Eastern Mediterranean Gas Infrastructure: ANTI OR PRO EGYPT’S DREAMS?

Eastern Mediterranean Gas Infrastructure: ANTI OR PRO EGYPT’S DREAMS?

By Mahinaz El Baz

Egypt’s contribution to Eastern Mediterranean potential gas supplies is not limited to its own reserves and production. The country is expected to be an important transit route for regional gas supplies through the Arab Gas Pipeline (AGP) and Liquefied Natural Gas (LNG) terminals, reinforcing the strategic importance of Egypt for the stability of the Eastern Mediterranean energy market. Yet, there are many obstacles along the road to success in being a regional gas hub. One of these challenges is the Eastern Mediterranean integrated gas infrastructure agreements that do not include Egypt, such as the Undersea Gas Pipeline commonly known as East Med gas pipeline linking Italy, Israel, Greece, and Cyprus.

Potential Effects of Undersea Gas Pipeline

Three Mediterranean European Union (EU) countries and Israel agreed in April 2017 to move forward with a Mediterranean pipeline project to carry natural gas from Israel to Europe, setting a target date of 2025 for completion, according to Cyprus Mail. The natural gas pipeline project is expected to link gas fields offshore Israel to Cyprus, Greece, and Italy, which might help the EU to diversify supplies away from Russia. “This is going to be the longest and deepest subsea gas pipeline in the world. It is a very ambitious project,” the Jerusalem Post quoted Israeli Energy Minister, Yuval Steinitz, as saying.

In an expected move, Cyprus, Greece, and Israel announced in June 2017, they would speed up plans for the development of the pipeline channeling gas to Europe from newly discovered East Mediterranean reserves. “We agreed to expedite our joint actions concerning our agreement on the construction of a large project which will offer new prospects of economic cooperation in the Eastern Mediterranean,” Greek Prime Minister Alexis Tsipras said in a press conference in Thessaloniki, Cyprus Mail reported. Some experts argue that such agreements might negatively affect Egypt’s potential of being a transit route for regional gas supplies and, accordingly, prevent Egypt from being a regional natural gas hub and exporting gas to the EU.

“Egypt should not be worried about [the East Med gas pipeline]. I think this gas pipeline is a political maneuver,” commented Tharwat Hassane, Professor in Petroleum Engineering and Energy and Advisor in the Committee of Energy in the Egyptian Parliament. Hassane further explained that the pipeline will be very costly for Israel. It will cost around $6 billion and will extend up to 2200 kilometer (km) under the sea. Due to high cost, Israel’s exported gas will not be competitive in any means with Russia’s gas to the EU. “I am sure the EU will not depend only on Israeli or Cypriot gas. They should depend on other sources of gas, such as Egypt especially after the new gas discoveries like Zohr field, which has around the double of Israel’s reserves,” highlighted Hassane.

Affirming on Hassane’s opinion, many experts have suggested that it is “more pipedream than pipeline,” according to Tareq Baconi, Visiting Policy Fellow, European Council on Foreign Relations in his policy brief to the European Council on Foreign Relations (ECFR). Baconi explained that there are concerns among experts, stakeholders, and industry actors that the budgeted capital investment for the pipeline is understated and that the level of capital investment means the gas will not be commercially competitive, especially in relation to American LNG and Russian natural gas.

On a technical level, gas infrastructure experts have suggested that difficult terrain around Greece would either prohibit the construction of the pipeline or make its cost much higher than current estimates suggest.  In addition, there are suggestions that the proposed route for the pipeline fails to address the same political impasse that has plagued Israeli efforts to export directly to Turkey − namely, Turkish claims to sovereignty over Cypriot maritime space, stated Baconi.

In contrast, a study conducted by EDISON stated that the East Med gas pipeline is commercially viable and technically feasible, as it is offering good perspectives for energy cooperation in the East Mediterranean region. In addition, the study found that by 2030 the EU may need more than 100 billion cubic meter (bcm) of additional net imports, with more than 50 stemming from production and import change.

