By Mahinaz El Baz
The recently discovered offshore natural gas fields in the Mediterranean Sea have driven speculation on how regional natural gas markets might change and what export and energy benefits might accrue for the countries involved. Natural gas discoveries in this area might enhance regional relations as emerging gas-rich countries need to pool their resources in order to export gas in either pipeline or liquefied natural gas (LNG) form, thereby encouraging dialogue and cooperation.
“The need to adopt a joint approach to export is due to commercial, technical, or political difficulties that prevent each country from exporting gas independently,” according to a paper published by the European Council on Foreign Relations (ECFR) in 2017 titled “A Flammable Peace: Why Gas Deals Won’t End Conflict in the Middle East”.
Although experts argue that the potential hydrocarbon reserves are huge, especially the natural gas reserves in the Mediterranean Sea, both pipelines and LNG infrastructure in the southern part of the sea are limited due to many technical and financial reasons. Egypt and Algeria are the only two African countries that have LNG terminals in the southern Mediterranean. Thus, experts argue whether the Egyptian LNG infrastructure is in competition with the Algerian facilities or whether they can cooperate with each other, raising discussions on the possibilities for future cooperation between the two countries in LNG infrastructure.
Egyptian LNG Infrastructure
There are two LNG facilities in Egypt. Both facilities have been idle since 2013 as the country has diverted its export supplies to its domestic market. The first LNG facility is owned and operated by the Spanish Egyptian Gas Company (SEGAS) and located in Damietta, while the second LNG project is located in Idku, east of Alexandria, and controlled by the Egyptian Liquefied Natural Gas Company (ELNG).
SEGAS LNG complex in Damietta is situated on the Mediterranean Coast 60 kilometers (km) west of Port Said. The complex came on-stream by the end of 2004 and was used to export LNG to the general European market via a receiving terminal at Sagunto in Spain. Damietta liquefaction project represented the first liquefaction plant ever built in Egypt as it is a single train plant with a capacity of 5.5 million tons per annum (mtpa), according to José Javier Fernández Martínez‘s research paper on Damietta liquefaction project.
The operating company, SEGAS, is controlled by Union Fenosa Gas in conjunction with Eni of Italy (80%) and two state-owned Egyptian companies: the Egyptian Natural Gas Holding Company EGAS (10%) and the Egyptian General Petroleum Corporation EGPC (10%). This LNG project in considered as the first facility of its type in Egypt and experts believe that it is one of the world’s largest capacity single train facilities. In late 2012, Egypt has stopped exporting Eni’s share of LNG from the Damietta terminal due to rising domestic consumption, Abdalla Darwish stated in his study about Evaluation Of LNG Projects In Egypt.
The second project is the Egyptian LNG project (ELNG). It is located on approximately 3km away from the town of Idku and 40km east of Alexandria on the Egyptian Mediterranean coast. The two train LNG terminal at Idku has a capacity of 3.6 mtpa and could accept gas deliveries of around 10 billion cubic meter (bcm) equivalent to 7.4 mpta, according Darwish’s study. The shareholders of the Egyptian LNG Companies are EGAS (12%), EGPC (12%), BG (38%), and Petronas (38%). Egyptian LNG can accommodate an expansion of up to six trains in total with potentially different ownerships and sources of feed gas.
Algerian LNG Infrastructure
Algeria has four LNG units located along the Mediterranean Sea at Arzew, Bethioua, and Skikda, with a total design capacity to process 44 billion cubic meters (bcm) per year equivalent to 32.56 mtpa of natural gas, according to US Energy Information Administration (EIA). The four units include three operational LNG plants and one decommissioned plant. The three largest and very similar plants (GL1Z, GL2Z and GL3Z) are located at Bethioua and Arzew, while the GL1K plant is located at Skikda.
