Insight into Egypt’s aspiration to become reginnal oil and gas hub.

By Amira S. Badawey

With recent offshore gas discoveries in the Mediterranean Sea, such as Egyptian Zohr and Cypriot Aphrodite, in addition to Israeli Tamar and Leviathan, the talk of creating a Regional Gas Hub has become a popular topic in international gas markets.

Discussions are motivated with hopes of trading in a win-win situation for both gas producing nations in terms of export revenues, and importing countries in terms of cheaper fuel alternative.

The Eastern Mediterranean (EastMed) area is in the position to become the next location for a global natural gas trading hub. However, the EastMed region is in need of market mechanisms to trade gas in an efficient manner, as well as pricing schemas to determine spot rates. Currently, gas exchange is based on long-term bilateral agreements. Furthermore, the lack of established market conditions has deterred sector development and increased the dominance of certain players within the market. Therefore, creating a regional natural gas trading hub can prove critical to sustaining benefits from the region’s natural resources for all involved countries.

There are a number of exporting options for Mediterranean gas including pipelines to Turkey or Greece and liquefied natural gas (LNG) plants in Cyprus, Israel, and Egypt. The most viable option would be to leverage Egypt’s existing infrastructure, with the additional supplementary facilities, in order to create a regional trading hub via a gas corridor to southeastern Europe.

Egypt’s government understands this potential. It is, therefore, eager to promote the country as a Regional Oil and Gas Hub under the recently announced Modernization Program agenda. The Ministry of Petroleum and Mineral Resources aims to overhaul the national oil and gas sector in order to enhance the country’s capacities to stand out in the regional market as the right and one-and-only option for such a hub. As Egypt’s Oil Minister, Eng. Tarek El Molla, eloquently stated to media already in August 2016 in relation to the development of the East Mediterranean gas as a whole: “I think our strategy optimally is to position ourselves as an energy hub in the region.” In October 2016, the Minister further noted during the US Business Mission Forum in Cairo, that the idea of Egypt as an Energy Hub would leverage the country’s central position “in the middle of resource-rich countries and major energy consumers” that would further boost international maritime trade.

With focused efforts, the ministry is strongly convinced that the strategy can materialize this vision in the relatively short term. Hence, for Egypt to soon emerge as Oil and Gas Hub in the region, the Oil Ministry is pursuing the 6th Initiative of its promising Modernization Program. It entails “developing a feasibility assessment to optimize and leverage existing oil and gas transport and storage infrastructure to build a regional hub,” as ministry’s presentation read.

It is no wonder that the ministry entrusted the role to lead the Hub Initiative Team to such an experienced professional as Eng. Amira El-Mazni, Vice Chairman for Gas Regulatory Affairs at Egyptian Natural Gas Holding Company (EGAS), whose years’ long experience and expertise is a guarantee of success.

Gas Demand Trends

As the appetite for natural gas grows, so does the need for trading facilities to ensure consistent supplies. US Energy Information Administration’s International Energy Outlook Report for 2016 stated that global consumption of natural gas is expected to reach 203tcf by 2040. Natural gas is undoubtedly the highest and fastest growing source of fuel in the world’s energy consumption.

In the MENA region, demand for natural gas has also been increasing, as developing economies turned to the resource to fuel electricity generation and power the industrial sector. This is evident in global indicators of natural gas consumption, with a specific focus on the Middle East and North Africa (MENA) regions. As a result, Bloomberg informed, the region had plans to increase annual natural gas capacity by 58.2bcm in 2021, with the addition of terminals and offshore units. In the cases of Kuwait and the United Arab Emirates (UAE), demand for natural gas has been growing in order to feed their power generation, water desalination, and petrochemical industries. But both countries had to cancel or postpone some of their projects due to the lack of gas supplies, as noted Petre Prisecaru in his paper titled Natural Gas Boom in the Middle East.

In continuous attempts to counterbalance exponentially growing consumption of gas and lacking supplies, countries in MENA, led by Egypt, Kuwait, and Morocco have opted for liquefied natural gas (LNG). They aimed at boosting their import capacities at the time of low prices.

Growing demand for natural gas is not, however, limited to MENA, but extends to Europe. Accordingly, the continent has been considering the importance of Southeast Europe and EastMed regions as part of the European Union’s (EU) energy strategy. Bloomberg declared that Enel SpA, Italy’s largest utility, perceives North Africa to be a major supplier of natural gas. Eurogas data showed that Algeria, Libya, and Egypt provided 10.4% of the EU’s total gas supply in 2012. However, these gas supplies are at risk of interruptions due to militant attacks in Libya and terrorist attacks on Algeria’s In Amenas gas project.