On a commercial level, industry actors have expressed confidence that gas delivered by pipeline to Europe in this manner would be competitive with American LNG. Furthermore, from a technical perspective, the route of the pipeline is presumed to be viable despite some challenging terrain around Crete and Greece, according to EDISON’s study.

The various opinions around the East Med make it uncertain if the pipeline will truly affect Egypt’s plans of becoming an energy hub. However, the existing risk should be taken in consideration by the Egyptian government to avoid it from ruining the country’s prospects.

Eastern Mediterranean Integrated Gas Infrastructure

Adopting a more cooperative regional approach by pooling infrastructure in Eastern Mediterranean area would create economies of scale effect that would offer Egypt commercial benefits, boost market confidence, and expand the appetite for foreign direct investment (FDI) in the region as a whole, according to Baconi.

Infrastructure developed on the territory of one of the Eastern Mediterranean countries could be used in part to meet the requirements of neighboring countries. In addition, collaborative planning between all parties could reduce environmental impact from the construction and maintenance of infrastructure. It is expected to reduce habitat fragmentation, raise biodiversity, restore functioning ecosystems, and sustain living resources. A coordinated approach might as well involve common rules and procedures for ensuring the safety of infrastructure, preventing marine pollution, and ensuring rapid intervention, noted Miroslav Kukobat, Head of Infrastructure and Energy Unit, Regional Cooperation Council (RCC).

With more developed and integrated infrastructure, more natural gas could be transported to the EU, where it can be marketed effectively. Transport costs constitute a significant part of the final cost of natural gas, unlike oil. Yet, linking natural gas pipelines and establishing new ones is considered as one of the main challenges in reaching a better balance between supply and demand in the Eastern Mediterranean, according to Shaul Zemach in his policy paper about Eastern Mediterranean Gas Infrastructure.

It is worth noting that there are precedents for gas infrastructure projects on a regional or sub-regional scale, although modest and fraught with political and economic difficulties.  Egypt was part of some of these agreements, such as the AGP and El- Arish-Ashkelon Pipeline. “The AGP is very important since Egypt used to export gas to Jordan and other countries through it. If activated again and extended, it could be used to transport gas to the EU, which will be a better option for the EU than the East Med Pipeline. […….] I think Egypt’s government should work hard on reviving the AGP and ink an agreement with the EU as soon as possible,” noted Hassane.

Moreover, Egypt signed a preliminary deal with Cyprus on August 2016 that paves the way for further negotiations on a construction of a submarine pipeline, through which the Mediterranean island would export natural gas from its offshore field Aphrodite to the North African nation, Egypt Oil & Gas reported at the occasion, citing an Oil Ministry’s press release. If the project overcomes the considerable hurdles in its path, including uncertain funding, the pipeline could be operational by 2020, enabling Cyprus to finally begin producing from its largest known natural gas deposit.

For Egypt, though, the deal is small part of a much broader strategy. As the promise of Eastern Mediterranean energy draws in significant amounts of foreign investment, Egypt hopes to become a regional gas hub. The plan will no doubt be successful, since without Egypt’s infrastructure and massive consumer market, many of the projects under consideration would be neither economical nor feasible, according to Stratfor’s analysis about Egypt as the next natural gas hub.

Egypt is considered as an irreplaceable ally for most of the neighborhood countries, especially that analysts stress on the joint export by gas-rich countries as it would enhance prospects in the region, particularly for Cyprus and Israel. The benefits for both countries are clear, as without such a regional approach, Israel and Cyprus are unlikely to be able to export beyond their local markets. Of the recent discoveries, Zohr is the only one that could possibly export gas to the EU markets on its own. Yet, even for Egypt, there are advantages to joint export, stated Baconi.

“It remains unclear what the export potential from the East Med will be. While Egypt certainly has some potential to act as a hub for liquefied natural gas (LNG) export or re-export, this will ultimately depend on the level of domestic consumption and the success of reforms the government is currently pushing through. If successful, there is the chance that Egypt’s current LNG infrastructure could be used for export of Egyptian or regional gas. As the market currently stands, I believe that it is less likely for the region to have any form of pipeline export to Europe in the near future. However, more insight will be gained on the state of the East Med. Pipeline through the EU’s feasibility study due at the end of this year,” said Baconi.

