By Mahinaz El Baz
With bright prospects in natural gas production, Egypt is willing to regain its position as a natural gas exporter. In order to reach this target and successfully reduce the gap between supply and demand, the country is taking serious steps towards increasing exploration and production (E&P) activities, in addition to diversifying energy mix. Yet, extraordinary paths are needed to ensure the sustainability of natural gas reserves and maintain production. One of these paths is maximizing the benefits of Egypt’s unique Liquefied Natural Gas (LNG) infrastructure and reviving the regional cooperation by re-exporting the natural gas of other neighbor countries.
The Easy Option: Resuming Natural Gas Exports
Egypt used to be a net natural gas exporter before starting to import LNG in December 2012. In 2014, the country completely halted exports, turning into a net natural gas importer in fiscal year (FY) 2015/2016, with a hydrocarbon external deficit of $3.6 billion compared to a surplus of $5.1billion in FY 2009/2010, according to BNP Paribas’ study on Egypt’s oil and gas industry in 2017.
In August 2015, the discovery of the giant Zohr gas field by Italy’s Eni brought a decisive turning point to the country’s status in the natural gas market. The field, with its recoverable reserves of 30 trillion cubic feet (tcf) of natural gas, represents around 50% of Egypt’s estimated 60 tcf of natural gas reserves, according to the Minister of Petroleum and Mineral Resources, Tarek El Molla.
The size of Zohr 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, as noted by Tareq Baconi in his policy brief to the European Council on Foreign Relations (ECFR). Additionally, 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, which could increase Egypt’s export capacity.
However, BNP Paribas’ study highlighted that, in order to free up natural gas capacity for exports, the country has to diversify the energy mix away from fossil fuels – hydrocarbons made up more than 95% of primary energy consumption in 2015. Although Egypt launched an ambitious renewables strategy aiming to increase the contribution of solar and wind resources to 20% of power output by 2022, progress has been rather slow and restricted to public projects rather than Independent Power Producers (IPPs). “As renewables accounted for only 0.5% of Egypt’s power generation mix, it will effectively take a long time for the country to reduce its dependence on natural gas for power generation,” according to the study.
Egypt’s energy dependency on natural gas led the country to liberalize the natural gas market through a new gas regulatory law. The Egyptian Natural Gas Holding Company (EGAS), alongside the Egyptian General Petroleum Corporation (EGPC), announced in May 2015 the decision to allow private companies to use the state-owned national gas grid to import, transfer, and distribute natural gas to the local market. After years of deliberation, the gas regulation law was finally issued in July 2017. The provisions of the legislation shall be applied to regulate the activities of the natural gas market in Egypt, with the exception of petroleum concession agreements, which follows the law number 20 for 1976.
“With new discoveries and the new market regulatory law, there is a guarantee that Egypt will export natural gas,” Professor in Petroleum Engineering and Energy Advisor in the Egyptian Parliament’s Committee of Energy, Tharwat Hassane, told Egypt Oil & Gas. He further noted that, in order to achieve its export target, the government should “put a quick plan to complete all work for the new facilities of the new fields, such as Zohr and North Alexandria; enhance the well productivity by work over operation and put more fields in the production, and start thinking about the unconventional resources.” Hassane added that the Egyptian oil and gas authorities should “invest in more exploration areas, enhance and maintain the gas network facilities to take more natural gas capacities, and try to use the new gas market regulatory law very soon and start giving the new gas licenses to the investors.”
With Egypt exporting natural gas, the industry will attract more investments as “IOCs will benefit from natural gas surplus and exportation [in light of] the new gas market regulatory law, which allows the investors and the IOCs to sell the produced gas inside and outside of Egypt with good prices,” Hassane explained.
Eventually, exporting natural gas will boost the Egyptian economy as it will increase foreign currency reserves and raise foreign investments. “The gas market is a promising market to which most countries are heading; therefore, there is a possibility of increasing prices. This will have an effect on the Egyptian economy, as the national economy has very few foreign currency sources. Hence, exporting natural gas will have a new source of foreign currency that adds to the foreign currency reserves, which will lead to currency stability,” Group CEO of Solid Capital, Mohamed Reda, pointed out.
Moreover, Egypt is expected to allow foreign companies to freely export natural gas not needed for domestic use in five years, El Molla announced during Al Ahram’s energy conference. New exploration contracts contains a clause that allows companies to export a part of their share of extracted natural gas abroad in the event it is not needed by Egypt, the Minister added.
The Unusual Option: Natural Gas Re-exports
While Egypt’s production is expected to match, even outstrip, domestic demand, some experts argue that, despite rising production, the supply-demand gap could continue to widen due to Egypt’s growing population and its heavy dependence on natural gas to generate electricity. This brings up a concern about running out of gas reserves and consuming the available capacity in exporting gas on the medium run, which leads to another hydrocarbon external deficit in a long term.
The Egyptian consumption of natural gas has been increasing by approximately 7% annually over the past decade, according to Daily News Egypt. The country’s total natural gas consumption is about 6 billion cubic feet per day (bcf/d), from which roughly 65% is burned in electricity-generation plants, as a government official told Ahram. The rising demand is caused by the growing industrial and chemical sector demand, and the utilization of natural gas to produce LNG for export, according to a study by Gaffney, Cline & Associates (GCA) on the Egyptian gas market.
Egypt’s natural gas demand is expected to increase by more than 5% per year between 2015 and 2021, according to the International Energy Agency (IEA). CI Capital, on the other hand, expects Egyptian demand to increase by 9.4% per year between 2016 and 2020, according its analysis in “Egypt’s Natural Gas Outlook,” predicting that demand will reach 2,860.5 bcf in 2020. GCA sees Egyptian demand rising as well. According to its mid-case scenario, GCA projects that Egyptian demand for natural gas will reach around 8 bcf/d in 2019/ 2020.
