Wednesday,18 October, 2017
Current issue | Issue 1364, (12 - 18 October 2017)
Wednesday,18 October, 2017
Issue 1364, (12 - 18 October 2017)

Ahram Weekly

Flare-ups in the Mediterranean

Egypt’s energy situation is improving thanks to its natural gas fields in the Mediterranean, but rises in consumption and competition may pose a danger to future energy security, writes Ahmed Mahdi

source: Eni
source: Eni

Earlier this month, Minister of Energy and Mineral Resources Tarek Al-Molla announced that production at the giant Zohr gas field in the Mediterranean north of Damietta was expected to start in October. The field would start by producing 350 billion cubic feet (bcf) of gas per day, he said, which would rise to about 700 bcf by the end of 2017 and to 1.2 by the end of March 2018.

The Zohr field, discovered by Italian energy giant ENI in August 2015 in the Shorouk concession north of Damietta, contains some 850 billion cubic metres (bcm) or 30 trillion bcf of natural gas and contributes 40 per cent of Egypt’s natural gas reserves, currently standing at 98 trillion bcf.

Other global energy companies have also seen the potential of the Zohr field and bought shares in it. British Petroleum (BP) bought a 10 per cent stake in Zohr from ENI in 2016, and in December 2016 Rosneft, Russia’s state-owned oil company, acquired a 30 per cent stake in the field. Costing $1.575 billion, the purchase made Moscow the second-largest stakeholder in the Zohr field.

According to Oilprice.com, an industry website, ENI CEO Claudio Descalzi said in April 2016 that the company would be spending some 20 billion euros ($22.5 billion) in Africa from 2016 to 2020 and that $14 billion would be spent on ENI’s investment in the Zohr field. This was expected to produce 2.6 bcf of gas per day by 2019, the equivalent to 40 per cent of Egypt’s total gas production in 2015, he said.

Descalzi also said at a conference in Cairo in February 2017 that Egypt would be ENI’s top country for investment over the next two years. BP also invested more in Egypt in 2016 than in any other country. “Some pretty good things are happening here for BP, like for ENI,” said BP CEO Bob Dudley at the same conference. “In 2016-17, we’re investing more money in Egypt than any other country in the world, so this is important for us.”

Such optimistic comments from giant international energy firms may ease worries about Egypt’s energy dilemmas. Egypt was a net exporter of liquefied natural gas (LNG) until 2014, when declining output and frequent power shortages turned it into a net importer. As a result of these gas imports, Egypt then accumulated debts of $3.6 billion to international energy companies. EGAS, Egypt’s state-owned natural gas company, currently imports 10 shipments of natural gas per month (from Russia, Algeria, the United Arab Emirates, and, indirectly, from Qatar). This is expected to decrease to seven by the end of this summer and to half of that when Zohr starts production.

Egypt’s current production of natural gas is around 5.1 bcf per day, which includes production from the Libra and Taurus fields in the West Nile Delta, which were developed by BP and started production in May. These fields produce 0.7 bcf of gas per day, while total consumption now stands at six bcf per day, with electricity generation consuming some 70 per cent of this amount.

The West Nile Delta development includes five offshore gas fields planned to have a combined production of up to 1.5 bcf of gas per day by 2019, equivalent to about 30 per cent of current production. Egypt aims to raise its natural gas production to 5.35 bcf per day in the 2017/2018 fiscal year and to 5.9 bcf per day in 2018/2019.

Government officials have made many optimistic comments about the potential of the Zohr field for ensuring Egypt’s energy security. Former minister of petroleum and mineral resources Osama Kamal said on the TV channel ONTV, for example, that if the country consumed 3.5 trillion cubic feet of gas per year, Zohr on its own would last for 12 years. Last August, Al-Molla also said that Egypt would become self-sufficient in natural gas by 2018. In May 2017, President Abdel-Fattah Al-Sisi said that recently discovered natural gas fields would save the country $3.6 billion per year.

Is it no wonder, then, that Wood Mackenzie, an international energy consultancy, has said that the Zohr field could be “transformational” for Egypt.

