Egypt turns to Israel to address shortage of natural gas

CAIRO — Egypt is plunging into darkness every day. Across the country, authorities are scheduling power outages to take the pressure off the national grid as Egypt struggles to deal with chronic energy shortages.

According to Hafez El Salmawy, managing director of the Egyptian Electric Regulatory Agency, Egypt will lack at least 20% of the natural gas it needs to properly power its electricity plants this summer. As energy usage spikes in the heat, these outages will become longer and more frequent.

The new president, widely expected to be popular army chief Abdel Fattah al-Sisi, will take office as the worst months kick in. His toughest challenge will be dealing with disgruntled citizens as they struggle through blackouts and fuel shortages; these same problems contributed to the downfall of President Mohammed Morsi, the very man Sisi overthrew last July.

In desperation, the state-owned Egyptian Natural Gas Holding Company (EGAS) is turning to Israel, a former export destination of Egyptian gas. Egypt lost an estimated $10 billion selling underpriced natural gas to Israel, Jordan and Spain between 2005 and 2011, according to a new report by the Egyptian Initiative for Personal Rights. The sales to Israel alone cost the country over $1 billion, estimated Mika Minio-Paluello, an energy researcher and one of the report’s authors.

Corrupt businessmen, including convicted Egyptian tycoon Hussein Salem, colluded with the state under ousted autocrat Hosni Mubarak to bypass normal bidding processes and secure the lucrative contracts.

But just two years after Egypt canceled the unpopular 20-year export deal, the Egyptian government is looking to buy Israel’s newly discovered natural gas for at least four times the price. A drilling consortium led by Israeli company Delek Group Ltd. and Texas-based Noble Energy are currently in talks with companies in Egypt after signing a historic gas deal with Jordan that will provide it with 1.8 billion cubic meters (63.6 billion cubic feet) a year for 15 years.

But the Egyptian deal could be four times that, with as much as 8 billion cubic meters (282.5 billion cubic feet) a year piped to Egypt, both Egyptian and Israeli sources told Al-Monitor. The deal makes sense as the direction gas travels in the existing pipeline can be reversed, one official at Delek Group Ltd. said.

The prices are expected to match Jordan’s $6.60 per million British thermal unit (btu), four times what Egypt received for the gas it exported to Israel.

In the mid 2000s, Egypt sold its gas to Israel for just $1.50 per million btu via sweetheart deals involving Salem’s East Mediterranean Gas (EMG) company, Minio-Paluello told Al-Monitor. “At the time, Egypt could have been getting as much as $9 per unit,” he said.

"The pipeline became a lightning rod of Egyptian hostility against Israel," Nimrod Novik, a former senior adviser to the Israeli prime minister who led the Israeli side in EMG, told Al-Monitor.

The unpopular contract was finally terminated by Egypt in March 2012, after 13 attacks by Sinai-based jihadist groups on the feeder pipeline, preventing Egypt from delivering the gas it promised.

Salem, now in exile in Spain, was sentenced in 2012 in absentia to 15 years in jail and ordered to pay millions of dollars in fines for squandering public funds.

But despite the murky history of gas deals with Israel, EGAS is still considering importing from its neighbor in an escalating energy crisis.

Natural gas production in Egypt, a country that boasts the third-largest reserves in Africa, has plummeted since 2011 due to poor investment in extraction. “Production has dropped to around 5.2 billion cubic feet [bcf] a day,” said Hafez El-Salmawy, managing director of the Egyptian Electric Regulatory Agency. “Egypt needs 6.5 bcf per day to function properly,” he said.

National consumption of energy, meanwhile, has risen more than 12% since the revolution, driven by the cheap costs of energy, Salmawy added.

Egypt's government spends $15 billion a year, or a fifth of its budget, on subsidizing both fuel for transportation and natural gas for electricity, encouraging consumption. The subsidies drain foreign currency badly needed to pay off spiraling debts to foreign energy companies that are now refusing to invest further in extraction. But the government could risk riots if it raised domestic energy prices at such a volatile time. When late President Anwar Sadat cut bread subsidies in 1977, he faced nationwide revolt.

So Egypt has been redirecting gas earmarked for export back to the domestic market, to ensure the country is not bled dry.

In 2009, Egypt exported some 647 bcf of both liquefied and piped gas. But by 2012, that was halved to just 256 bcf. The amount continues to plummet. Consequently, the country’s two liquefied natural gas (LNG) plants, which liquefy gas for export and are owned by multinational companies like the UK’s BG and the French Gaz de France, have been practically idle for over a year.

Facing multiple lawsuits for defaulting on its commitment to provide gas for export, Egypt plans to use the Israeli gas deal to solve this problem first, not the domestic power cuts, Novik said.

The industry expert explained that the deal could see the Egyptian government agree to facilitate Delek Group Ltd. and its partners to export Israeli gas via Egypt’s LNG plants in a bid to appease companies like BG, which have warned their investors of no Egyptian gas exports in 2014.

The project could eventually be adapted to satisfy Egypt’s ravenous local demand. 

"The [gas] molecules lose their white and blue identity once they enter into the Egyptian grid; some of it might go to domestic use,” Novik said. He added, “Nobody can tell which portion went where.”

Nonetheless, even if Israeli gas were to be piped straight to Egypt’s electricity plants, nothing could be done before 2015.

So EGAS is seeking short-term — and therefore expensive — supply contracts from anywhere, one Egyptian source in the Petroleum Ministry told Al-Monitor.

But without a functioning import pipeline or regasification equipment that could convert liquefied gas shipped into the country, the only option is to rent floating plants. Only six of those exist in the entire world.

Saudi Arabia, Kuwait and the United Arab Emirates have already given $4 billion of oil to Egypt, but that does not help Egypt’s gas-based power plants.

International cement companies are currently pushing to replace gas with coal, which is comparatively cheap. But the move has split Egypt’s new cabinet, as the environmental impact on the country would be major and the long-term financial benefits dubious.

Meanwhile, the country is preparing for a presidential election campaign set to start next month. Time is running out.

With few options to solve the deepening energy crisis, Field Marshal Sisi may find himself fighting the same social unrest that confronted his predecessor. And losing.