By Mahinaz El Baz
When speaking of natural gas and the Egyptian-Israeli relations, discussions almost always shift to the previous export history and the Israeli hopes of shifting the gear one day and exporting to Egypt its own production.
In 2005, Egypt and Israel signed a 20-year export agreement. Under the terms of the agreement, Egypt was to export up to 247.2 billion cubic feet (bcf) of natural gas to Israel per year, approximately 40% of Israel’s yearly demand, according to The Economist. The country additionally exported natural gas to several other countries, such as Jordan, Syria, and Spain, but Israel remained the most prominent importer of Egyptian natural gas. Growing domestic demand, however, led to a shortage of gas in the Egyptian market. In 2011, rising domestic consumption began to disrupt gas exports to Israel and Jordan. The next year, exports were completely cut off after the pipelines were sabotaged.
At the same time, domestic conditions were changing as well in Israel. In March 2013, natural gas production began from the Israeli Tamar field; furthermore, development began in the Leviathan and Karish/Tanin fields.
Output from the Tamar field alone has met Israel’s goal for natural gas self-sufficiency and has permitted the country to consider potential export plans to countries it has well established export-infrastructure to, namely European countries and Egypt.
However, the game changed with the discovery Egypt’s Zohr field in 2015. The country’s ambition to export natural gas revived. Anticipating rising production, Egypt is targeting exports to the European market by 2020, potentially setting off a gas-export competition between the two counties.
Natural Gas Reserves
Over the past two decades, Israel has gone through a huge transformation, shifting from a gas-importing country to a producer of natural gas. The country is currently focusing on developing the Leviathan gas reservoir, which is expected to begin production in 2020. Production from the field will enable Israel to become a substantial exporter of natural gas. Even by conservative estimates, Leviathan holds enough gas to meet Israel’s domestic needs for 40 years, according to The Economist. Israel’s gas reserves are estimated at 34.6084 trillion cubic feet (tcf), more than 90 times its expected consumption in 2017 and 70 times the its projected domestic demand in 2020, according to BDO Consulting Group. These reserves will be sufficient for both domestic consumption and exportation.
Israel’s gas reserves are significant in relation to the size of the Israeli economy. Experts expect that this ratio of reserves to the size of the economy will give Israel a competitive advantage within the next few years. An analysis of the supply side of the regional energy equation shows that, among the regional countries, Israel has the highest per capita gas reserves. Hence, international rating agencies are upbeat about the effect of gas on Israel’s economy. Kristin Lindow, Senior Vice President at Moody’s Investor Services, notes, however, that the contribution of natural gas to gross domestic product growth (GDP), “is not substantial anymore.”
“At first when Tamar came on there was an extra boost to GDP and there has not been an additional boost relative to the rate of growth of other sectors of the economy since then. But the construction of Leviathan will certainly contribute to growth and so will the exports,” Lindow said, according to CNBC.
At present, Israel ranks fourth in the OECD in per capita oil and gas reserves, according to BDO. The significant quantities of gas discovered in the Tamar and Leviathan fields—and the potential for future gas and oil finds—guarantee that domestic electricity production, industry, transport and other economic sectors will have sufficient gas supplies for many years to come.
Things are slightly different in Egypt as one gas field changed the rules of the game. The discovery of the Zohr gas field has raised prospects for a rapid turnaround in the country’s gas reserves and production performance. The Zohr field, which was discovered in 2015, holds the largest reserves in the Mediterranean and is almost twice the size of Israel’s Leviathan, 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 reported. Moreover, Eni believes production from Zohr will reach 2.6 bcf/d of gas by 2019, according to Financial Times.
Egypt has around 60 trillion cubic feet (tcf) of natural gas reserves, a senior governmental official told Egypt Oil & Gas, noting that the state aims at reaching 70 tcf in the near future. It worth noting that both BP statistical report and BNP Paribas put reserves at around 65 TCF. Nevertheless, demand for energy resources is on the rise. If gas reserves are properly utilized, they can satisfactorily supply the country’s growing energy needs. Capturing flared gas could meet an additional 5% of the national energy requirement, according to the World Bank. Experts recommend that Egypt avoid full reliance upon its natural gas reserves and begin to diversify its energy mix. “It would be the biggest mistake to rely on this find and to postpone [the adoption of] renewables,” stated Mohamed Shoeib, former head of Egyptian Natural Gas Holding Company (EGAS), according to Financial Times. “We have to work on all fronts, to increase [fuel] reserves and to reduce consumption through efficiency. Everything has to march in parallel. There has to be a vision and an action plan,” Shoeib added.