 

GAS FROM ISRAEL: Egypt is thus expected to become self-sufficient in natural gas thanks to these recent discoveries. But given that Egyptian natural gas consumption is massive and is not expected to decline any time soon, the question arises of how long this self-sufficiency will last. For how long can Egypt abandon its need for gas imports?

In the past, Egypt was an exporter of natural gas, and during the presidency of former president Hosni Mubarak the country exported gas to Israel at $4 per million British thermal units (BTU), according to a deal between Cairo and Tel Aviv signed in 2005. This price was much cheaper than market prices at the time, which averaged around $15 per million BTU.

Mubarak, removed from power in the 25 January Revolution, was later put on trial for exporting gas to Israel at such cheap prices, as well as for receiving villas as gifts in 2000 from Egyptian businessman Hussein Salem, responsible for exporting the gas to Israel. In return, the charges said, Salem had been allowed to set up a company to export the gas to Israel at cheap prices. Mubarak was acquitted of the charges in 2012 under a 10-year statute of limitations. In May 2017, Salem was acquitted of profiting from his personal relations with Mubarak and exporting gas to Israel at less than its global price, and, in a reconciliation deal with the Egyptian government, he gave up hundreds of millions of dollars to clear himself.

Prior to the discovery of the Zohr field, in October 2014 Dolphinus Holdings, an Egyptian consortium led by businessman Alaa Arafa which represents private gas-importing and refining companies, signed a letter of intent with Israel’s Delek Group and America’s Noble Energy, the operators of the Tamar gas field, a giant Israeli field in the eastern Mediterranean discovered in 2009 which holds about 250 billion cubic metres of gas, to buy 2.5 billion cubic metres of gas annually from the Tamar field.

The Israeli gas would then be liquefied in plants operated by Union Fenosa, a joint venture between Spain’s Gas Natural and Italy’s ENI, and British Gas (BG) in the Mediterranean off the coast of Egypt.

Jordan also signed a similar letter of intent with Israel’s Tamar consortium during the same period to import gas from Israel. In January 2017, natural gas from Israel’s Tamar field started flowing to Jordan, providing energy for a Jordanian bromine plant and potash factory. Although the quantities of gas involved were relatively small, the development was politically significant. As a result, a Saudi bank divested from the Arab Potash Company (APC), one of the factories receiving the Israeli gas. However, the APC board of directors still includes representatives from Emirati, Iraqi, Libyan, and Kuwaiti shareholders. It is also partial owner of the other factory receiving Tamar gas, the Jordan Bromine Company.

Israel became concerned about its natural gas exports in 2015 for two main reasons. The first was because of internal disputes between the government in the Tel Aviv, Israeli political opposition groups, and private Israeli energy companies over the amount of natural gas to be exported and the tax to be paid on it. The second was the discovery of the Zohr gas field in August 2015, which threatened to undermine Israel’s gas exports to Egypt.

However, in an interview with Reuters in September 2015, then Egyptian minister of energy and mineral resources Sherif Ismail said the discovery of the Zohr field would not undermine negotiations on buying gas from Israel. “Any negotiations between private companies in Egypt and in the eastern Mediterranean, and by this I mean Israel and Cyprus, will not stop,” Ismail said, adding that these negotiations were still “ongoing”.

However, there have been disagreements between Cairo and Tel Aviv on gas imports from Israel. One of the main points of the negotiations, according to a report by Bloomberg in August, has been the route used by the Israelis to transport gas to Egypt. According to conventional wisdom, Israel would export the gas to Egypt via Sinai, as there is already a pipeline connecting the Egyptian port city of Arish to the Israeli port city of Ashkelon.

This pipeline, the East Mediterranean Gas Pipeline (EMG), was established by Hussein Salem, Israeli businessman Yossi Maimon, and others, to transport natural gas from Egypt to Israel during Mubarak’s presidency. The conventional wisdom has been that this same pipeline can be used for the new exports, but this time the direction of flow will be reversed and will go from Israel to Egypt instead of Egypt to Israel as during the days of Mubarak.

