assessments

Sep 4, 2015 | 09:00 GMT

4 mins read

Energy Security Will Not Cure All of Egypt's Ills

The headquarters of the state-owned Egyptian Natural Gas Holding Co. in Cairo in April 2012.
(KHALED DESOUKI/AFP/Getty Images)
Summary

Italian oil firm Eni's Aug. 30 announcement that it has discovered the largest known natural gas deposit in the Mediterranean in Egyptian waters means Egypt could re-establish its energy independence with natural gas supplies, ending several challenging years for the country's energy sector.

For most of the past decade, international energy producers have been able to earn only $2.50 to $2.65 per mmbtu for the natural gas that they sold to EGAS, the Egyptian domestic natural gas company. This pales in comparison to most global natural gas prices, which at times have exceeded $15 per mmbtu. (Under the terms of the deals by which international oil companies operate in Egypt, Cairo can force them to sell at below-market rates.) Making matters worse, Cairo has struggled to pay international oil companies. By late 2013, Egypt owed energy firms an estimated $6 billion to $7 billion, prompting the firms to hold off on numerous exploration projects. Reduced investment resulted in lower Egyptian production as older fields and wells saw production declines. Between 2012 and 2014 alone, Egyptian production fell from 61 billion cubic meters to 49 bcm.

Meanwhile, Egypt's natural gas demand, which has grown every single year for more than three decades, reached 53 bcm in 2013. This had two major effects. First, falling domestic production invariably meant falling domestic supply because Egypt had no ability to import natural gas from other producers, causing Egypt's domestic consumption of natural gas to fall to 48 bcm by 2014. Second, it meant that Egypt had to force energy companies to send even more of their natural gas to the domestic market, making it even more difficult for energy companies to justify reinvesting in Egypt's upstream sector. None of this was sustainable.

After his 2014 re-election, President Abdel Fattah al-Sisi carried out reforms in the energy sector, including reducing energy subsidies that had accounted for 25 percent of the government's budget. It allowed Cairo to begin repaying foreign oil companies, lowering its outstanding debt from more than $6 billion in late 2013 to $3.5 billion at the end of June 2015. (Cairo hopes the debt dropped below $3 billion in August, though figures are not yet available.) In one example of debt repayment, Egypt will pay Eni from $4 to $5.88 per mmbtu versus $2.65.

The higher return for oil companies means new projects and delayed ones are back on the table. In March, BP announced that it would invest $12 billion to develop two offshore blocks that would start production in 2017, to eventually produce 12 bcm annually. Meanwhile, Eni has said that it will fast-track the development of its recent discovery and that it hopes to begin production by 2017. The timetable is likely optimistic, but the field could add at least another 12 bcm of production by the early 2020s. International oil companies probably will remain interested in Egypt because it is one of the few places where returns have increased over the past five years while global energy prices have dropped.

Egypt's falling production levels had led Cyprus and Israel to believe they could step in to supply Egypt's needs. In 2011, Noble Energy discovered the Aphrodite natural gas field in Cypriot waters a year after finding the Leviathan natural gas field in Israeli waters. Both fields, however, are expensive deepwater fields far from traditional natural gas markets such as Europe. Any export project to supply those markets — such as floating liquefied natural gas options or a pipeline to Turkey — could become prohibitively expensive now that Egypt has had another major natural gas field discovery.

Both Eni's and Noble's natural gas could be brought onstream by 2020. Proximity, the simpler approval process in Egypt and its overall higher potential resource base mean that Eni's project has likely vaulted ahead of Leviathan. Since Israel's domestic energy needs would account for just 60 percent of Leviathan's potential production, the rest would have to be exported for the project to make economic sense. Eni's announcement has therefore put the entire Leviathan project in jeopardy.

Israel had hoped to see Egypt become energy dependent on Israeli natural gas to strengthen their strategic relationship. But even though Israel will not be able to use energy to build its relationship with Cairo, energy security in Egypt also improves the chances of government stability. And this would benefit Israel, which wants to see the military remain the core pillar of the Egyptian state.

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