Does Egypt have what it takes to become a top LNG exporter?

According to McKinsey’s ‘Global gas outlook to 2050’ report, gas will be the strongest-growing fossil fuel and will increase by 0.9% from 2020 to 2035.

As Africa’s second-largest producer in 2019, Egypt is expected to become one of the world’s leading 10 exporters of LNG (liquefied natural gas) by the end of this year. Its transnational pipelines are also a major asset, connecting the country to Jordan, Israel and stretching out to Europe. What has pushed this boom? How is Egypt managing its export infrastructure?

Turning point

Egypt has come a long way. Natural gas production had been steadily growing – reaching 62.7bn cubic meters (Bcm) by 2009.

But 2013 was the start of a turning point for Egypt after it signed around 83 oil and gas exploration deals with international oil and gas companies (IOC) – between November 2013 and February 2020 – worth about $15.5bn, according to the International Trade Administration (ITA).

The move paid off with important discoveries:

• In 2015, the Italian Eni uncovered the Zohr gas field – the largest in the Mediterranean to date (30trn cubic feet).
• BP also came across Nooros the same year (4trn cubic feet) in the Nile Delta. This was in addition to existing fields in the Western Desert region, representing important resources to respond to growing global demand.

Political & economic instability hits hard

But a clear decline in production  (-31%) from 2012 to 2016 was connected to the political and economic environment at the time.

“This coincided with a slowdown in natural gas production and the halting of new exploration contracts from the government following the popular uprisings in 2011 and 2013,” says Brendan Meighan, an economist at Moody’s Analytics.

Economic difficulties and arrears also increased Egypt’s debt to international oil and gas companies (IOC), reaching $6.3bn in 2013. This in turn affected Egypt’s infrastructures including pipelines, and its liquid natural gas (LNG) export terminals, with its Damietta Segas plant ceasing activity in 2012 and Idku in 2015.

Instability in Sinaï has also threatened infrastructures and exports, notably the trans-national Arab Gas Pipeline (AGP) that connects Egypt to Jordan, Syria, Lebanon and Israel.

“The most visible effect of the 2011 revolution […] has been a series of attacks on the Arab Gas Pipeline, which prior to the revolution had transported natural gas to Jordan and Israel,” reports the US Energy Information Administration.

Because of those factors, Egypt was left with no other option but to import gas in 2015.

Discovery and recovery

As the global economy tries to recover from the effects of the lingering Covid-19 pandemic, a jump in the price of gas was expected given the reduced supply. But recovery has been remarkably strong.

We must not forget the tensions that exist between certain member countries as well as the disputes over maritime borders that the discovery of gas must have provoked. Therefore, this forum could be a pacifying factor…

“The pace has been faster than initially thought because of multiple converging factors both in Europe and in Asia. One is demand recovery in this phase when we are finally trying to get out of the pandemic. Another factor is the policies in many countries aiming at replacing coal consumption with gas consumption. This may reinforce the role of natural gas as a transitional fuel, which produces 50% less emissions than coal,” Alessandro Bacci, senior legal analyst for the MENA Region at IHS Markit, tells The Africa Report.

Egypt now has functioning export infrastructures, with its Idku export plant resuming activities in 2020 and the Damietta plant resuming activities in February 2021. These announcements came on the back of Egypt achieving self-sufficiency of gas in 2019, largely favoured by the 2015 discoveries and mounting global prices post-pandemic.

The domestic market has been a main beneficiary.

“President al-Sisi made an announcement at the beginning of the year that he’s personally trying to push use of natural gas in Egypt, converting a number of vehicles, expanding its use in houses. It is cheaper,” Aidan McKay, general manager at Energy Egypt tells The Africa Report. However, he says: “If they want to continue focusing on export, they are going to have to focus on renewables to take the pressure off the domestic market”.

With 38 years of gas left, Egypt needs to make strategic decisions with regards to new markets and infrastructure. Its proximity to the Suez Canal and the Mediterranean is an important tool to ensure right decisions are made and that they will be beneficial.

Asia and Europe

“The European gas market at the moment is very tight, so there have been opportunities for Eni through the Zohr [gas field] and its ownership of the Damietta [LNG export facility] to make use of doing very short journeys across the Mediterranean Sea,” says Tom Marzec-Manser, global gas and LNG analyst at the Independent Commodity Intelligence Services (ICIS).

