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Egypt Not Mediterranean Gas Boss, Yet – Analysis

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Egypt, poised to be a major regional energy hub, must work on policy, legal frameworks and communications with Egyptians.

By Mohamed El Dahshan*

The natural market gas in the Eastern Mediterranean is in full ebullition – with Egypt determined to be the center of this regional marketplace. The country faces challenges, including maintaining equidistance from the region’s various tensions, reforming its legal framework for regional gas deals and effectively communicating its activities to the Egyptian population – no easy matter given the complex history of regional gas cooperation, Egypt’s own regional energy relations, and its need to subdue public opinion with the necessities of regional cooperation around natural resources, which know no political frontiers.

The most recent Israeli-Egyptian gas cooperation agreement offers a unique lens into this complexity.

In February, Israel media announced a massive gas export deal with Egypt, worth US$15 billion over 10 years. Israeli Prime Minister Benjamin Netanyahu clamored about “a joyous day” that would “strengthen our economy [and] strengthen regional ties.” But not a word came from Egyptian authorities, with local media citing Israeli sources.

Naturally, the announcement confused the Egyptian public. For the past year, they had heard much about the promises of the Zohr gas field, a massive discovery in Egypt’s sector of the Mediterranean with an estimated reserve of 850 billion cubic meters. The field had started production weeks earlier in December 2017, and Egyptian Minister of Petroleum Tarek El-Molla had stated the field would allow Egypt to be self-sufficient by the end of 2018.

So Egyptians wondered where did a decade-long import deal fit in then. It took the Egyptian government 24 hours to develop its talking points, which coalesced into two distinct and diverging lines of thought: First, this was a private-sector deal, with the Egyptian signatory being a company called Dolphinus Holdings over which the government had no control, and therefore the government could not speak for the firm. Second, in parallel, the deal was part of a larger strategy to make Egypt the regional hub of natural gas.

Two days later, President Abdel Fattah el-Sisi briefly addressed the matter, while not mentioning Israel by name and rather referring to the deal as “importing gas from… another place.” The confused explanation was “we scored a goal” without clarifying how. Snippets of statements started trickling from the government, emphasizing larger strategic implications, as if to dilute the bilateral deal into larger regional cooperation, and stressing that Egypt would use its existing gas liquefying stations to become the main trading point for Eastern Mediterranean gas on its way to Europe. The deal itself leaves out some details – no start date or information on how the gas would be shipped – and would likely benefit from an extension of export facilities between Israel and Jordan, and use existing, now unused pipeline that once delivered gas from Egypt to Israel a few years ago. More importantly, the deal does not clarify whether the gas is truly meant for export to Europe. A foreign natural gas official explained that the Israeli imported gas was, in his expert opinion, certainly for Egyptian local consumption. Gas from Israel’s Tamar and Leviathan fields, suffering from fewer impurities than Zohr’s, is readily available for consumption. Zohr’s raw gas must undergo a refining process to remove contaminants.

Thus, the deal’s “strategic” dimension may not be the only impetus on the Egyptian side – a more immediate concern is fulfilling Egypt’s large internal energy demand, contradicting the image of a regional powerhouse that the government seeks to project.

A French expression, “There’s water in the gas,” signifies impending trouble and is appropriate in describing the gas discoveries in the Eastern Mediterranean, which augur both prosperity and conflict. Consider the Israeli-Lebanese example: While the two countries remain legally at war, they disagree over maritime borders, creating overlapping gas exploration concessions. Even if the border issue were resolved, the countries are small, about 20,000 and 10,000 square kilometers, respectively; the source of any gas found nearby would likely straddle the border – forcing the countries into revenue-sharing discussions they do not wish to have.

Then there’s the Israeli-Palestinian conflict: The Gaza Marine field, with its estimated 1 trillion cubic feet of reserves, has been a contentious point for two decades between the Palestinian governments in Gaza and Ramallah, the Palestinians and the Israelis, and oil developers and buyers. No less important is the unclear demarcation of territorial waters between Palestine and Israel – and, in all likelihood, Palestine and Egypt. Turkey, on its side, has been wary of the Egyptian-Cypriot rapprochement. Turkish Foreign Minister Mevlut Cavusoglu declared “null and void” the 2003 Egyptian-Cypriot demarcation agreement, and the country physically blocks oil companies from conducting additional exploratory drilling in the  exclusive economic zone of Cyprus. Turkish-Cypriot tensions, too, could yet slow creation of this regional market.

But regional energy ties are not all in conflict. In September 2016, Jordan signed an agreement to purchase 300 million cubic feet per day of Israeli gas, in a 15-year US$10 billion agreement. Also, Egypt and Cyprus have intensified bilateral cooperation, often drawing Greece along – equally for economic benefits as much as for an adversarial position vis-à-vis Turkey. Yearly tripartite summits have been held since 2014, and Sisi has visited Nicosia twice in three years.

Egypt’s gas cooperation with Cyprus goes back to 2012, when Cairo and Nicosia signed an agreement on joint exploration for border zones, and plans about how to best supply Europe with Cypriot and Egyptian Mediterranean gas have been a regular discussion topic since. The day after the announcement of the Egyptian-Israeli deal, Cyprus also announced it was nearing an agreement to sell natural gas to Egypt, to be signed within weeks, and in April, Foreign Minister Nicos Christodoulides visited Cairo to finalize the terms. The agreement would likely include plans for laying an underwater pipeline for gas export from Cyprus to Egypt, a distance of 645 kilometers, for the gas to be liquefied there and subsequently re-exported to Europe – an ambitious and costly plan.

Egypt has what it takes to be the regional energy market hub: location, a developed infrastructure for refining, storing and exporting oil and gas; access to regional suppliers; and major markets across the Mediterranean. Some of Egypt’s plans, however, may be too optimistic – from the quality of the gas in Zohr to the Mediterranean underground pipelines – and the nation is an immense market itself, compelling the government to fulfill local needs before considering exports. Some pending issues remain, including security in the Sinai Peninsula, which disrupted a previous Egypt-Israel gas export deal in 2011 and 2012, ending in a legal fracas. The deal, signed in 2005, provisioned the export of 1.7 billion cubic meters annually for 20 years. The financial penalties from this legal debacle are pending, with Israeli partners claiming compensations from Egyptian parties in Egyptian, French and Swiss courts and potentially other jurisdictions. Then Prime Minister Sherif Ismail of Egypt declared that the issue of compensation was subject to “an understanding” while the Israeli Electric Company, for its part, issued a statement declaring, “We will not relinquish the debt and the company will continue to work towards collecting it.”

Nonetheless, Egypt remains the most logical export hub. This will require careful policy, transparency and significantly improved local communication, to put this vision in motion.

*Mohamed El Dahshan is managing director of OXCON Frontier Markets and Fragile States Consulting. He can be reached @eldahshan.


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YaleGlobal Online

YaleGlobal Online

YaleGlobal Online is a publication of the Whitney and Betty MacMillan Center for International and Area Studies at Yale. The magazine explores the implications of the growing interconnectedness of the world by drawing on the rich intellectual resources of the Yale University community, scholars from other universities, and public- and private-sector experts from around the world. The aim is to analyze and promote debate on all aspects of globalization through publishing original articles and multi-media presentations. YaleGlobal also republishes, with a brief comment, important articles from other publications that illuminate the many sides of this complex phenomenon. To the extent permitted by copyright arrangements, YaleGlobal archives such articles and makes them available for search and retrieval.

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