The Fuse

Egypt-Israel Gas Deal Points to Eastern Med Energy Hub

by Nick Cunningham | February 21, 2018

An Egyptian company has committed to purchasing natural gas from two Israeli gas fields for a decade in a $15 billion deal that could bolster the Eastern Mediterranean as a growing natural gas hub and strengthen the relationship between the two countries.

The deal has the potential to turn Israel into a sizable gas exporter while also providing Egypt with a significant source of gas supply and strengthening the country’s effort to become a gas hub for the region.

Political leaders from both countries are hailing the agreement as the most significant export deal in the nearly 40-year relationship since inking a peace treaty in 1979. The deal is not yet final and could still encounter some obstacles, but it has the potential to turn Israel into a sizable gas exporter while also providing Egypt with a significant source of gas supply and strengthening the country’s effort to become a gas hub for the region.

Eastern Med gas slow, but picking up

Israel has been trying to use its enormous gas reserves to its advantage for some time. The discoveries of the Tamar and Leviathan gas fields in the Eastern Mediterranean date back to 2009 and 2010, respectively. However, regulatory uncertainty held up investment and delayed development for years. Tamar came online in 2013, but Leviathan faced a number of delays and was not given a final investment decision by Noble Energy until February 2017. Noble estimates that the project will come online at the end of 2019.

Israel has been trying to use its enormous gas reserves to its advantage for some time.

Meanwhile, Egypt’s gas fortunes have turned around. The country had suffered from significant energy supply problems and became a net importer of gas in 2014 as domestic production flagged and demand rose. Supply woes and blackouts forced Egypt to turn to costly LNG imports. But in 2015, Italian oil giant Eni discovered the massive Zohr gas field off the Egyptian coast, and with an estimated 30 trillion cubic feet of natural gas (or about 5.5 billion barrels of oil equivalent), it was the largest discovery ever recorded in the Eastern Mediterranean. Eni fast-tracked development of the field and brought it online in late 2017, record time for a field of its size and complexity.

Egypt’s momentum has carried into 2018. Just this month, BP announced the startup of its Atoll Phase One project, an offshore gas project in Egypt that will add 350 million cubic feet of gas per day to the Egyptian grid. Policy reforms from several years ago have succeeded in attracting new investment, and the commencement of new gas projects should help Egypt erase its energy deficit.

The February 19 agreement between Egypt and Israel could mark the next phase of development in the Eastern Mediterranean. Under the terms of the deal, Texas-based Noble Energy and Israel’s Delek Group, the two companies producing gas in Israeli waters, will ship about 64 billion cubic meters of natural gas over the next decade to Egypt’s Dolphinus Holdings. Half of the gas will come from the massive Leviathan field, and the other half from the Tamar field nearby. Shares of Noble Energy rose by more than 10 percent after the deal was announced.

Some of the gas could be rerouted for export from Egypt in the form of liquefied natural gas (LNG). Royal Dutch Shell operates an LNG export terminal in Egypt, and there has been speculation that gas from various fields in the Eastern Mediterranean could be sold on the global market. Egypt’s energy deficit has made that promise elusive, and liquefaction plants on the Egyptian coast sit idle. But new gas supplies from Israel, combined with the startup of the Zohr field, will likely improve the outlook for Egypt becoming an LNG exporter.

“Egypt is becoming a real gas hub,” Yossi Abu, CEO of Delek subsidiary Delek Drilling LP, told Reuters. “This deal is the first deal of potentially more to come.”

The region should continue to thrive in gas exploration and production. In a 2010 assessment, the U.S. Geological Survey found that the Eastern Mediterranean held a mean estimate of 122 trillion cubic feet of undiscovered natural gas, which was “comparable to some of the other large provinces around the world and its gas resources are bigger than anything we have assessed in the United States,” the USGS said at the time.

Uncertainty remains

One outstanding question is the security of the gas link between Israel and Egypt.

One outstanding question is the security of the gas link between Israel and Egypt. Gas flows used to head in the other direction, but they were halted in 2012 after militants in the Sinai Peninsula attacked a pipeline. Since then, Egypt has become a net gas importer amid falling production and rising demand, while gas exports to Israel have ceased. Against that backdrop, security remains a sticking point, despite the recent deal. One option would be to send the gas through Jordan, which is already connected by pipeline to Egypt. That possibility would have the side benefit of economically linking the three countries together. Alternatively, the existing pipeline connecting the two countries could be reversed, allowing gas to flow from Israel to Egypt. However, uncertainty over the security of shipments through the Sinai Peninsula would remain a worry.

Another open question surrounds back payments that Egyptian companies owe Israeli firms for the disrupted gas flows related to instability in the Sinai. An arbitration ruling stated that Egypt owes Israel $2 billion in compensation for the disrupted gas exports, but Egypt has disputed the ruling. Egypt’s petroleum minister Tarek El Molla said that the issue would need to be resolved before Israeli gas can begin flowing to Egypt.

Ultimately, the potential for Eastern Mediterranean gas is enormous. At a minimum, the new supplies will help meet immediate needs, particularly in Egypt. A broader transformation that turns the region into a major energy hub and gas exporter is possible, although whether it can be fully realized remains to be seen.

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