Gas coming from Israel to Egypt .. Questions about feasibility and destination

Where will Israeli gas head?
The economic viability of the deal

Key findings and conclusions

Israeli Prime Minister Benjamin Netanyahu and Energy Minister Yuval Steinitz were unable to hide the extent of their extreme happiness with Israel exporting natural gas to Egypt; Netanyahu described the day of the signing of the gas deal between them - which was concluded in February 2018 - as a day for Israel. Almost two years later, Steinitz said that the start of pumping gas to Egypt (mid-January) is a historical and ceremonial moment.

There is no doubt that the descriptions of “Eid Day” and “Historical Moment” are accurate expressions of Israeli gains, whether from a strategic or political point of view or from an economic standpoint. But the question that concerns us here is: Will Egypt get - in return - the same amount of gains? Or rather: Could there be strategic and political gains from this gas? Will he go to export abroad to represent gains that contribute to achieving a boom in the Egyptian economy, or will he go to domestic consumption only?

We will try here to review the economic viability and the strategic and political dimensions of the deal on Egypt objectively, in an attempt to reach accurate and clear answers.

Where will Israeli gas head?

Before we talk about the political and strategic dimensions and the economic feasibility, there is a pivotal question that we must stand with and reach an answer to, so that we can evaluate many things related to this gas deal; a question related to the direction of the gas flowing from Israel.

The discovery of the offshore “Zohr” field represented a great leap for Egypt in the production of natural gas, and contributed to achieving self-sufficiency and the transformation of Egypt from a country importing natural gas to an exporting country, and Egypt’s current production exceeds 7 billion cubic feet per day, which allowed it to have a surplus it exports to Jordan and to Edco liquidation plant. It is expected that the volume of Egypt's gas production will reach 8 billion cubic feet per day in 2021.

Despite Egypt achieving self-sufficiency, there is a real problem facing it in the future, as the volume of Egypt's gas consumption increases dramatically, and this means that it will turn again to import gas to meet the needs of its market. There are recent studies and estimates - for the Oxford Institute for Energy Studies, the Wood Mackenzie Research Center, and major Western banks - that confirm the end of Egyptian self-sufficiency between three and five years from now.

Of course, when asked about the direction of Israeli gas, we will have to get an answer that not only represents the current moment, but rather the timeline that extends to 2035, as the gas deal is 15 years old starting from 2020. Thus, according to the current data, the gas The Israeli may be exporting abroad in the first few years of the life of the deal, then in the remaining years of the deal he will go to domestic consumption.

The economic viability of the deal

In the short term, it is assumed that Israeli gas will be exported abroad, and if the export will be liquidated in the Egyptian liquefaction stations "Edco" and "Damietta", then it will be transported with LNG tankers to European markets. The economic gains here are summed up in two things: gas export revenues, fees Operating Egyptian liquefaction stations.

Here we return to asking key questions, the answer of which will constitute the overall picture of the potential economic gains from Israeli gas. First, can Egypt compete in the European market with liquefied gas and reap significant profits? To answer the question, we mention a set of facts:

One of the main problems facing liquefied gas is its high cost compared to regular gas, and we can imagine the difference between transporting gas to liquefaction stations, then liquefying it and shipping it in tankers abroad, then loosening liquefaction in the importing country; and between transporting gas directly via a pipeline to the country importer. In short, this means that the priority always in the global market is to transport gas directly through pipelines, and if it is not possible, the second option is the direction to liquefied gas.

Russia controls over a third of gas imports flowing into the European market, and the problem with Russian gas is not only that it goes directly through transport lines to Europe, but that it is cheap compared to global gas prices, and compared to its main competitors in the European market: Norway and Algeria. This means that competition from Israeli gas to Russian gas on the European market is a challenge, not insignificant.

LPG prices have fallen sharply 2019, and there are expectations that they will continue to decline in 2020, which will have a significant negative impact on the opportunities for exporting Israeli gas, and it is sufficient only to point out that Egypt canceled - during the months of August and September 2019 - more than one auction for gas shipments Liquefied, due to the low prices for offers.

A few years will pass, then most of the Israeli gas will go to the Egyptian market for local consumption. This means that the time period during which this gas can be used for export will be limited, which will nullify the talk about Egypt's gain from this export, which will face great difficulties.

Secondly, what is the size of the economic gains from liquefying gas in Egyptian liquefaction stations? To answer the question, we mention a set of facts:

- The percentage of the foreign partner, "Union Venusa" company in Damietta Gas Liquefaction Station, exceeds 80%, while Egypt owns 20%. Shell and other partners own 76% of Edco, while Egypt owns 24%. This means that Egypt's share of the total proceeds from the liquidation fees does not exceed 25%.

Damietta station is still suspended due to legal problems with Union Venusa (a fine of $ 2 billion in favor of Union Venusa), and this means that nearly half of the capacity of the liquefaction stations in Egypt is suspended.

There are still questions about the ability of the current LNG infrastructure in Egypt to export the Egyptian surplus, the Israeli and the supposed gas exports from Cyprus in the coming years, as there is also an agreement to transfer Cypriot gas freely to the Egyptian liquefaction stations.

