Israel and Egypt: A Natural [Gas] Match

Israel’s newfound natural gas wealth is moving the country from energy importer to potential exporter, altering the energy balance of the region in the process. Even more interesting is that Israel’s most promising export market just slipped from energy exporter to importer—that country is Egypt.

Apr 20, 2014 at 10:45AM

This article was written by Oilprice.com -- the leading provider of energy news in the world. Also check out these recent articles.

Israel's newfound natural gas wealth is moving the country from energy importer to potential exporter, altering the energy balance of the region in the process. Even more interesting is that Israel's most promising export market just slipped from energy exporter to importer—that country is Egypt.

Israel has historically been a natural gas importer, but recent offshore discoveries will likely change that. Concentrated in the Tamar (estimated 10 trillion cubic feet) and Leviathan (estimated 19 trillion cubic feet) fields, Israel's Mediterranean natural gas holdings could make the country a significant natural gas exporter.

This could be good news for Egypt, which is in the midst of an energy crisis. Egyptian electricity generation is largely dependent on natural gas. Unfortunately, government after government in Cairo have failed to implement sound national energy policies. Fearing this policy uncertainty, the international energy companies operating in Egypt—upon whom Cairo depends to explore for and extract natural gas—have slowed operations.

Now Egypt, once a net energy exporter, is predicting widespread shortages and electricity outages by mid-summer. Things have gotten so bad that authorities recently banned the production and import of air conditioning units that can be set below 20 degree Celsius as a means of conserving electricity. Energy scarcity is causing public dissent among Egyptians, who seem to be growing tired of mismanaged public policies.

In addition, Egypt's LNG export terminals sit unused as more and more of the gas previously destined for foreign markets is used to satisfy domestic demand. Egypt is an attractive market for Israeli gas, not only because of Egypt's shortage, but because those unused LNG export terminals and the Suez Canal give Israel access to the lucrative Asian LNG market.

"We definitely want to strengthen the economic ties with our neighbours, but we also don't want to be too exposed to possible upheavals in the region, so Israel has to have outlets that do not limit us to the region," Eugene Kandel, the head of the national economic council at the Israeli Prime Minister's office, told Reuters.

A sub-sea natural gas pipeline has been proposed, which would travel from Leviathan to connect with an offshore Egyptian pipeline network. The pipeline would feed Israeli natural gas directly into the underutilized Idku LNG plant, 50 KM east of Alexandria, and avoid previous infrastructural setbacks. In particular, groups opposed to Israeli-Egyptian relations have bombed previous aboveground pipelines—moving the pipeline under the Mediterranean would make it far harder for small groups to target.

Only two years ago Egypt decided to cancel natural gas exports to Israel, prompting the Israeli finance ministry to denounce the move as a "dangerous precedent that casts clouds over the peace treaties and the atmosphere and peace between Israel and Egypt." At the time, Egypt supplied about 40 percent of Israel's natural gas demand.

Two years later and the roles have been reversed. The energy landscape is constantly shifting, particularly where politics and revolution upset the status quo. Now, Cairo will have to hope that its previous customer can alleviate Egypt's energy shortages.

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Written by Rory Johnston at Oilprice.com.

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