By Mahinaz El Baz

The countries and territories of the Eastern Mediterranean have been a controversial topic in international natural gas markets. A number of regional export options, especially to the European Union (EU), has been raised, including pipelines to Greece and liquefied natural gas (LNG) plants in Egypt.

Although Egypt and Greece are sharing the struggle of reforming their economies, both countries are having great potential of being regional hubs, and the relationship between the two countries is more likely to comprise integration rather than competition.  Egypt is aiming to export natural gas by 2020, while Greece is willing to establish a very strong natural gas infrastructure.

Natural Gas Market Dynamics: Greece

Greece’s natural gas market is managed by the Greek Public Gas Corporation (DEPA), the corporation’s 100% subsidiary National Natural Gas System Operator SA (DESFA), and two gas supply companies in which DEPA has a 51% share. It is further managed by three distribution companies, two of which DEPA has a 51% share, while the third is DEPA’s 100% subsidiary, according to Rokas Law Firm’s article entitled “Recent developments in natural gas sector.”

The Greek government is adopting a natural gas security policy that is aiming through DEPA to diversify supply sources, establish market-based demand measures, reduce the liquefied natural gas (LNG) delivery lead times during high demand periods, and sign new contracts for gas supply. Additionally, it looks at developing the natural gas transmission system by updating the existing LNG terminal and establishing new pipeline and an underground gas storage facility, according to OECD&IEA Energy Supply Security 2014.

Greece’s domestic production of natural gas is scarce. Although, its natural gas production fluctuated substantially in recent years, it tended to decrease through 1995 – 2014 period. The data from the 1990s is not available; however the production was around 0.95 billion cubic feet (bcf) in 2003 and ended at 0.18bcf in 2014, according to Knoema’s latest available data. In addition, International Energy Agency (IEA) estimated Greece’s natural gas production for 2015 at around 0.21bcf.

Greece imports more than 99% of its oil and gas, according to IEA. The country’s total natural gas imports reached 109.5bcf in 2016, according to BP statistical review of world energy 2017. “It’s not great news: Greece is, to a large extent, dependent on imports. […..] Questions might be raised on whether it will have problems financing those imports. Suppliers might, under these circumstances, ask for guarantees or pre-payments,” said Walter Boltz, Vice Chairman of the board of regulators at the EU’s Agency for Cooperation of Energy Regulators, according to Sara Stefanini and Kalina Oroschakoff’s article entitled “The next Greek crisis: gas shortages.”

DEPA has three long-term contracts for natural gas supply. The first contract is with Russia’s Gazprom to export up to 98.9bcf/y until 2015-2016, which was extended in 2014 to 2026. The second contract is with Algerian Sonatrach to import around 17.7 bcf/y until 2019. The third contract is with Turkish Botas to import up to 24.7bcf/y until 2021. Together they will supply a total volume of about 141.3 bcf/y, according to OECD&IEA Energy Supply Security 2014.

Russia has been the main source of natural gas since Greece began to import gas in 1996. However, the share of Russian gas in total gas imports has gradually declined from 85% in 2005 to 60% in 2012, due to the increase in imports from Algeria and Turkey, which accounted for around 16% and 15% of the total gas imports in 2012, respectively, according to OECD&IEA Energy Supply Security 2014.

Breaking the continuous gas import decline, Russia’s Gazprom provided nearly 70% of Greece’s gas in 2014, equivalent to 60bcf, according to BP statistics. Dropping again, Greece obtained 65% of its gas supplies in 2015 from Russia through the Trans-Balkan pipeline which passes through Ukraine and delivers gas first to Romania, Bulgaria, and then splits in two with one branch going to Greece and the other to Turkey.

“On top of difficulties stemming from liquidity issues, if Greece were to leave the euro and adopt a new national currency, that could impact its ability to import and use natural gas, among other commodities,” said Anastasios Giamouridis, a senior consultant at the energy consultancy Pöyry. Furthermore, it could be too expensive for end-consumers to pay for US dollar-priced imports in drachmas, according to Stefanini and Oroschakoff.

