Egypt’s gas ambitions increasingly hinge on Israeli inflows
Al-Monitor Pro Members
Journalist covering Egypt and Sudan
May 5, 2023
In February 2023, Egypt’s gas output fell to its lowest level in nearly three years, the latest data from the Joint Organizations Data Initiative (JODI) show. The decline was an indication of the country’s struggle to sustain high production levels at a time when it is trying to position itself as a regional hub for natural gas trade. The downward trajectory, coupled with high domestic consumption, is making Egypt’s gas dreams increasingly dependent on imported Israeli gas used for re-export. Together, they also raise doubts about its ability to sustain exports in the mid- and long-term.
- Egypt attained self-sufficiency and began exporting natural gas in 2018, four years after the discovery of Zohr, the largest gas field in the Mediterranean. Since then, authorities have sought to position the country as a regional hub for gas trade.
- Issues with production started to become evident as of mid-2021. In 2022, Egypt produced 67 billion cubic meters (bcm) of natural gas, down 4.8% from 70.4 bcm the previous year, JODI data shows.
- The drop in production was mainly driven by the decline in output at the Zohr field, operated by the Italian giant Eni. In 2022, its output fell by 11% from 2021 production records, according to energy analysis firm MEES, and stood 6% below a cap placed in September 2021.
- During the first months of 2023, production problems have persisted. In February, the last month for which JODI has released figures, gas output stood at 4.8 bcm, which is 12.7% lower than in January and 5.9% lower than a year earlier.
- Despite these production issues, Egypt’s liquefied natural gas (LNG) exports rose 7% in 2022 to a 12-year high of 7.14 million tons, according to MEES. Over 80% of these volumes headed to Europe, according to Egypt’s Ministry of Petroleum, as the region looks to wean itself off Russian gas. Prior to the Ukraine war, over 70% of Egypt’s LNG went to Asia.
- The growth in Egypt’s LNG exports was made possible thanks to a four-legged strategy: increased gas imports from Israel, rationalization of domestic gas consumption, bringing online the country’s two LNG plants, Damietta and Idku, and raising the amount of fuel oil (mazut) used in power plants in place of natural gas.
- The export of gas represents a key source of hard currency for Egypt, especially at a time when it is experiencing a financial crunch. In Q1 of FY2022/2023, which runs from July to June, natural gas was the top commodity exported by Egypt and brought in $2 billion, according to the latest data from the Central Bank of Egypt.
- Egypt began importing gas from Israel in 2020, initially through the East Mediterranean Gas pipeline connecting El-Arish and Ashkelon, and since last year also through the Arab Gas Pipeline, connecting the two countries via Jordan.
- In 2022, Egypt’s imports of Israeli gas rose 48.5% year-on-year to a record 6.27 bcm, JODI data shows. January started the year with a new all-time monthly record supply of 843 million cubic feet per day (cfd).
- In June 2022, Egypt and Israel signed a memorandum of understanding in Cairo along with the European Union that calls on the sides to explore the possibility of working together to send more Israeli gas to the EU through Egyptian liquefaction plants. But the agreement is not binding and does not set volumes.
- The increase in Egypt’s LNG exports was also made possible by the Damietta liquefaction plant, one of the country’s two plants, being operational throughout 2022 after restarting in February 2021 following an eight-year shutdown.
- Aiming to free up more gas for exports, the Egyptian government announced in August 2022 a plan to reduce consumption by up to 15% in the country’s electricity sector, which in 2018 soaked up around 62% of domestic consumption, according to analysis firm Fitch Solutions. No end date has been set for this plan.
- Domestic consumption represents Egypt’s main challenge if it is to keep exporting gas in the future, as it has grown at a rapid pace in recent years. In 2011, it stood at 47.8 bcm, according to oil giant BP, while ten years later it had risen to 61.9 bcm.
- The government’s decision to switch to fuel oil in power plants to save gas is in turn showing its limits as mazut is a much less efficient fuel and the profit margin is shrinking fast due to falling spot prices for LNG in the Mediterranean region.
- In the long run, Egypt’s plans to become a hub for gas trade are also compromised by underinvestment in mature fields that are depleting fast, aging infrastructure, sometimes unattractive contractual terms, low prices, and a large state footprint.
Scenario 1: Egypt’s gas ambitions take a blow as Israel shifts priorities, reduces flows
The medium- and long-term outlook for Israel’s gas sector is promising. Its production capacity is set to increase in two years by around 65% from end-2022 levels thanks to expansion plans for the Tamar and Leviathan fields and the ramp-up at its third field, Karish, which came on stream last October, according to MEES. Israel also has plans to further expand Leviathan later this decade, and announced a new bid round for exploration in late 2022.
Yet momentum in Israel could prove detrimental to Egypt. This is because Leviathan’s partners are increasingly leaning toward building a floating LNG (FLNG) plant as part of the field’s second phase of development, for which they already approved an initial $100 million for preparations in February. Although the unit would take several years to build, Israel would no longer be totally dependent on Egypt’s LNG plants to export to Europe. A final investment decision could come as early as the second half of 2023. If approved, it would force Egypt to accelerate exploration campaigns and try to diversify its gas suppliers.
Scenario 2: Egypt strikes new major gas fields to reverse output decline, sustain exports
Egypt has placed high hopes that the exploration campaign currently underway in the country’s waters will yield a major new gas discovery. The authorities’ optimism has been bolstered because the race includes major energy firms such as BP, Shell, ExxonMobil and Eni, all of which have in recent months secured exploration blocks offshore Egypt.
The prospect of hitting a large gas field has also been strengthened by recent announcements by Chevron in December and Eni in January of significant gas finds in Egypt’s Nargis offshore area, which have injected new momentum. Reserves from the well found by the US giant are estimated for now at 3.5 trillion cubic feet (tcf), according to MEES, which would represent a substantial push for Egypt. Yet these volumes are far lower than the 21.5 tcf of the Zohr field, leaving the country in need of more such discoveries if it is to not only curb its falling output but increase it to the point where it can sustain exports.
In the short term, Egypt’s LNG exports will continue to increase thanks to high demand from Europe and rising Israeli gas flows. But the peak could be reached as early as this year. In the mid to long term the outlook is much bleaker, as its sustained fall in production and high domestic consumption will increasingly limit the volumes of gas available for export. Israel will continue to supply gas to Egypt as part of its gas diplomacy, but whether it will increase or remain as high as today remains to be seen and now appears unlikely. This means that without a Zohr-sized field discovery, or a new agreement to import gas for later export with another country in the region with vast fields such as Cyprus, Egypt will not be able to maintain production, let alone become a regional hub for gas.
Marc Español has been reporting on Egypt since 2017, with a focus on the economy and the human rights situation in the country. He has been a contributor to Al-Monitor since 2018 and his work has appeared in other publications such as El País and the think tanks Fundación Alternativas and the European Institute of the Mediterranean (IEMed).
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