Egypt, on the other hand, guarantees safe conduct and highly promising and long lasting reserves, given the 32tcf natural gas reservoir in Zohr field. Therefore, positioning Egypt as a Regional Oil & Gas Hub could alleviate the pain felt in Europe and in the region as a whole by providing a steady flow of both supply and demand based on open market dynamics.

Egypt’s Infrastructural Capacities

Indeed ”Egypt has a very important role in shaping the landscape in the North African region, the Eastern Mediterranean region, by virtue of its location and infrastructure,” said CheironPetroleum Corporation’s CEO, Dr. Hany Elsharkawi in The Energy Exchange’s report titled The Future for Egypt’s Oil and Gas Industry.

On top of that, the country has been blessed with the Zohr gas discovery. Its impact extends beyond the country’s geographical boundaries and Egypt’s Oil Ministry is determined to build upon this potential in an effective and efficient manner, especially in terms of facilities in place.

Currently, to support the field, Egypt is developing multiple infrastructure projects in Port Said. In addition, the country plans to rely on the existing LNG export facilities in Idku and Damietta for liquefaction, which have been sitting idle. The development of Zohr will primarily serve the Egyptian domestic gas market, making up for a rapid decline in gas production, which has left the country relying on costly imports as it increasingly struggles to meet domestic demand.

As a result, Egypt began importing LNG in 2015 via two floating storage and regasification units (FSRU) docked at the country’s eastern shore, which the government purposefully intends to take advantage of. Furthermore, the Arab pipeline that goes from Egypt into Jordan, Lebanon, and Syria represents yet another strong argument for Regional Gas Hub strategists.

As Minister El Molla stated in his speech at the October Forum, the Hub strategy relies heavily on the infrastructures in place such as that of Suez Canal, SUMED, LNG facilities, and pipelines. Osama El-Saadawy, Marketing Manager at Oil & Gas Skills, stated in an exclusive interview to Egypt Oil&Gas that SUMED can be used as a model and Egypt plans “maximizing this economic model” in its entirety. Similarly, the country aims to position the Suez and Alexandria coastal cities as World Class Refining centers.

El-Saadawy convincingly affirmed: “We are in a very hot location that can permit us to serve our neighbors with a variety of activities and products.” Hence, the tactic to build upon the existing massive network of facilities that Egypt possesses is the right way to go.

Interconnecting EastMed Gas Reservoirs

Undoubtedly, Egypt would be able to further leverage these facilities as part of the gas trading hub strategy, together with existing capabilities, in the entire EastMed, especially given the proximity of Zohr to both Aphrodite and Leviathan fields as well as to the Cypriot offshore gas reservoirs.

The government can benefit from these facilities for Israeli and Cypriot gas exports, even more so as Zohr’s production for the first two years will be dedicated to domestic consumption. And even then Zohr’s production will still provide superfluous exporting capacity that can be used to advance the trading hub.

Osama El-Saadawy, Marketing Manager at Oil & Gas Skills, said that the government is considering Egypt’s central location and studying the possibility of establishing additional storage units along the Suez Canal, Damietta, and Delta to service European and Mediterranean countries. “We [Egypt] have the capacity to receive gas and supply LNG.”

He further emphasized value-added activities Egypt is equipped to offer to the entire region and thus establish itself as a steadfast partner for EU’s energy projections.

Racing in the Regional Gas Corridors

Egypt is, however, not the only export route available to EastMed countries. The regional competition is severe.

Cyprus and Israel are also considering the construction of a pipeline through Turkey, which would act as a transit hub to reach European markets. Although this appears to be the easiest and cheapest option, this solution has stagnated for a number of years due to trilateral political friction. However, the boom in recent gas discoveries has renewed interest in this plan. Accordingly, there has been a round of talks between the Greek-Cypriot and Turkish-Cypriot leaders, as any pipeline from Israeli fields must pass through Cyprus’ EEZ.

Moreover, the Turkish parliament has recently approved an agreement on the construction of TurkStream gas pipeline with Russia. This move signifies the tendency of the Turkish government to settle deals with conflicting nations, signaling their willingness to engage in trade cooperation with Israel.

Accordingly, ELektor Magazine sees Turkey as the strongest player to become the gas hub in the region, citing “the volume of its national gas market and its projected growth, as well as the level of infrastructure development and six entry points for pipeline gas and LNG.” With the addition of possible pipelines from Kurdistan, TANAP, and the EastMed, Turkey will boost its position to eight entry points, thus increasing and diversifying supply. The Trans Adriatic Pipeline (TAP) would give Turkey at least one inter-connector and one exit point to Greece, thus connecting it to the southern European markets.