The key to the Eastern Mediterranean’s gas future

Egypt holds the keys to the Eastern Mediterranean’s gas future. It has the ability to proceed alone by exporting the expected gas surplus from Zohr field via its existing exporting infrastructure, such as the two idle LNG terminals and the AGP, or it might decide to proceed together with Israel and Cyprus, by creating a new Eastern Mediterranean gas hub, according to Simone Tagliapietra and Georg Zachmann’s Forbes Opinion.

As for the EU, Egypt’s northern LNG terminals are the most probable sources of gas supply in the entire region. Egypt has the largest natural gas reserves and already has its own infrastructure in place to export. In this sense, Egyptian LNG would be cheaper than either Cypriot or Israeli gas, as no large capital investment is needed. Although no supply can compete with the price of Russian pipeline gas, 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.

Egypt’s Minister of Petroleum and Mineral Resources, Tarek El Molla, declared in many occasions Egypt’s plans to increase production capacity by 50% by the end of 2018, with aspirations to re-enter the export market by 2019, according to Bloomberg. Furthermore, officials have suggested that the Idku terminal could be running at full capacity by 2021, although these estimates are ambitious. It is more likely that Egypt will resume its role as an exporter by 2021- 2022, when production would have sufficiently expanded and balanced out domestic demand, stated Daily News Egypt.

However, experts argue that the second option of proceeding together with Israel and Cyprus would present benefits for all parties involved, allowing Egypt to enhance its role in the region and secure revenue from being a transit route, and Israel and Cyprus to fully exploit their gas reserves. It would present an opportunity for the EU as well, where imports requirements will grow post 2020 due to declining domestic production and expiration of long-term contracts with Norway and Russia. This option can be implemented by pumping Egyptian LNG exports through under-utilized European LNG terminals in Greece, Spain, Turkey, and elsewhere in Southern Europe, informed Baconi.

Even if Cyprus and Israel decide to fully exploit their gas reserves, the impact of Zohr field could go beyond Egypt’s boundaries, due to its location and settled infrastructure, according to Forbes. Zohr is close to Aphrodite and Leviathan fields, allowing the development of the fields to be coordinated and the economies of scale to put in place a competitive regional gas export infrastructure.

From Israel and Cyprus point of view, as potential gas exporters, having a neighbor country like Egypt may appear worrisome at first sight, since it intensifies competition and complicates export plans. However, great integrating powers can always be a game changer. “In this sense, the latest developments in Egypt can be an opportunity, offering perhaps more practical export options if mutually beneficial agreements are negotiated and if common sense is used in a region that is not famous for rational thinking and behavior,” according to Carole Nakhle’s study for The Lebanese Center for Policy Studies.

Having a new Eastern Mediterranean gas hub will ultimately depend on foreign policy considerations and domestic politics. From a regional perspective, having a major competitor such as Egypt right at their own doorsteps presents challenges to many Eastern Mediterranean countries like Cyprus and Israel. That is why many neighborhood countries took steps towards having their own gas infrastructure, aiming to have a plan B that does not include Egypt.

On the contrary, many experts see that integrating regional gas infrastructure and linking it to Egypt’s established ones can lead to opportunities if cooperation is pursued. Integrated planning, policies, and design could strengthen overall gas infrastructure in the Eastern Mediterranean, avoiding duplication and ensuring the efficient use of existing pipelines.

In addition, the EU should support a regional cooperation scheme to develop an Eastern Mediterranean gas hub, for both energy policy and foreign policy considerations. In terms of energy policy, this initiative could provide much-needed substance to the long-lasting EU gas supply diversification strategy. In terms of foreign policy, this initiative could allow international collaboration in an area that currently presents very few opportunities for cooperation.

Dr. Mahinaz El-Baz 318 Posts

Mahinaz El Baz received her PhD degree in International Economics from Helwan University in 2022. She has +10 years of experience in journalism and economic analysis. She received the "Best Economic Article Award" in 2016 from CFA Society Egypt.


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