“Most Egyptian [LNG] cargoes go through the Suez Canal and onwards to Asia, but there’s certainly been a handful to Belgium and Lithuania. It’s quite unusual, we haven’t historically seen Egyptian cargos going into Europe beyond the Mediterranean Sea,” he says, a fact reflected by BP’s 2020 performance in the country, with 2.7 Bcm exported to Asian and the Pacific and 1.7 Bcm to Europe.

Egypt might be of particular interest to European countries seeking alternatives to coal and Russian gas. Price is also a factor as “suppliers to the European markets can get better rates in the Far East,” McKay tells The Africa Report. A tight balance has to be maintained between the current cost of gas for immediate delivery (spot price) and that of transportation for buyers – also known as Freight on Board (FOB).

“It appears that spot LNG production in Egypt requires FOB prices above $5 MMBtu. When prices are below this threshold, the result is liquefaction and production shut-ins as it occurred in 2020. If the prices are above this threshold, unless there are technical problems at the Egyptian liquefaction plants, it is expected an increase in the exported LNG to both Europe and Asia,” says Bacci.

Mediterranean opportunities

There are other important gas discoveries in the eastern Mediterranean:

• Israel: the offshore Tamar field with a capacity of 10 Tcf discovered in 2009 and Leviathan capacity of 649 Bcm
• Cyprus: Aphrodite with a capacity of 4.5 Tcf discovered in 2011

Pipelines and LNG plants were discussed as an option to exploit these resources.

“The significance of Zohr and other offshore fields goes well beyond Egypt’s boundaries, as geographical proximity with other fields off the shores of Israel and Cyprus can put in place a competitive regional gas-export infrastructure based on the existing Egyptian LNG export facilities in Idku and Damietta,” says Simone Tagliapetra, a senior fellow at Bruegel, in his article ‘Eastern Mediterranean Gas: What Prospects for the New Decade?’

There are also plans to build an underwater pipeline from the Aphrodite plant to Damietta Segas LNG export terminal. Additionally, in 2020, Egypt signed a deal to import and liquefy gas from Israel (through the Arab Gas Pipeline – AGP), since it does not have such facilities – which could then be exported. LNG is easier to transport, requiring less infrastructure.

The EastMed pipeline, projecting to connect the gas reserves of the eastern Mediterranean (Israël, Cyprus) to Europe (Greece, Italy) is in the works, projected to function fully in 2025, thereby opening yet another opportunity for Egypt’s gas liquefying and export infrastructure.

However, other competing projects, such as TurkStream (connecting Russian gas to Turkey and on to Europe) have emerged, opening in 2020 despite US and EU sanctions.

Shifting geopolitics

With political stability being rather volatile in this region, the diplomatic stakes remain high for these shared gas projects. That’s why the East Mediterranean Gas Forum was created in 2019 to regroup producing countries (Egypt, Israel, Cyprus) and importers (Greece, Italy, France, Jordan, Palestinian Authority). With its headquarters in Cairo, “this forum could be useful if it is well used,” Alex Issa, a research associate in international relations at Sciences Po, tells The Africa Report.

“We must not forget the tensions that exist between certain member countries as well as the disputes over maritime borders that the discovery of gas must have provoked. Therefore, this forum could be a pacifying factor of relations between the countries of the region. On the other hand, it risks creating more tensions in other cases, if Turkey for example perceives it as a provocation and in turn could provoke certain member countries like Cyprus or Egypt through military activities in the Mediterranean. The US has also asked to become a permanent observer, which implies American political, economic and strategic interests to be monitored,” he says.

Indeed, the region has its own tensions, with Libya “also being an important issue in view of the involvement of Turkey and Egypt in the Libyan conflict. Any tension related to either gas or politics could in turn generate either political or gas-related tensions, the two factors being closely related. Moreover, we must not underestimate, Russian ambitions in the Mediterranean, and how Russia could play on alliances to secure its interests: despite this potential EU-Egypt alliance, we must not forget the relations maintained by Egypt and Russia,” says Issa.

Bottom line

With its production back on track post-revolutions, Egypt has interesting opportunities both as a producer and a gas liquefying actor in the region. Balancing diplomacy and market demands are at the core of its potential success as it collaborates and competes with regional newcomers and old-timers.