Two trains at the Skikda complex in Algeria totaling 9.2 mtpa were brought online in 2013 and 2014, a 2017 report by the International Gas Union (IGU) explained. The complex currently consists of four trains. It worth noting that Algeria announced during the first week of March that Skikda LNG export plant is set to take one production unit, or train, offline for 40-50 days of planned maintenance from March 9, industry sources previously told Reuters. The Bethioua project in Arzew is a 13-train LNG development with a total capacity of 20.8 mtpa operated by Sonatrach, according to Wood Mackenzie’s 2015 report entitled “Algeria LNG Bethioua”.
Regional Market Dynamics
Egypt used to export natural gas to several countries, such as Israel, Jordan, Syria, and Spain, yet 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.
After discovering Zohr in 2015, Egypt recovered the ability to proceed alone by exporting the expected gas surplus from the field via its existing infrastructure, such as the two idle LNG terminals and the AGP. Some economic experts have predicted that it may, however, decide to work together with Israel and Cyprus to create a new Eastern Mediterranean gas hub.
As for the EU, Egypt’s northern LNG terminals are the most probable sources of gas supply in the entire region. The country has the largest natural gas reserves, in addition to having 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 compete with American LNG and allow the EU to diversify their energy sources, lessening dependence on Russian supply.
Egypt’s Minister of Petroleum and Mineral Resources, Tarek El Molla, declared on 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. 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 against domestic demand.
On the other hand, Algeria exports natural gas via pipelines and on tankers in the form of LNG. The country has three transcontinental export natural gas pipelines: two transport natural gas to Spain and one transports natural gas to Italy. Most Algerian LNG volumes are delivered into Europe, although deliveries have been made into the US and Asia. It worth noting that Algeria was the first country in the world to export LNG in 1964. In 2014, Algeria was the world’s seventh-largest exporter of LNG, exporting about 5% of the world’s total exports.
Algeria exported about 1.5 trillion cubic feet (tcf) of natural gas in 2014 of which approximately 910 billion cubic feet (bcf) was transported via pipelines and 578 bcf by LNG tankers. Approximately 90% of Algeria’s natural gas exports were sent to Europe in 2014, making it the region’s second-largest natural gas supplier outside of the region after Russia. In addition, around 84% of Algeria’s LNG exports were sent to Europe with the remainder going to markets in Asia and Oceania, according to EIA.
Despite new LNG export infrastructure and increased capacity, Algeria’s LNG exports have declined over the past few years (although an increase in production in 2014 led to an increase in exports as well). Algeria is facing pressure to boost natural gas output with new projects to meet growing domestic demand and to fulfill long-term contractual obligations to export natural gas to Europe.
As for the mechanisms of exporting natural gas, Algeria’s pipeline system transports natural gas from the Hassi R’Mel fields and processing facilities, owned by Sonatrach, to export terminals and liquefaction plants along the Mediterranean Sea. There are three main pipeline systems in the country: Hassi R’Mel to Arzew, Hassi R’Mel to Skikda, and Alrar to Hassi R’Mel.
“The Hassi R’Mel to Arzew system is a collection of pipelines that move natural gas from Hassi R’Mel to the export terminal and the LNG plant at Arzew. The system also includes a Liquefied Petroleum Gas (LPG) pipeline. The Hassi R’Mel to Skikda system transports natural gas from the Hassi R’Mel fields to the Skikda LNG plant, and the Alrar to Hassi R’Mel system transports natural gas produced in the Alrar and the southeastern region to the Hassi R’Mel processing facilities,” EIA’s analysis added.
Cooperation or Competition?
In light of the fact that Egypt and Algeria are the only countries to have LNG infrastructure in the southern Mediterranean, industry experts argue whether the Egyptian LNG infrastructure is in competition with the Algerian infrastructure or whether they act in concert with each other. “There could be competitiveness between these two countries in the broader context of a gas glut. However, there are some differences that might mitigate competition. Egypt is better positioned to serve the Asian markets while Algeria is well positioned for access to terminals in southern Europe,” Tareq Baconi, Visiting Policy Fellow at the ECFR, stated.
