Can Egypt And Israel Fill The European Energy Vacuum?

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As European energy markets are dealing with the fallout of Russia’s invasion of Ukraine, Brussels now seems to have realized that there are natural gas and LNG sources available on the southern shores of the Mediterranean. The potential of the East Med, in which Egypt, Israel, and potentially Cyprus, are in the process of setting up major LNG exporting infrastructure, has suddenly popped up on the desks of Brussels’ bureaucrats and experts. After years of almost total neglect by Europe, caused by cheap natural gas and an anti-Cairo attitude, Egypt is back in the picture.

To increase possible LNG or natural gas deals between Egypt (East Med) and European partners, Israel is stepping up its efforts to supply volumes too. The ball started rolling after Israeli Minister of Energy Karine Elharrar and EU Commissioner for energy Kadri Simson met in Paris in March. After this meeting, an EU-Israeli team was set up to work out a political framework in coordination with the Egyptians to enable gas to flow to Europe. According to Israeli sources, EU representatives openly indicated that East Med gas will be needed if the EU is not willing to enable more coal-fired power generation. All agreed that no other short-term suppliers are available to counter a potential blockade of Russian natural gas supplies.

The EU-Israeli discussions include Egypt, as Cairo is the only party that actually has available export capacity in place. Israel and Brussels both agree that exporting East Med gas via Egypt’s LNG plants in the Nile Delta (Idku-Damietta) is the only feasible option at the moment. No real emphasis has been given to the still continuing hype around a possible deepwater natural gas pipeline to Europe.

After years of being shunned by most, based on price, cost, or volume issues, Egypt’s strategic position in energy markets is again being recognized. Another major change, seen by East Med partners, is the dramatic change of mind within the European Union. Before the Ukraine war, and the cost-of-living crisis, European countries were only talking about removing oil, gas, and coal from the energy mix. Sky-high energy prices and very tight supply may have sparked a change of strategy in Brussels.

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For a number of years, Israel has been trying to get access to the European market. In 2020, the East Med offshore gas pipeline deal was signed, targeting a pipeline from Israel’s offshore gas fields to Greece. This project was doomed from the beginning, as costs were too high, even in today’s high-price environment. One of the main backers, the US, has pulled its support since President Biden came to power. Domestic interest in Israel for offshore gas also wanted as the new government has been wary to provide new licenses. Ultimately, it is long-term deals that are needed to make future projects feasible. For Israel, European gas demand is important, as it not only brings in additional revenues but also opens doors in Brussels. Israeli politicians should be looking at securing not only exports but also enough supply for Israel itself for the next 30-40 years. Israel’s consumption of natural gas has been increasing by about 1 billion cubic meters per year. In 2019, Israel consumed about 11.25 billion cubic meters. Currently, Israel is estimated to have around 900 Bcm in proved reserves.

Still, Brussels is pushing Israel and Egypt to supply additional volumes. The full focus is on the capacity available, and possible expansion of the Egyptian Damietta-Idku plants. Brussels is trying to entice East Med parties by offering increased cooperation and investments in the clean energy sector too.

In a reaction to the Egyptian media, Egyptian Minister of Petroleum and Mineral Resources Tarek El Molla said that Egyptian LNG is already meeting a part of European demand. In an interview with Asharq Bloomberg, El Molla reiterated that East Med partners are looking to increase supply and capacity further. Potential additional natural gas supply to Egypt’s LNG plants could also come from Cyprus. The island nation expects to build out infrastructure at its Aphrodite gas field. A natural gas pipeline to Egypt is expected to be onstream by 2025.

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Furthermore, El Molla indicated that Egypt exports around 1 Bcf of gas per day, and is expecting this figure to grow to 1.5 bcf per day by 2024. At present, total natural gas production in Egypt is between 6.6-6.7 Bcf per day. The Aphrodite field is expected to hold 4.5 Tcf of natural gas, mostly to be transported to Idku and Damietta LNG plants in Egypt.

One thing is clear, demand fundamentals are strong, prices are very attractive, and E&P constraints are minor. The East-Med could be one of the options for diversification of energy supplies for the EU, but geopolitical challenges remain. The ongoing criticism by Brussels bureaucrats or respective European governments of Egypt’s government, led by President Sisi, is a potential obstacle to additional energy deals. In an increasingly competitive LNG market, European nations shouldn’t count on Egypt’s unconditional support. It will take more than a diplomatic trip to Cairo to heal old wounds.

Despite these geopolitical challenges, a new multilateral energy relationship is on the horizon.

By Cyril Widdershoven for Oilprice.com

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