However, there are problems with using the EMG pipeline through Sinai, as there have been legal disputes between Cairo and Tel Aviv involving the EMG Company. Following the 25 January Revolution that overthrew Mubarak, gas exports from Egypt to Israel were frequently interrupted, and the EMG pipeline was attacked some 15 times by Islamist groups in Sinai between February 2011 and April 2012.

In April 2012, the Egyptian government cancelled the 2005 gas exports agreement. In reaction, Israel’s state-owned Israel Electric Corp (IEC), the country’s main electricity provider which was dependent on Egyptian gas supplies to generate electricity, took the matter to international arbitration, seeking compensation from the Egyptian Ministry of Petroleum, EGAS and the Egyptian General Petroleum Corporation (EGPC).

In 2016, a French court ruled that EGAS and EGPC should pay the IEC $2 billion in compensation. The companies appealed in a Swiss court, but the court rejected the appeal in April 2017. However, an official at the Ministry of Petroleum said that Egypt would not import gas from Israel unless the dispute over the compensation payments was settled.

As a result, the EMG pipeline might not be a suitable route for Israeli gas coming to Egypt. A more appropriate route might be through Jordan, where the Israeli gas would reach Egypt via a pipeline operated by the Jordanian-Egyptian Fajr Company for Natural Gas Transmission and Supply instead of the more direct EMG pipeline.

 

DISPUTES IN THE MEDITERRANEAN: Apart from the Zohr and Tamar fields, the East Mediterranean is rich in natural gas fields. But these are not without controversy, and they are implicated in disputes between Israel and the Arabs and between the Turks and the Greeks, among others.

For example, there are disputes between Israel and its Arab neighbours (including Lebanon, and, according to independent experts, Egypt) over the ownership of the Tamar and Leviathan fields, the latter being a giant Israeli field discovered in 2010 that contains some 620 billion cubic metres of gas and is also operated by the Delek Group and Noble Energy.

The Lebanese Shia group Hizbullah has repeatedly threatened to attack Israeli gas shipments. Syria is involved in the disputes as well, and one of the reasons Israel wants to weaken Syrian President Bashar Al-Assad is to prevent him from supporting Lebanese claims to the Mediterranean gas fields.

According to commentator Yuri Zhukov, a fellow with the Programme on Global Society and Security at Harvard University’s Weatherhead Centre for International Affairs in the US, Tel Aviv would prefer Al-Assad to stay in power in Syria to combat Islamist groups that might attack Israel’s energy installations, however. In his article “More Trouble in the Eastern Mediterranean” that appeared in the US journal Foreign Affairs in September 2013, Zhukov said that Tel Aviv wanted Al-Assad to stay in power, but be weakened by the ongoing civil war in Syria.

Turkey has been involved in the disputes over the Mediterranean fields too, as there have been disagreements between Turkey and Cyprus over them, especially the Aphrodite field operated by Noble Energy. Ankara has thus far resisted attempts to redraw the maritime borders of the region in order to accommodate the fields, and in December 2011 Turkey carried out naval manoeuvres in the region between the Aphrodite and Leviathan fields in order to make a show of force.

The Turkish actions have led to frequent Russian naval deployments in the Mediterranean to protect the Russian energy company Gazprom’s partnership with Israeli and Cypriot gas companies, as Gazprom is also a partner in the Tamar field. Russia has also offered Cyprus aid to help bail it out of its financial crisis in return for a partnership in Cypriot gas resources. While Russia is already energy-rich, it wants to have a stake in eastern Mediterranean gas resources since these, if exported to Europe, could threaten the Russian share in the European gas market, which is important for Russian oil and gas exports.   

Egypt has also been involved in these maritime disputes, since in previous years independent Egyptian experts claimed that parts of the Tamar and Leviathan gas fields lay within Egyptian maritime borders and that Egypt thus had a share in these giant fields. However, the government has not followed up such claims.