However, the publication notes that Turkey’s domestic gas production is “very small,” accordingly, it depends on LNG imports spot markets in Algeria, Qatar, and Nigeria, while Russia, Azerbaijan, and Iran are its key pipeline gas suppliers. This in turn might inflate the cost of gas from the Turkish hub and accordingly impact the price.

In strong contrast, Egypt will be able to source some gas to its hub from new gas discoveries, such as Zohr, thus economizing costs. Furthermore, unlike Turkey, which still lacks some inter-connectors, adequate storage, market liberalization and gas pricing transparency, and its regulatory systems need to be aligned with that of the EU, Egypt has presented a better balance sheet in terms of its capacities and facilities.

Claims for Regional Gas Hub come in the context of overhaul gas market liberalization measures that the Egyptian government has already decisively undertaken. This is evident in the progressive steps with the ratification of the New Gas Law and the establishment of a Gas Regulator, in addition to the devaluation of the Egyptian pound, which will boost the confidence of investors and traders in the availability of hard currency. Platt’s Senior Editor, William Powell agreed, saying: “That is a very important signal for foreign investors, as they want to see the role of government limited to facilitating negotiations with other companies and as a regulator, and maybe doing some major infrastructure work.”

Given its potentially prime position in EastMed thanks to the country’s infrastructure and liberalized framework, Egypt, is also showing much needed willingness to work with its regional partners for the benefit of all involved countries.

Egypt’s Leverage in Regional Cooperation and Beyond

It is paramount for regional countries to cooperate with neighboring oil and gas players in order to maximize their benefit from the existing resources.

Indeed, for Cyprus and Israel to build their own exporting infrastructure will be costly and time consuming. If they do not have access to adequate facilities for gas production, it will be difficult for them to yield returns on investments in the fields, resulting in monumental losses. As GDF Suez Egypt’s President and Country Manager, Maqsood Sher, explained to The Energy Exchange: “All of these new emerging countries, they have discovered the gas, but they are not in the same league as Egypt is today in terms of its human resources, technical expertise and the infrastructure.”

Regional cooperation shows further complexities of the Oil & Gas Hub strategy. Therefore, Cairo’s openness to collaboration puts Egypt’s aspirations for regional hub role in positive light.

As Ministry’s Modernization Program Team Leader confirmed, Egypt is considering cooperating to a certain level with other players, which “might need a high level of political engagement,” as the government has correctly recognized. As a first step, a closer inter-ministerial collaboration may necessarily be taken into account.

On the regional front, Egypt has already taken additional steps to strength ties with its partnering neighbor, Cyprus. The two countries have launched high level communication and as a result signed an agreement for the supply of gas via an undersea pipeline. The deal outlines the political framework for additional commercial agreements that will determine the details of how, where, and when the gas will reach Egypt and how, where, and when it will be shipped for exports.

This Egyptian-Cypriot cooperation will likely set a precedent for similar agreements with other countries via a network of gas pipelines in the region that may possibly involve Greece on the European side, and Jordan in the onshore MENA region.

It is therefore important to continue developing, cascading, and communicating this strategy to other actors; Turkey, Libya, Saudi Arabia etc.

What is more, noted El-Saadawy, Egypt is connected to Africa where “is high level of gas demand and building transportation oil and gas pipeline to Africa might also play a role.” This opens a new gate for Egypt to boost its economic stability and capitalize on its existing facilities.

All in all, Egypt as a regional gas nexus is to become beneficial for all concerned parties. Egypt’s neighboring gas producing countries such as Cyprus will have a readily available and mature platform to shuttle their gas to Egypt for exports. For Egypt, on the other hand, the country will maintain its role in the region, while adding national revenues from the oil and gas transit and trading schema.

“Egypt has the advantage of being already a mature oil player, having a large number of human resources, who are very competent to do the work. Egypt is very well placed to take this [Regional Hub] role,” Maqsood Sher explained to The Energy Exchange.

El-Saadawy sees this strategy as a desired reality, likely to happen in the next five years, as Egypt is working on “Oil and Gas Hub Strategy report that will be presented during EGYPS 2017.”

“This will bring us a value proposition from utilizing the infrastructure, utilizing the regional and geographic location, offering an opportunity for the economic profile to receiving and giving final products and do value proposition to transportation or refining fees.”

With the available exporting capacity ready for use and an abundance of knowhow, Egypt holds the key to the region’s gas future, beyond any doubt. It remains to be seen how successfully the Oil Ministry will play this card in the regional game.

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