“Furthermore, the prospects of Algeria’s gas sector remain unclear, as further investment is needed to sustain production. For both countries, the domestic market is large, and continues to grow given generous subsidies. The manner in which the domestic markets are served will determine each country’s export potential,” he added.
Other experts believe the two countries will not compete against each other. “There is no competition between Egypt and Algeria,” Mohamed Farghaly, LNG Plant Manager, disclosed. Industry expert Amr Magdy Abdel Aziz, likewise stated: “Regarding the infrastructure competition, I do not believe that this is the case. The LNG market have been depending on long term contracts and will be like this for a while. So you can say that each terminal is dedicated to specific buyers. The competition is then transferred to the buyers to secure more long term contracts or to benefit from any extra or un-contracted quantities in the spot markets where the higher prices are paid.”
Ahmed Hussein, Engineer at the Egyptian Natural Gas Company (Gasco), explained that both countries are mainly targeting the European market, thus there will be some aspects of competition in the future. Currently however, the two countries are not competing with each other. One reason for this is that the Algerian LNG infrastructure is bigger than Egypt’s infrastructure in terms of production capacity. Egypt has two LNG plants with total maximum production capacity 9 million ton per year, while Algeria has four LNG plants with total maximum production capacity 24 million ton per year.
Moreover, in 2016, Egypt began to export LNG again after a long time of LNG production problems, due to the large domestic consumption. Further to this, Egypt is currently importing natural gas, which is expected to be halted by 2019. “Even when Egypt [resumes] exporting LNG, we are targeting different countries in Europe compared to Algeria,” Hussein added.
Experts’ answers are varied when asked about the possibility for future cooperation between the two countries in terms of LNG infrastructure, joint research and development (R&D), developing maintenance technologies and exchanging experiences. “Possibly, however, the frameworks of such cooperation remains unclear. For the time being, each country is preoccupied with the internal reforms that are required to stabilize their energy market, address domestic consumption, secure foreign investment, and maximize their export potential,” Baconi highlighted.
“In Egypt, the performance of the terminals is highly appreciated from the shareholders whether in the technical part or the commercial part. The Egyptian experts are very professional in handling any technical issues and very talented in solving new challenges. Also due to currency prices, the terminals are very competitive regarding the operating costs. Cooperation between terminals is very common whether by exchanging experts or exchanging best practices. In Egyptian terminals we are exchanging knowledge and experience with many other terminals all over the world, even professionals who moved to other international terminals proved to be of the best experts,” Abdel Aziz said.
Furthermore, Hussein highlighted that “Egypt and Algeria have to cooperate together in this field for many reasons as they are the only countries having LNG structure in the Mediterranean countries. [Both countries] can face many threats in future, so supporting each other with sharing information and technology will help them to grow faster. Also [cooperation] in the research and development field, will help them to grow bigger and to develop their infrastructure to have a bigger share in the European countries.”
Due to the effect that new natural gas discoveries in the Mediterranean and increasing prices have had on market dynamics, there is a new debate about whether there is a need for more LNG projects in the region or whether it is better to invest further in developing the already-established terminals and plants. “There is little commercial sense to invest in new LNG terminals given the state of the global gas markets and the presence of the American LNG. If investments are to be made, they are best targeted to the current infrastructure,” Baconi explained.
Abdel Aziz also mentioned that “building new terminals in the current global situation is very costly and needs to secure contracts first to be able to complete FID and secure loans. Pumping more investments in the current infrastructure such as debottlenecking in Qatar Gas will be more effective if more feed gas is provided locally or from other countries.”
Although industry experts argued over the current relationship between the Egyptian LNG infrastructure and the Algerian facilities and if they compete or cooperate with each other, they stressed on the importance of considering future cooperation between the two countries in LNG infrastructure. Such cooperation could maximize the regional integration and benefit both exporting and importing countries.