Globes (Gina Cohen and Miki Korner 29^th February 2020) – Opinion: careful optimism – the export of gas to Egypt is expected to increase

The benefit to Israel is clear – revenues from taxes, the development of the market and geopolitical benefits, but there is a need to examine the need for Egypt to import gas from Israel also from the point of view of Egypt

The energy market in Israel has entered into a new era of having a large surplus in its ability to supply the energy it needs. For the first time since significant volumes of natural gas started to be used in Israel (in 2004) which has contributed to the local market’s environment and economy, it has become possible to also take a look towards exports.

On the one hand, the global energy market is not cordially welcoming at this moment. There is a surplus of gas supply, prices are low and the construction of infrastructure such as a pipeline to Europe and new liquefaction facilities have become more challenging.

The self-evident alternative is exporting to neighbouring countries. The benefits to Israel are clear – revenue from taxes, the development of the market and geopolitical benefits.

We will examine Egypt’s need to import gas from Israel from the point of view of Egypt.

Regional energy hub

Egypt is well placed as a potential gas hub with: a large local market, a number of fields, investments from international companies, diversified infrastructure to export and import by pipeline, LNG liquefaction and regasification facilities and the Suez Canal is a strategic chokepoint route for LNG shipments to the Middle East, Europe and Asia. Israel can play a role in the Egyptian vision.

Production, generation and consumption of energy in Egypt

In 2019, about 72 bcm of gas was produced and consumption was about 66 bcm.

For the first time in 6 years, production was higher than local consumption and one of the export facilities was reactivated after years of being shut-down (exports of 4.8 bcm in 2019). The peak demand in the summer is 40% higher than the lowest months and this leads to a shortage also when the situation is balanced on an annual basis.

Electricity: in 2019, 200 billion KWH was generated, out of which 85% is from natural gas. Egypt has no coal or nuclear stations, the Aswan dam supplies 6.5% of the electricity consumption, 2.6% comes from solar and wind and the rest for fuel oil and gasoil (which are being converted to gas). The scope of renewable energy has increased but is partially offset due to a decrease in the efficiency of the grid.

Imports of gas from Israel

The need and scope of the import of gas from Israel focusses on the Egyptian supply/demand ratio and on global gas prices which is curbing the worthiness of exporting LNG from Egypt. On the other hand, surplus local supplies, and global energy prices are not the only important elements because of the volatility of these two parameters. The supply/demand ratio has changed from a shortage of 20% in the summer of 2017 to a similar surplus in March 2019 and in January 2020, global gas prices have fallen to half of what they were in January 2019. A concrete example of the fluidity in the supply equilibrium in Egypt was witnessed a couple of weeks ago when BP delayed to the end of this year the production of its Raven gas field (5 bcm/year) because of its high rate of sulphur. This reduced the local supply in 2020 and is a reminder of the volatility of supply.

A decade ago, most energy companies walked away from Egypt, the scope of production fell, exports ceased and the lack of gas caused frequent electricity black-outs making it necessary to import expensive LNG (between 2015-2018 Egypt spent over $5 billion in importing LNG).

The changes and difficulties were scorched into the minds of the decision makers who take into consideration other constraints

In a country like Egypt, where gas is used as the main source of energy, energy security is critical. Relying only on local supplies (which more or less meets the demand) reduces the reliability of supply over time and therefore diversity of supply is vital.

Over pumping the reservoirs, will over-time represent a risk of damaging the stability of the fields. Over the long-term the country needs to take into consideration the risks of continuing such operations.

The Egyptian Zohr field supplies 30-40% of the local needs and when considering risk management it is advised to reduce this dependence.

The USA declared that it was providing Egypt with $1.5 billion in incentives to help Egypt become a regional hub (as part of the “deal of the century). The import of gas from Israel can help with this and to re-enforce the chance that American help will be assured.

Pipeline infrastructure from Israel (89 km) will provide a reliable back up to any local shortage of gas or when global prices are attractive enough and will enable to channel more Egyptian gas to exports.

In our view, despite the concerns, imports of gas from Israel exudes a certain degree of cautious optimism. On the one hand, current demand in Egypt is lower than local production whilst at the same time global energy prices are low and make it very hard to export LNG. On the other hand, there are the considerations of security and reliability of energy supply in Egypt that absolutely justify importing +/-10% of the local consumption (7 bcm/year). Looking towards the future, the gaps between production and demand in Egypt as well as global LNG prices are constantly changing and could help support the import of larger volumes of gas during certain periods.

Gina Cohen is an international gas expert and lecturer at the Technion. Miki Korner is an engineer and accountant and a consultant in the energy sector