By Amanda Figueras

Sometimes in life, as in chess, a single movement may determine the outcome of an entire game.

In this sense, Eni’s discovery of massive gas deposits in Egypt could be the checkmate that Israeli gas exports have long anticipated –and dreaded–. With a Queen who can now move more freely than ever on the chessboard, the question is now focused on how Israel will react to the threat.

While Egypt once used to export gas to Israel and elsewhere, in recent years booming consumption and depletion of its own natural gas reserves have led to it become a net importing nation.

Five years ago, however, Leviathan –until now the region’s largest field, with 22 tcf of proven reserves– was discovered in Israel, and it was touted as a potential game-changer in the eastern Mediterranean.

Together with Israeli’s other large gas field, Tamar—holding 10 tcf—, the country could have positioned itself better but ultimately however, developers have struggled for years to put the massive fields to use.

Egypt exports of Liquefied Natural Gas - 2013

Problem Shifts from Supply to Demand

While previously just a red tape problem, the issue has now shifted to being one of supply and demand. Whereas previously regulations stymied the further development of the industry in Israel, the recent discovery of the Zohr prospect gas field off the coast of Egypt means that the country may have lost one of its main consumers.

Indeed, Eni affirms that the Zohr deposits are expected to satisfy Egypt’s gas demand for decades.

The US-based Noble Energy and its local partner—Delek Group—have been producing gas from the Tamar field, located off the Israeli coast, since 2013. Consumption has generally been for the domestic market. Leviathan, meanwhile, has not yet been developed.

Critics point out that the proposed deal between Noble-Delek and the Israeli government would overly favor the companies involved. Progress on the deal was thrown into serious doubt last year after the anti-trust regulator paused development, branding the operation a monopoly.

Prime Minister Benjamin Netanyahu, however, has maintained that the deal is necessary to pump billions of shekels into the economy.

Israel’s Regulatory Struggle

Last June Israel’s security cabinet voted in favor of a plan to let the US-Israeli energy group keep control of most of the country’s natural gas deposits, as long as they sell off other assets in the area.

This deal is up for a parliamentary vote, but it has been delayed as a result of antitrust commissioner David Gilo’s resignation last May, which came into effect of the beginning of September. The monopoly czar left his post after calling for the local natural gas market to be opened to increased competition. Prime Minister Benjamin Netanyahu, meanwhile, has announced that said vote will only be temporarily delayed until a new antitrust commissioner can be appointed.

The latest deal gives Delek subsidiaries Avner Oil and Delek Drilling six years to sell their 15.625% stakes in another large field, Tamar, while Noble will have to lower its stake in that project to 25% from 36%, industry sources said.

Delek and Noble will also be forced to sell their stakes in two smaller fields, Tanin and Karish,—which have a combined 3 tcf—in up to 18 months, according to Reuters.

ENI’s discovery, however, threatens to undermine potential demand from Egypt and the region once Israel’s field comes online—sometime after 2017—as an Israeli expert working in the sector recently told Egypt Oil & Gas.

“Israel passed an important benchmark when the anti-monopoly issues were resolved. Eni’s discovery is a game changer which should teach Israel a lesson, as too much politics and infighting is very counterproductive for its energy development efforts,” explained Ariel Cohen, Senior Fellow at the Atlantic Council’s Global Energy Center.

Plans Before Zohr

Noble Energy and the Delek Group have long been negotiating long-term contracts to sell gas to customers in Egypt, but these deals have also been held up by regulatory uncertainty in Israel, Reuters reported.

Tamar’s stakeholders signed a contract earlier this year with a private Egyptian company to sell as much as 5 bcm of gas to Egyptian companies over the next three years. This gas will flow through an old pipeline that once transported gas in the opposite direction, from Egypt to Israel.

In March, The Wall Street Journal reported that the Egyptian government might import natural gas from Israel if the price is low enough, and if one of the drilling companies dropped a legal suit against the Egyptian government.

Reuters likewise explained that the consortium operating Israel’s Tamar gas field had reached an agreement with Egypt, subject to regulatory approvals in both countries, for the sale of at least 5 bcm of gas over three years via EMG’s pipeline to Dolphinus Holdings—a firm representing non-governmental, industrial, and commercial consumers in Egypt. The cost of converting the pipeline to allow for flow in the reverse direction was estimated to cost between $10 and $20m.

Last September the Leviathan partners signed an agreement with the Jordanian Electric Power Company (JEPCO) to export $15b worth of natural gas over 15 years, according to Al Bawaba.

From Exporting to Importing

Over the course of relatively few years, Israeli natural gas has become the primary, preferred fuel for industrial electrical generation. According to the Ministry of National Infrastructures, Energy and Water, vast gas reserves found off the coast of Israel are helping to encourage energy initiatives based on natural gas.

Yam Thetis supplied approximately 60% of consumption, with the remainder supplied by Egyptian gas company East Mediterranean Gas Company (EMG). In 2010, 40% of electricity in Israel was generated from natural gas and by 2015, the rate of natural gas consumption was expected to rise to 50%.

Supply of natural gas from Egypt started in 2008, following an agreement for the supply of up to 7 bcm of natural gas per year over a 20-year period. The natural gas flowed through a submarine pipeline from El Arish to a reception facility adjacent Ashkelon. This pipeline connects the Arab Gas Pipeline with Israel.

However, regular attacks on the pipeline in Egypt’s Sinai Peninsula, which began shortly after the 2011 revolution, halted operations for extended periods of time. In 2012, due to persistent natural gas shortages in Egypt and the political crisis, the gas supply to Israel was suspended indefinitely while the supply to Jordan was resumed, but at a rate substantially below the contracted amount, Al Ahram reported.