A few years, and most of the Israeli gas will go to the Egyptian market for local consumption. Therefore, talking about the gains of operating the liquefaction factories shows a very short view because the size of the gains is very limited. Of course, this does not mean that there are no gains from operating the liquefaction stations, because there is a strategic dimension in Egypt's possession of liquefaction stations that do not exist in any other country in the Eastern Mediterranean, but Egypt's interest in this takes its size in the context of the overall evaluation of the deal.

Third: Has the deal eliminated the penal conditions that Egypt had to pay for canceling the contract to export gas to Israel? To answer this question, we mention some facts:

- In 2012, the contract to export Egyptian gas to Israel signed during the era of Hosni Mubarak was canceled, and the cancellation of the contract resulted in the signing of fines for Egypt estimated at $ 1.7 billion in favor of the Israel Electricity Company, and compensation in the amount of $ 288 million in favor of some shareholders of the owner of the Eastern Mediterranean Gas Company (EMG) For the El-Arish / Ashkelon pipeline.

Through the gas deal with Israel, Egypt was able to make settlements with the companies claiming its rights, so that Egypt would pay 500 million dollars to the Israel Electricity Company - over a period of 8 and a half years - instead of 1.7 billion dollars, and at the same time, Egypt would acquire with its partners (Delek and Noble Energy) ) On the share of the shareholders of the lawsuit in the company (EMG), in exchange for their waiver of compensation in the amount of 288 million dollars.

There is no doubt that settling the fines due on Egypt is one of the gains of the gas deal with Israel, but relying on the settlement policy against the deal carries a degree of risk, especially if we know that after all these settlements, PTT Company, which is a subsidiary of the Thai government and a partner in EMG- To file a lawsuit in mid-2019 demanding compensation of one billion dollars.

The logical question in this case would be: What deals can Egypt offer to avoid paying the fine to the Thai company if the ruling came in its favor? Consequently, what Egypt gained from reducing the compensation due on it could lose its value by a court ruling issued for the Thai company.

Strategic and political dimensions

As we explained earlier, Egypt's self-sufficiency will end in a few years, and Israeli gas will be one of the main gas sources on which Egypt depends. This equation simply means that this gas will be a lifeline for Egypt, in which heavy industries depend mainly on natural gas, and Egypt also depends on natural gas for the production of electrical energy (about 60% of Egypt's total consumption of natural gas).

In light of what we mentioned, we refer here to the most important potential risks to Egyptian national security:

- Egyptian security is directly related to Israeli security, as any security threats that harm Israel's ability to produce gas will also represent a direct threat to gas supplies coming to Egypt, which will push Egypt - in its foreign policy - to adopt positions that are compatible with Israel's policy in its continuing crises, Whether with Gaza, with southern Lebanon, or with other regional parties, to maintain the flow of Israeli gas.

The matter does not stop there. Rather, Israel can exploit the Egyptian dependence on this gas to blackmail it and influence its political decision, by threatening to delay or cut off its supplies due to any military crisis or operation by Israel, which gives Israel a decisive influence in its relationship with Egypt.

It suffices here to refer to the Israeli policy in exporting gas, and how it puts its national security at the forefront of its calculations, to see the difference clearly with the Egyptian side, as Israel is committed to using 60% of its gas reserves in domestic consumption, in a way that guarantees it self-sufficiency in gas until 2040.

In this policy, Israel seeks to achieve a balance between exporting gas and self-sufficiency in the long run. Whatever the economic gains accrued from exporting gas, it is in no way equal to the threat of self-sufficiency, which can make Israel dependent and dependent on the gas of neighboring countries, so Israel's priority is not to give An opportunity for neighboring countries to possess pressure cards that could pose a threat to them in the long run.

Key findings and conclusions

In sum, after reviewing the economic feasibility and the political and strategic dimensions of the gas deal between Egypt and Israel, and after arriving at an answer to the question regarding the direction of gas coming from Israel, we can reach several main results:

First: We can imagine the size of potential future threats to Egyptian national security, which relate to the control and control of Israel in a portion of the supply of natural gas to the Egyptian market, which I do not think can be absent from any political decision maker who understands the nature and dimensions of dealing with Israel, which It remains Egypt's first strategic enemy, even if relations appear stable and positive at some point.

We can also clearly realize that the size of the potential economic gains is very limited and not equal - in any way - Egypt entering into a deal whose risks to national security are settled.

Second: As of this moment, there is no accurate answer from official sources about the direction of Israeli gas and whether it will go for export to the European market or will it be for domestic consumption. Suffice it to point out the inconsistency between the statement of the Egyptian Minister of Energy confirming the trend of gas to export, and what was published by the "Israel in Arabic" page (the official page of Israel in the Arabic language) that the gas will go to the Egyptian domestic market to produce electricity and use in industry.

The fact remains that Egypt currently has a self-sufficiency and surplus of natural gas, and in light of the restrictions that I mentioned about the low prices of LNG globally and the difficulty of competition in the European market; the only solution for the Israeli use currently is to reduce Egypt's production to open an Israeli gas path inside the market The Egyptian.

Third: The gas deal between Egypt and Israel is a stark example that confirms that Sisi does not depend in his policy on a vision of achieving national security or economic interests, as much as it depends on the agreements and satisfactions of his allies and his international and regional supporters, especially Israel. The result is the lack of independence of political decision-making and dependency, and the continued loss of Egypt's status, which is evident in taking decisions far from Egypt's interests and affecting its national security in more than one situation, or silence in situations where the rights and capabilities of Egypt are being wasted.