Egypt ‘primary actor’ in next phase of East Med natural gas development


Al-Monitor Pro Members


Gerald Kepes

President, Competitive Energy Strategies, LLC


Sept. 29, 2022

Bottom Line:

The Eastern Mediterranean gas play extends across the offshore areas of Lebanon, Israel, Palestine, Egypt, Cyprus and, by its own insistence, even Turkey. The next phase of commercial development is incredibly complicated given the interplay of petroleum geology, national policies and regional politics, competing energy markets (local gas versus global LNG), existing infrastructure and corporate strategies.

The first phase of regional play development focused on pipelines to domestic markets, all within national boundaries; Tamar and Leviathan Phase 1 gas to Israel and Zohr gas into the offshore Egyptian gas grid. Subsequently, new discoveries and successive phases of field development either exceeded local market needs, encountered ill-defined marine borders and overlapping political claims, and for the major investors, market conditions went against corporate strategic priorities and expectations of profitability. Local market demand for natural gas offered modest growth and/or less competitive natural gas pricing and before the current global gas crisis the near-term LNG market prospects were challenged by an over-supplied global market, at least through 2025.

Then Russia invaded Ukraine, and the need to replace Russian gas in Europe became a huge energy security priority for the continent. LNG was the only alternative with dramatically higher pricing and volume opportunities. Now, existing infrastructure favors future East Med gas development involving offshore Cyprus and Israeli natural gas, centered around Egyptian offshore infrastructure, domestic market needs and LNG export capacity. The next three to six months will tell the tale.

Background Facts:
  • The Eastern Mediterranean is an emerging world class, natural gas play, with four basins — Eratosthenes, Levantine, Herodotus and Cyprus — having an estimated ultimate recovery (EUR) of at least 175 trillion cubic feet (Tcf); of which about 90 Tcf is discovered, recoverable resource, currently. It surpasses the maturing Nile Delta Basin’s 70 Tcf discovered, recoverable resource (roughly a EUR of 105 Tcf).
  • Egypt: The Nile Delta Basin extends from onshore to shallow and deep water offshore Egypt’s Nile Delta and is wholly contained within Egyptian waters. Roughly 85% of Egyptian natural gas production comes from the offshore Nile Delta and Eratosthenes (location of the Zohr gas field) basins, with the remainder coming from the Western Desert onshore and minor volumes from elsewhere. Egypt’s natural gas sector is largely focused on serving the requirements of the domestic economy whereas the crude oil sector has long been focused on export revenues. Two LNG export facilities exist on the Egyptian Mediterranean coastline, but exports have suffered over the last 15 years due to the need to meet rising domestic gas requirements.
  • In the absence of significant new gas reserves, proved up in the next several years, and enormous progress made in new renewable energy supplies, Egypt will cease to be an LNG exporter in the coming years failing to take advantage of what appears to be a period of higher, albeit volatile prices in global gas markets. The result: forgone foreign exchange revenues for a government, badly in need of external financing.
  • Israel/Palestine: In 2009, the Tamar gas discovery in Israel’s deepwater completely changed the outlook for the country’s energy sector. The larger volumes discovered with Leviathan in 2010 further confirmed this and launched modest gas exports to Jordan and Egypt. Currently, higher Israeli gas volumes into Egypt, enable increased Egyptian LNG exports capturing much higher LNG spot prices in Europe and elsewhere.
  • Liquids-rich natural gas under development on or near Israel’s un-defined marine border with Lebanon, ironically, boosted the commercial potential for Lebanon’s offshore gas resources, but ignited border tensions with Hezbollah. Given Lebanon’s dire need for energy (and foreign financing) US mediated negotiations are advancing although it has delayed the appraisal of the gas potential offshore Lebanon and may have delayed first gas from the Israeli project at the same time.
  • Modest gas discoveries were made in the shallow water offshore Gaza but were never developed. The heightened attention to the Israeli gas near (or on) the maritime border with Lebanon has also brought renewed attention to these Gaza finds.
  • Cyprus: Offshore Cyprus, the Aphrodite gas discovery (prior to Zohr), and subsequent discoveries (post-Zohr), Calypso, Glaucus and Cronos offer the tantalizing possibility of a standalone LNG project based wholly in Cyprus. But no one discovery established the 12 to 15 Tcf needed for such a project. The potential for an LNG project fed by multiple gas fields remains but does not meet the strategic objectives of the different energy companies involved in the play. Appraisal (of existing discoveries) and new exploration continues and the discovery of a 15-20 Tcf gas field cannot be discounted, given the immature status of the play.
  • Turkey: The discovery of the Tamar and Leviathan gas fields in 2009-10 alerted governments to prospectivity outside of Egyptian waters in the region. Turkey initiated an acreage licensing program for Türkiye Petrolleri A.O. (TPAO) in 2011-12 in response to plans to drill Aphrodite (2011), covering waters it claims itself and areas claimed on behalf of its proxy, the Turkish Republic of Northern Cyprus. Licensing created a “buffer zone” around disputed waters outside of the 12-mile zone surrounding Cyprus, but did not impinge on official or claimed borders of neighboring countries (Syria, Lebanon, Israel, etc.). Much of the Turkish claimed acreage directly overlaps licensed offshore Cyprus acreage. Turkish military ships went so far as to blockade an Eni-contracted drillship offshore southeast of Cyprus in 2018 and continues to argue against drilling activity and potential commercial developments of the Cyprus offshore. Note that to date, its most aggressive actions have taken place away from the southern portions of the offshore where the aforementioned discoveries have been made.
  • International and regional oil energy activities and strategies: All of the larger global energy companies are active in the East Med play, but have different strategies. Eni (often partnering with TotalEnergies) and Shell are highly interested in maintaining and then boosting LNG exports (via the Egyptian system) but also are important players in the Egyptian domestic market. ExxonMobil and Chevron (both present in offshore Egypt and Cyprus, and, in Chevron’s case, offshore Israel) are focused on single large opportunities with a specific eye to accessing higher value LNG markets, whether through a new standalone LNG facility, floating LNG or through the Egyptian system via a tolling agreement with an existing, unutilized Egyptian LNG plant. There are other regional players, with important assets and capabilities in Israel. NewMed is in the larger gas fields offshore Israel and the Aphrodite field offshore Cyprus. Energean (see Karish field) are in more modest plays near the marine border with Lebanon. Of them all, Eni and Shell are best positioned to drive the development of Cyprus gas south into Egypt’s offshore gas system.
  • Currently, Chevron and its partner NewMed are negotiating with Egypt (and other stakeholders including Israel) regarding commercialization of the Leviathan Phase 2 gas reserves. They are also partnered with Shell negotiating for the Aphrodite field. Those developments are now independent of each other. Eni and its partner TotalEnergies continue exploration drilling in and around the Calypso and Cronos gas discoveries southwest of Cyprus with a commercial objective of finalizing an evacuation path southward into the offshore Egyptian gas grid. ExxonMobil and its partner Qatar Energy continue appraisal activities focused on commercialization of the Glaucus gas discovery and additional potential in close proximity. The timing of each of these individual investment decisions appear to be headed for resolution by the end of 2022, or certainly within 2023.
Alternative Scenarios:

Scenario 1: The Egyptian option ie., the convergence of all of these gas field developments on commercialization via the Egyptian natural gas system is not a foregone conclusion. Divergence, or piecemeal, separate commercial outcomes remains a high possibility. Leviathan Phase 2 could be developed via floating LNG (FLNG) although larger scale projects have struggled. Or Phase 2 resources could remain undeveloped for a longer period of time. Aphrodite gas appears to have a good shot at landfall in the Egyptian system but will have to accept an offtake agreement predicated on the lower priced domestic market. Of course, Shell, Chevron and NewMed (with the latter two being partners in Leviathan) might be more willing to accept a baseload contract for Aphrodite gas into Egypt if it enhanced the potential for Leviathan Phase 2 gas accessing global LNG prices. Eni’ and TotalEnergies’ continued exploration activity could lead to a larger discovery in excess of 10+ Tcf and prompt the Government of Cyprus to hold out for a standalone LNG development, and thus prohibit Calypso and Cronos gas from making their way south into the Egyptian system. The commercial outcome for ExxonMobil’s Glaucus gas might hang on the very same set of issues. A wild card here is the continuing or an even more aggressive Turkish policy vis-à-vis any Cyprus gas development in its overlapping claimed areas for either a Cyprus project or an Egyptian destination. Note that this same pressure acts in another alternate scenario, and is in favor of the most likely scenario, where all Cyprus gas flows are developed (southward) via the Egyptian energy infrastructure with perhaps 100-200 million cubic feet per day kept for the modest Cyprus market.

Scenario 2: An additional alternate scenario sees stranded gas on Egypt’s maritime perimeter where Egypt fails to reach commercial agreement with some or all of the potential incoming gas from Aphrodite, Leviathan, Calypso & Cronos et al, and Glaucus. Coupled with a failure to construct significant renewable energy capacity for its domestic market, Egypt’s LNG exports continue to struggle, and collapse in the medium term, as domestic energy requirements demand all available gas production.

Conclusion - most likely scenario:

The Eastern Mediterranean gas play (including the Egyptian, Israeli, Lebanese and Cyprus offshore) could see enormous investment (over and above what has already taken place) but domestic energy security, policy consensus and stability, border agreements, not to mention Turkey’s role, all need resolution.

The Egyptian government is a primary actor in most of the next series of commercial decisions pertaining to the above. It and its corporate partners, own or operate the existing, offshore infrastructure allowing them to modulate the commercial terms, enhance project economics, accelerate timing to first gas and by control of what is in effect a national gas clearing house could guarantee agreed access to the LNG facilities for each of the different investing partnerships. Successful commercial agreements via the Egyptian system for all (or the majority of) the gas resource located on Egypt’s maritime perimeter, at more or less the same time, ensures that Egypt is more likely to secure the needed baseload gas for its domestic gas market and preserve a significant volume of gas for LNG export into a much higher value global LNG market. The same holds true for the investing consortia. The greater volume of their gas which is commercialized via the Egyptian system, the more likely that they also would obtain higher LNG prices for their gas volumes, with less risk that all of their gas would be diverted to the domestic market.

Moreover, this scenario is likely to reduce the risk of an aggressive Turkish policy given its claims and prerogatives regarding Cyprus and the Turkish Republic of Northern Cyprus. Turkey has been willing to threaten the Government of Cyprus (and Greece for that matter) and the drilling activities of offshore operators. It may be less likely to directly confront the Government of Egypt over planned or actual investments in southern Cyprus waters adjacent to its marine border.

A collective decision to enable this scenario and follow through on an ambitious renewables investment program would yield a much more secure national energy security outlook for Egypt in the longer term and generate additional revenues in the medium term. There is no better timing than now.

Contributor Background:  

Gerald Kepes has more than 35 years of experience as a consultant and petroleum geologist in the global energy industry. Most recently, he was vice president in energy & natural resources for IHS Markit, and previously, a PFC energy partner, where he established PFC’s global upstream consulting practice. He also held various positions with a US oil company in North Africa and the Middle East.

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