Israel’s gas reserves are estimated at 34.6084 tcf while Egypt has 60 tcf of natural gas reserves. Furthermore, Egypt has a larger geographical area than Israel, giving it a higher chance to boost its reserves further. However, in terms of reserves per capita, Israel enjoys a much better standing, in addition, Egypt’s population is 12 times the population of Israel, increasing the demand and pressure on the existing supply.
Natural Gas Demand Forecast
Thirteen years have passed since Israel began producing natural gas domestically. The country was totally dependent on imported oil and coal for its entire energy supply prior to 2003, according a study by BDO. Between 2004 and 2008, Israel began to use natural gas production from the Mari-B/Yam Tethys (YT) reservoir for the production of electricity.
In spite of its domestic natural gas production, the country was still partially dependent on natural gas imports. Between 2008 and 2012, around 60% of Israel’s natural gas was produced domestically while the remaining 40% came from Egypt. This arrangement came to an end in 2012. In April 2012, the Egypt-Israeli natural gas agreement was cancelled due to recurring and frequent damage to the connecting gas pipelines and economic reasons, stated Yaniv Bar in a study on Israel’s natural gas sector.
In tandem with rising production, Israel’s consumption increased as well. During the past decade, gas demand in Israel increased by an average annual rate of 17.5%. In 2016, consumption reached 342.6 bcf and it is expected to rise to 370.8 bcf by the end of 2017, according to BDO’s forecast. Current gas consumption levels, however, do not usually represent potential market demand, according to experts. In recent years, supply constraints in Israel have held back demand growth. These constraints include gas shortages and a lack of transmission and distribution infrastructure. Despite these handicaps, BDO expects local gas demand to increase by an average annual rate of 8% over the next decade, reaching 505 bcf by 2020, 724 bcf by 2025, and 883 bcf in 2030.
The main drivers behind BDO’s prediction of a 162.4 bcf increase in Israeli natural gas consumption between 2016 and 2020 are: increased demand for electricity and the closure of four Rabin coal units with a total capacity of 1,440 megawatts (MW). Continuing demand growth will be generated by ongoing structural change in the energy sector, higher electricity demand, reduced utilization of coal, and increased usage of gas for transportation, industrial, and chemical uses.
While Israel’s rising consumption of natural gas is driven by structural changes as the country shifts from an energy importer to an energy exporter, Egypt’s rising demand is caused by increased power generation from gas-powered plants, 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) about the Egyptian gas market.
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 bcf/d. Out of this 6 bcf/d, roughly 65% is burned in electricity-generation plants, a government official told Ahram Online.
Between 2008 and 2015, Egypt faced a 529.7 bcf shortfall in domestic production; production in 2015 stood at only 4.395 bcf/d. Due to supply shortages, the country experienced routine power blackouts due to Egypt’s heavy reliance on gas-fired generation, according to the International Energy Agency (IEA).The Egyptian government responded to this issue by redirecting gas supplies away from energy-intensive industries and towards power production. Since 2014, it has initiated reforms in the oil and gas sector, including reducing fuel subsidies and increasing prices for industrial and residential customers.
The IEA expects Egypt’s gas demand to increase by more than 5% per year between 2015 and 2021. 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.” It predicts that demand will reach 2,860.5 bcf in 2020. GCA also sees Egyptian demand as rising. According to its mid-case scenario, it projects that Egyptian demand for natural gas will reach 7.bcf/d by 2020 and 8.7 bdf/d by 2025.
The government is willing to reduce the country’s dependence on gas by developing renewables and turning to coal. The discovery of Zohr, however, has changed the gas industry in Egypt and has the potential to substantially alter the gas supply outlook of the country. Because of Zohr, Egypt could reach self- sufficiency by the end of 2018, according to Egypt’s Minister of Petroleum and Mineral Resources, Tarek El Molla. This will likely affect the development of new coal plants. As a result of governmental policies, the IEA expects the power sector to use 60% of Egypt’s natural gas consumption by 2021.
