middle East and Africa for the International Gas Union. Abu Bakr told the Weekly that the import deal is not about covering Egypt’s needs but about taking strategic steps to establish Egypt as a regional hub for the export of natural gas.

With the pipeline, national grid and two state-of-the-art liquefaction plants, Egypt has the necesary infrastructure to receive the gas and process it for re-export, he said. Leviathan is a strategic “game changer”, according to Abu Bakr, because of its size.

With this deal, the Egyptian private sector wants to make sure it secures sufficient supplies to realise the target of making Egypt a hub, he explained. “A hub for such a strategic product as natural gas gives Egypt geopolitical leverage on the international political scene,” he said.

In the area of oil and gas, deals are not calculated according to politics but according to whether they are economical or not, Abu Bakr stressed. In this case, Egypt will definitely come out a winner, he believes.

Dolphinus will only act as a transporter, Abu Bakr explained, bringing the gas from Israel, Cyprus and other locations, then processing it in Egypt and re-exporting it. This will create jobs in Egypt, royalties will be paid for the use of the national grid, and taxes will be collected.

Abu Bakr does not doubt Zohr’s potential. He pointed out that being in deep water means that new technology will be introduced to the Egyptian market that could soon help in the discovery of more gas.

But there are other concerns. Abul Ela, who is also vice-president of Pharos University, argues that the Leviathan field is within Egyptian territorial waters. Together with a group of scientists, he believes that existing economic borders used by the Ministry of Petroleum are in error. Because of this, Israel has claimed ownership of Leviathan.

“We warned against imports from this particular well because that would jeopardise our chances of proving our point should we decide to file for international arbitration,” he said.

If there had been a case in court, or if the government did not officially recognise internationally signed agreements, the Egyptian private sector would not be making deals to import gas from the field, explained Abu Bakr.

Despite the official political and economic normalisation of relations between Egypt and Israel, public opinion remains pretty much against normalisation. The average citizen views dealing with Israel as akin to committing treason, especially with the recent increase of Israeli violence against Palestinians in the occupied territories.

And what has increased sensitivity to the gas issue in particular is how Egypt’s gas was sold to Israel at below-market rates by the Mubarak-era tycoon Hussein Salem, causing Egypt to forfeit billions of dollars in revenues.

What is needed is greater transparency but the Petroleum Ministry is doing things the same old way, said energy analyst Amr Kamal Hammouda. To Hammouda, there is more than meets the eye in this deal. He understands that the government has been having a hard time covering the energy needs of the private sector, which has affected production.

“It is better that they provide for themselves their needs of energy,” he said. But Hammouda believes there were other quicker options besides Israel. Russia, he said, is a friendly country that could have even provided payment facilitations.

The private sector’s energy shortages were particularly acute this summer as most fuel was directed toward energy production. The problem began to ease only recently. According to Abu Bakr, Egypt’s local production covers 80 per cent of its needs.

The remaining 20 per cent is imported and processed in two floating re-gasification plants that Egypt recently invested in to help it secure its energy needs. The amount that is imported, he explained, is needed by the electricity sector during the summer, when demand for electricity is high. When the summer ends, that 20 per cent suffices for electricity production as well as factories.

The deal over Leviathan gas would not be the first time Dolphinus has signed a contract for Israeli gas. In March this year Dolphinus agreed to purchase a minimum of five billion cubic metres of gas for the first three years from the Tamar field, near Leviathan.

In the meantime Leviathan’s partners are also in negotiation with British Gas (BG) on a potential supply deal to BG’s liquefied natural gas plant in Idku, Egypt, the Delek Group press release said.

A final deal to import from Leviathan would depend on approval by authorities in both countries, according to the press release.

A press release by the Egyptian Petroleum Ministry issued when the deal was announced also stressed that the importation of gas by the Egyptian or foreign private sector hinges on government approval as well as the “achievement of the national interest”, added value to the Egyptian economy and the resolution of arbitration cases filed against Egypt.

The Union Fenosa Gas plant in Damietta, which shut down in 2012 due to lack of delivery of gas supplies from the Egyptian government, filed a complaint with the International Chamber of Commerce in 2013 that a state partner had failed to comply with contracts.

The plant is 80 per cent owned by Union Fenosa Gas while the remaining 20 per cent is split between state-owned companies EGAS and EGPC. Prompted by the shortage of fuel, the Egyptian government stopped supplying gas to the liquefaction plant and redirected it to pressing domestic uses such as electricity plants.

The release also said that the ministry has no objection to allowing private sector companies to import gas for their own use or for a range of industries using the extensive infrastructure and facilities owned by the state in exchange for a tariff.

The press release added that the government is currently working to transform Egypt into a strategic hub for natural gas to bring added value to the Egyptian economy, support economic growth, attract investment, create new job opportunities and support regional stability.

Jordan has also agreed to buy gas from Leviathan for 15 years, in a deal that could be worth up to $15 billion, Reuters reported.

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