“This unfavorable framework could therefore result in a collapse of gas demand, as imported energy becomes too expensive to use by the Greek population, and/or in non-payment issues as end-customers find themselves unable to settle their bills towards Greek importers, which could in turn affect the latter’s ability to pay their foreign suppliers,” Giamouridis added.

Natural Gas Market Dynamics: Egypt

Unlike Greece, Egypt is the second largest producer of natural gas in Africa after Algeria, yet Egypt’s power generation infrastructure is dependent on natural gas. More than 75% of the electricity generated in Egypt comes from natural gas plants. Egypt currently produces about 3.9bcf/d of natural gas and imports another 1-1.1bcf/d with an estimated cost of $300 million per month in order to meet the growing needs of the electricity sector, according to Daily News Egypt.

“The main challenge for the O&G sector in Egypt is the macroeconomic environment. As most of the hydrocarbon production is destined to domestic consumption, mainly power and households, the capacity of the Egyptian government and consumers to pay is the key factor,” according to feedback from Dr. Pascal Devaux, Senior Economist MENA and Youssef Beshay, Senior Banker , BNP Paribas.

Egyptian consumption of natural gas has been increasing by approximately 7% per year over the past decade. However, since 2011, production and reserves have been on a consistent downtrend. This was driven by International Oil Companies (IOCs) reducing exploration capital expenditures (capex) following the Petroleum Ministry’s delay to settle its dues, which meant that natural depletion of resources was not being offset, according to The American Security Project (APS)’s report about energy in Egypt. As a result, Egypt had to reduce exporting natural gas in 2011 to secure the local consumption. Yet, the domestic production did not fulfill the local consumption and the country had to stop exporting then start importing gas in December 2012, turning into a net natural gas importer as Greece.

“In the short term, the EGPC arrears [to] IOCs [represent constrains] for further investments. But the current noticeable improvement in external accounts, […] thanks to EGP flotation, will allow the government to repay those debts. In the medium term, the consumer has to pay the right price for energy supply. If not, the gap will have to be met by the government and could imply new arrears. The reform of energy subsidies is on the right track, but the social impact of higher energy prices is something to be considered as well,” noted Devaux and Beshay.

Regarding Egypt’s natural gas reserves, Zohr field, which was discovered in 2015, holds the largest reserves in the Mediterranean, according to the economist. The field is expected to produce 500 million standard cubic feet per day (mscf/d) before the end of 2017, according to the Egyptian Prime Minister, Sherif Ismail, Al Ahram Newspaper reported. It is worth noting that Egypt has 60 trillion cubic feet (tcf) of natural gas reserves, according to a senior government official. Yet, demand for energy resources is on the rise. Accordingly, if gas reserves are properly utilized, they can satisfactorily supply country’s growing need for energy.

Egypt has plans to reach self- sufficiency by the end of 2018, which seems to be an impossible dream for Greece, which is exporting most of its natural gas consumption and does not have enough proven reserves to cover the domestic consumption.

Economic Hardships

Both Greece and Egypt faced economic hardships and had to follow economic reform programs, which affected their hydrocarbon sectors and changed their mid-term plans. Similar to Egypt, the International Monetary Fund (IMF)’s economic assistance to Greece is attached to implementing energy reforms. In Egypt, the main energy reform is gradually removing the energy subsidies, while in Greece it is completing the liberalization of the energy market, both in terms of regulation and ownership, according to the IMF.

In Greece, a number of recent developments and significant reforms in all sectors of the economy have put Greece on a new course and have kept energy at the forefront of the economic recovery. Despite the humble gas production, the Greek hydrocarbon sector is currently witnessing fundamental reforms. The ongoing reforms are tackling many issues through liberalizing the electricity and natural gas markets, increasing competitiveness, extending, and enhancing the domestic and cross-border electricity, natural gas and oil networks. It separates production and supply from transmission networks, consumer choice, increasing share of energy from Renewable Energy Sources, reducing share of fossil-fuel generated electricity, improving energy efficiency, saving energy, and protecting the environment, according to Greece’s Ministry of Environment and Energy.