Natural Gas Supply and Demand Dynamics
The Tamar field is currently the only operational gas field in Israel, according to BDO. Hence Tamar is the main source of natural gas for Israel’s domestic market. Shortages caused by higher demand during peak-demand periods or infrastructure limitations are currently met by liquefied natural gas (LNG) imports.
With the start of production from the Leviathan and the Karish/Tanin deposits, Israel anticipates a change in its domestic gas supply by 2020. The gas market will enter a new phase with multiple suppliers. The entry of new suppliers will not only lift current limitations, but could also cause increased domestic demand as gas utilization is expanded to new sectors of the economy, according to the BDO study.
Even with increased demand, an analysis of the projected supply and demand for natural gas in the Israeli market in 2025, taking into account existing export agreements, indicates that production should keep pace with higher demand. At present, 90% of the natural gas extracted from the Tamar field is designated for the domestic market with the remaining 10% allocated for export to Jordan’s Arab Potash Company (APC) and Egypt, according to BDO. Exports to Jordan began in 2016 and currently stand at approximately 5.3 bcf/y. In the case of an export agreement between Egypt and Israel, production from Tamar could be increased.
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. To better analyze the market, GCA has developed short–to-medium-term and long-term scenarios to identify potential gas surpluses and deficits during the next 20 years. Egypt’s outlook can broadly be divided into two timeframes. The first stretches from the present to the early 2020s, which represents the short-to-medium term, and the second, or long-term timeframe, encompasses the years following the early 2020s.
In the short-to-medium term, GCA expects that LNG imports will be sought on a fast-track basis to address chronic shortages caused by underdevelopment as a result of perceived political and commercial uncertainty. As uncertainty has decreased, however, upstream investment has risen. In addition, the recent Egyptian production decline will be arrested in the near-term by development of gas resources near existing infrastructure networks, supplemented by new fields, such as West Nile Delta and Zohr. GCA’s mid-case supply scenario suggests a peak supply of around 8 bcf/d in 2019/2020 and an ability to maintain production at more than 6.0 bcf/d until 2024.
In the long term, as the chronic supply shortage is alleviated, GCA anticipates, based on its supply-demand analysis, that Egypt will be able to secure substantial, cost-effective domestic and regional gas supplies from Zohr and other developments. If known reserves that have yet to be approved for development are taken into account, Egypt could maintain this production rate until at least 2027 without resorting to gas imports from neighboring countries, according to GCA.
With rising production in both countries, Egypt and Israel are expected to attain self-sufficiency in natural gas market on the long term, according to GCA and BDO forecasts. In the short term, though, Egypt might face a temporary supply-demand gap.
Regional Export Potential
In contrast to the current situation in Egypt, Israel has surplus gas for which the government has given authorization to export. Egypt, on the other hand, does not anticipate the resumption of natural gas exports until 2020, according to El Molla. Israel, while it plans to export most of its excess gas to Europe, has no LNG terminals, according to BDO. Egypt has two. These LNG terminals allow natural gas to be loaded onto tankers and shipped around the world. Both terminals have sat idle for the past five years as Egypt has prioritized domestic needs over exports. These plants, according to The Economist, could quickly ramp up operations again. With the infrastructure in place, Egypt will face few challenges in exporting gas once the country generates sufficient output from its gas fields.
Egypt’s plan to resume exports is supported by GCA’s short-to-medium-term scenario. Based on the pre-2020 GCA forecast, LNG exports from the Damietta and/or Idku LNG terminals could compete in some European and Middle Eastern markets in the medium term. Furthermore, Egypt’s LNG export potential could extend past this period in an upside scenario. In light of the exploration interest that emerged after the discovery of Zohr, it is possible that new, as yet unidentified, relatively low-cost gas developments in the Mediterranean may sustain LNG exports well beyond 2020. By the mid-2020s, energy production from renewable-energy sources could also reduce domestic demand for natural gas, making it available for export via the Idku and Damietta LNG plants.
Longer term, if the upstream sector in Egypt and the wider region is able to capitalize on cost efficiencies and better utilize regional gas infrastructure, LNG exports from Egypt may become more attractive, especially if the efficiency is achieved through positive marginal cash flow measures rather than being based on new capital, according to GCA.
In the regional competition for market share, Egypt possesses larger natural gas reserves. This advantage, however, is offset by its higher domestic demand caused by its growing population. With both countries looking to increase production above domestic requirements, the competition will ultimately be decided by supply dynamics, international trade patterns, and diplomatic/political considerations.