Nevertheless, Cairo is keen to agree its maritime borders with its Mediterranean neighbours in order to avoid any such conflicts. The most prominent step taken by Cairo in order to do so has been the Egyptian-Greek-Cypriot negotiations over maritime borders, in which Egypt started serious negotiations with Greece and Cyprus who shared Cairo’s fears about Turkish and Israeli attempts to prospect for gas in the Mediterranean. These negotiations have included maritime border demarcations that have been unlikely to make Ankara or Tel Aviv happy.

In an October 2014 article entitled “Gas Battle Flares Up on Egypt’s Maritime Borders”, the Egyptian Al-Watan newspaper said that it had obtained a copy of a letter sent by Tel Aviv to Nicosia threatening to impose financial sanctions on Cyprus if it agreed to Egypt’s demands to redraw maritime borders in accordance with Cairo’s desire to assert its share of the gas fields in the Mediterranean.

Nevertheless, the negotiations proceeded, and in November 2014 a meeting between President Al-Sisi, Cypriot President Nicos Anastasiades, and then Greek prime minister Antonis Samaras resulted in the Cairo Declaration calling for the resumption of negotiations on maritime borders between Egypt, Greece and Cyprus, declaring that the Arab-Israeli conflict was the most important security threat in the region, and calling on Turkey to stop seismic surveys in Cypriot maritime areas.

Turkey responded by declaring that its navy was applying new rules of engagement in the eastern Mediterranean in order to protect Turkish research vessels in the region and to increase Turkish surveillance of foreign vessels carrying out oil and gas exploration, including Greek, Cypriot and Israeli vessels.

Since then, several meetings have taken place between Egyptian, Greek and Cypriot officials to negotiate the demarcation of Mediterranean maritime borders and possible cooperation on gas fields. Yosri Al-Ezbawi, a researcher at the Al-Ahram Centre for Political and Strategic Studies, has said that Cairo has been trying to avoid a conflict over maritime borders and gas fields in the Mediterranean.

“This is why Egypt rushed into forging the Cypriot-Greek alliance, while there is some information that Israel has taken over gas in the Egyptian region and off the Gaza Strip coast,” Al-Ezbawi told the Al-Monitor news website in October 2015, adding that the Egyptian-Cypriot agreement would be a “very painful blow to Tel Aviv”. Israel has relied on a demarcation convention signed with Cyprus, but this has been rejected by Egypt, Lebanon and Turkey.

In July 2017, Al-Molla said Egypt would finalise its maritime borders with Greece and Cyprus “soon”.

 

FUTURE PROSPECTS: Further maritime border agreements may not be enough to put an end to such conflicts in the Mediterranean.

Hamed Qarqar, a former deputy president at the Energy Planning Department at the Egyptian Ministry of Planning, told Al-Monitor that “the underground gas and oil reservoirs in this area are located at varying depths, and [some] reserves span [international borders],” which was why partnerships and agreements between countries and the accurate demarcation of borders was necessary to prevent breaches or disagreements between the countries concerned.

This is especially the case because of claims that part of the Zohr field might lie within Cypriot borders. Al-Sisi also recently said that he had told the Cypriot president that Cyprus could have its “fair share” of any Egyptian gas fields if it could prove that that fields in question extended within Cypriot maritime borders.

Prospects are currently good for Egypt, as Cairo expects to see the country achieve natural gas self-sufficiency in 2018, and it has been seeing progress in cooperation with Athens and Nicosia. But given the vast Egyptian consumption of natural gas, and maritime disputes in the Mediterranean that could still cause military conflict, as Hassan Nafaa, a professor of political science at Cairo University, told Al-Monitor, Cairo should remain cautious and not become overly optimistic.

The country will need to keep on looking for further ways to increase its energy efficiency, avoid waste and emphasise its maritime rights off the coasts as a result.   


The writer is a member of the Egyptian Council for Foreign Affairs (ECFA) and the Royal Institute of International Affairs (Chatham House) in London. He is an assistant professor of political science at the Future University in Egypt.

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