On the other hand, investing in Egypt as a regional hub would create a positive potential and generate a significant source of revenue that could reduce the deficit of the budget and mitigate public debt and underpin governmental expenditure. A revived and reformed energy sector might be what Egypt needs to stabilize the economy and trigger medium term growth, stated Baconi.

Regional Role

Greece has the potential to become a regional gas hub, due to its location at the EU boarders of the Southern Gas Corridor and has access to LNG and gas supplies from Russia, one of the largest suppliers of natural gas to the EU. It has, therefore, all the characteristics needed for the development of a liquid hub, providing price competition, security of supply, and market integration in the Region, according to European Semester: Country Reports – Greece, 2014.

Amidst the economic uncertainty that Greece has been recently facing, having a real reform that includes establishing new projects is of great significance as it keeps energy in the forefront of economic investment in Greece and turning it into a regional hub. One of these Projects is the agreement signed in 2013 between Greece and an international consortium, the Transadriatic Gas Pipeline (TAP). Through this agreement, a new pipeline will be built, which will cross Greece and then move gas through Albania, and underwater through the Adriatic to Italy, and then to Europe. Construction of this $3.52 billion pipeline will be completed by the end of 2019, transporting 353.1 bcf from Azerbaijan to Italy, according to Institute of Energy for South-East Europe (IENE).

This is not a significant amount of gas given European gas needs, which reached almost 17,657.3bcf in 2014. Nevertheless, the TAP pipeline is supported by the EU as Europe’s best alternative gas supply route in its efforts to lessen its customary dependence on Russian gas. Still, TAP, even if it doubles its capacity to 706.3bcf, as latest plans suggest, will still provide insufficient quantities to enable it to play a key part in European gas supply diversification, according to IENE.

While Greece is having the privilege of being part of the EU, which supports its dreams of being a regional hub, simultaneous gas discoveries in offshore Egypt have opened a new opportunity for regional collaboration with the EU and the East Mediterranean Countries, given that discovered volumes seem to exceed domestic market capacities.

Egypt’s bid to become a regional energy hub is based on three main prerequisites for success. These pillars are strategic locations on key trade routes, proximity to resource-rich countries with relatively saturated domestic markets, and advanced LNG export infrastructure, according to BNP Paribas. “The availability of two LNG terminals is a key advantage given the cost of building a new one for the other Mediterranean producers. Other secondary advantages encompass a stable regulatory environment, attractive fiscal terms, and the demonstrated capacity to fast-track major projects,” stated Devaux and Beshay.

Yet, Egypt’s main challenges are internal. The country has increasing domestic gas consumption and slowing production, driven largely by the absence of government investment in further exploration activities or existing ones. The discovery of Zohr injected much needed gas into Egypt’s energy balance. Given Egypt’s domestic demand, the bulk of Zohr’s gas will probably be directed to internal markets, according to Bloomberg.

However, the size of the gas field suggests that, at maximum production, a surplus could be set aside for export, allowing Egypt to resume its role as a regional exporter by 2020, after the current LNG glut has passed, noted Tareq Baconi in his policy brief to the European Council on Foreign Relations (ECFR). There is optimism that, given the wealth of resources in the Eastern Mediterranean region, additional offshore reserves on Egypt’s western coastline might be discovered. This could increase Egypt’s export capacity all the more, noted Baconi.

Having more than a new Eastern Mediterranean energy hub would present benefits for all players involved, allowing Egypt and Greece to enhance their roles in the region and secure revenue from such a transit economic scheme in both countries. Furthermore, it would present an opportunity for the EU, where imports requirements will grow post 2020 due to declining domestic production and expiration of long-term contracts with Norway and Russia.

Experts argue that no supply can compete with the price of the Russian natural gas. However, Egyptian gas could be competitive with American LNG, and provide an option for greater diversification of the EU’s energy mix, lessening dependence on Russian supply. It is entirely possible that Egyptian LNG exports could be sent through under-utilized European LNG terminals in Greece and other countries, which will create a win-win game.