Meanwhile, in an interview with Daily News Egypt, the former Minister of Petroleum and Mineral Resources, Sherif Ismail, announced that economic studies to import gas from the Aphrodite gas field in Cyprus were underway. “We will likely beginning importing after 2017,” Ismail stated.

Although it has exported gas to Israel, Jordan and Syria since 2003, Egypt has increasingly dealt with growing local energy demands. That demand led the country to import Israeli gas early this year, but the measure has proved to be unpopular on account of the longstanding Arab-Israeli conflict, as well as the scandalous fact that Cairo is paying for the gas at global prices far above what it charged Israeli importers for years, Al Arabi reported.

Egypt has signed three letters of intent to import Israeli gas, two of them from the Union Fenosa and British Gas LNG terminals, which would then export the gas to customers in Europe and Asia. The third is with a company called Dolphinus Holdings, which intends to provide gas to industrial companies in Egypt. These letters of intent with Egypt were meant to allow for the development of the Leviathan field and the expansion of the Tamar field.

Eni’s Finding: Checkmate?

Until now, this was the status quo. According to Eni, the Zohr field covers 100 square kilometers and contains at least 30 tcf of natural gas. The Leviathan reserves, meanwhile, are estimated at only 22 tcf.

“The discovery may change the energy picture in the Middle East,” Sir Michael Leigh, Senior Advisor to the German Marshall Fund of the US told Globes. “It will perhaps be possible to implement the export deal with Dolphinus, but the LNG deals will be more difficult.”

A study by the Egyptian Center for Economic Studies (ECES) forecasts that, due to the recent gas discovery, Egypt will be able to double its natural gas production by 2018. Egypt is expected to add an average 2.8 bcf/d of natural gas to its production levels. Such a boom will allow Egypt “to significantly reduce the expected daily deficit of 3 bcf of natural gas in 2018.” The report also states that the discovery will also help address the current energy bill deficit of EGP 1.7b and ensure growth rates of 6% by the 2018-19 fiscal year.

In addition, the report explained that Egypt has the option to export up to 29% of the extracted gas while reserving the rest for domestic demand, allowing Egypt once again be “a net gas exporter,” and “strengthen the Egyptian pound.”

“I think the Zohr gas find greatly reduces Israel’s ability to export gas to Egypt. It may possibly still send gas to Egypt to be liquefied and re-exported from the existing LNG terminals,” the Dubai-based analyst Robin Mills, Head of Consulting Manner Energy Group, said by email to Egypt Oil and Gas.

“Jerusalem needs to wake up and smell the coffee—the sand in the clock has run out. The time to make decisions and structure deals is way overdue,” Cohen added.

Dry natural gas production and consumption in Egypt

The Time Advantage

Time is definitely a key factor if Israel wishes to keep its foot in the door of the Pharaohs’ land.

As the analyst explains, “Israel may have a short-term opportunity to export gas to Egypt until the Zohr field comes online, at which point I will be surprised if Israel maintains even a small market share in Egypt.”

Ahram Online quoted Sherif Ismail saying that the discovery of the Zohr natural gas field off Egypt will not undermine private-sector negotiations about buying gas from Israel.

Indeed, as the Brookings Doha Center sustains, the key issue is how fast can this field became online and at what cost.

Miki Korner, a private energy consultant and former chief economist for the Natural Gas Authority, told The Jerusalem Post that the Zohr reservoir, located 200 kilometers off the Egyptian coast, contains clay rather than sand. Due to these conditions, according to a well-informed source in LNG, development will take at least two years, while Korner estimates the time to trend more towards six.

“We are still ahead of them in time, because of all the checks that will take a year or two there. All of this has already been done in Israel. But we have to start immediately,” he said.

In this sense, Israel has not entirely lost its chance to export gas to Egypt, especially in terms of the Union Fenosa LNG facility in Damietta. This facility could be used to export the gas all over the world, and the Tamar partners have already signed a letter of intent to move forward.

“That would help the Union Fenosa plant at Damietta, in which ENI has a stake, but after paying for the Israeli gas there would not be a large margin left over from LNG sales given the current, depressed prices,” Mills explained.

Magdy Nasrallah, founder of the Department of Petroleum and Energy Engineering at the American University in Cairo (AUC), said: “The opportunities are there for cooperation between Egypt and its neighboring countries to best utilize the gas resources recently discovered in the Eastern Mediterranean. Gas produced from the Tamar, Leviathan, and Aphrodite fields can be detoured to Egypt, through its available infrastructure, to be processed in Edko and Damietta.”

“I believe that there is a memo of understanding signed between Egypt and Noble Energy—part owner of the gas fields—in neighboring countries who do not have the capabilities to process their gas, in addition, the gas produced is relatively expensive compared to international prices and liquefying it through Egypt will be the most profitable for both parties,” added Nasrallah.

With regards to the other pieces on the chessboard, the expert said, “Cyprus might also benefit if it could be involved in a joint development with Zohr. The Mediterranean nation, along with other companies exploring the area around Zohr are also possibly benefitting, amongst them BP, Eni (again), PetroCeltic, Edison and—in Cyprus—Total.” The Cyprus energy minister has stated publically that he believes parts of the Zohr gas may extend into his own country’s exclusive economic zone. If true, the discovery and development will certainly benefit Cyprus.

“The European markets may benefit as well as they can use Eastern Mediterranean gas in order to diversify imports away from the Russian supply,” Cohen added.

The world awaits the next move in this daring game of Energy Chess.

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