“With the recent gas developments brought on-stream, Wood Mackenzie forecasts that Egyptian domestic gas production will reach 7.7 bcf in 2020. Post-2020, we see production from fields currently on-stream or under-development falling, largely due to the continued decline from historic fields, which could force Egypt to restart imports in the mid to late 2020’s. However, this could be offset by new discoveries, especially with new licensing rounds planned for the Western Mediterranean and Red Sea, both of which are considered to be gas prone,” Stephen Fullerton, Research Associate at Wood Mackenzie explained.
Affirming on Fullerton statement, Dr. Pascal Devaux, Senior Economist MENA at BNP Paribas Bank, mentioned that “Unless there are new significant discoveries, the long term Egypt will have to import gas again as consumption will continue to increase.”
Therefore, “Egypt has to choose between the traditional path of exporting surplus natural gas in either LNG – in order to accumulate foreign exchange reserves – or industrial forms, in a way that maximizes factors of economic development, such as employment and industrial integration,” BNP Paribas’ study noted. The second path will push the state to go for unusual options, such as using the current LNG infrastructure in re-exporting the natural gas of neighbor countries to Europe.
“Given Egypt’s current reserves and expected future production, it makes sense to utilize Egypt’s LNG facilities to re-export gas from neighboring countries. This allows Egypt to realize revenues from these facilities without having to use its domestic gas reserves. But this is an evolving picture and if Egypt was to make significant exploration discoveries to allow for long-term gas self-sufficiency, it would make sense to export the excess gas via LNG,” Fullerton noted.
Re-exporting natural gas of other countries should help the country in saving its reserves, as some producing legacy gas fields suffer from high rates of decline in production (12% annual average). While the four key offshore discoveries are being fast-tracked, they have varying production plateaus ranging from 11-18 years (Atoll, Zohr) to much shorter 3-5 years (Noroos, West Nile Delta). Replacing declining offshore production necessitates further exploration investments to proactively sustain Western Desert production that should start naturally declining in 2-3 years, albeit at smoother rates, according to Daily News Egypt. “Egypt’s capacity to export gas may not last beyond 2022,” the study stated.
Potential Regional Cooperation
Energy producing and non-energy producing countries tend to use their geographical location to become energy hubs. Turkey, for instance, is not one of the major oil and gas producers; yet, its geographical locations serve as a bridge between the east and the west. In the same context, Egypt’s goal of becoming 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 country is planning to receive natural gas from different source countries and transform it into LNG using the Egypt located Idku liquefaction plant and the Damietta liquefaction plant. ”Being a regional gas hub and using domestic gas resources can be done together. As I think that the Egyptian LNG export capacity is limited, the development of the gas hub advantage is a good opportunity to use existing facilities and generate revenues,” Devaux stated.
Egypt is already part of some regional and sub-regional agreements, such as the Arab Gas Pipeline (AGP) and El- Arish-Ashkelon Pipeline. The AGP is a shared pipeline between Egypt, Jordan, and Syria, which has been executed over four phases. 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 Cyprus would export natural gas from its offshore field Aphrodite to Egypt, according to Egypt’s Ministry of Petroleum’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. It worth noting that Egypt has offshore pipelines connecting it with Cyprus, which is why the two countries had signed a memorandum of understanding (MoU) in 2015 to send gas from Cypriot Aphrodite field to Egypt to be re-exported.
The agreement is part of Egypt’s plans to have a shared infrastructure with its neighboring countries to import and export energy. El Molla stated to Pipeline Journal, “This is part of the development of the east Mediterranean gas as a whole and I think our strategy optimally is to position ourselves as an energy hub in the region.” In his interview with BP Magazine, the minister further stated, “We have signed agreements with Cyprus to bring their gas here, whether for our domestic use or to export on their behalf through our LNG facilities. There’s an opportunity to do the same with any other gas [sic] in the Eastern Mediterranean basin.”
Besides Cyprus, Egypt has good opportunities to cooperate with other East Mediterranean countries. With limited domestic markets, Israeli and Lebanese fields will need to find external buyers at a time when world gas markets are close to saturated. The most pragmatic and practical near term path to outside markets would be to build a network of short pipelines and tap into Egypt’s LNG plants.
Egypt, at least initially, provides the most pragmatic route to reap the economic benefits of exporting East Med’s natural gas to the European Opinion (EU) without exacerbating regional tensions, according to the Financial Times. “[Egypt can access the European Market], but as a re-exporter, not as a direct exporter,” Devaux explained. Moreover, he highlighted that “there are a lot of gas resources in the East-Med region, but building export capacities is very costly. Egypt can benefit from the use of its LNG facilities to re-export gas. Nevertheless, for the time being the political factor is a strong constrain that prevent Egypt to take profit from its LNG facilities.”
From his side, Fullerton mentioned that “one stumbling block may be the landed price of East-Med gas into Europe via Egypt’s LNG facilities. Cypriot/Israeli gas would have to compete with several new sources of supply, so this could present challenges once tariffs, liquefaction costs, and transportation costs are factored in.” Furthermore, he explained that “in recent years, Egypt has been one of the largest importers of LNG in the region. With the increase in domestic production, this will offset most and potentially all of these volumes. As far as exports go, this is very much an evolving picture. We have already seen a discovery made in Cyprus and further exploration successes could completely reshape the landscape for LNG exports.”
The Egyptian LNG infrastructure is promoting the country to be either a gas exporter or/and a transit point. Both paths will help the country to become a regional energy hub. Yet, it is important to maximize and sustain the Egypt’s regional competitive advantage on both short and long-run.