Andrew McGregor
May 15, 2014
Only two years after public opposition and attacks by militants brought an end to Egyptian gas shipments to Israel, there is a new proposal to begin shipping Israeli natural gas to Egypt. Texas-based Noble Energy signed a non-binding letter of intent with Unión Fenosa Gas (UFG – a Spanish-Italian joint venture) on May 5 calling for the shipment of 2.5 trillion cubic feet of natural gas from Israel’s offshore Tamar gas field over 15 years. The gas would be liquefied for export at Unión Fenosa’s Damietta liquefied natural gas (LNG) plant (20 percent owned by Egypt) before shipment to foreign markets by tanker, though the Egyptian government announced two days later that it had not yet issued the necessary authorization required for any imports of gas from Israel. Egypt’s Oil Ministry has said that any such deal would need to “serve the national interest of the country” (Wall Street Journal, May 6; Haaretz/Reuters, May 7).
The Tamar gas field is located 50 miles off the Israeli coast in the waters of the eastern Mediterranean and began production in March 2013. The largest partner in developing the gas field is Noble Energy, with a 36 percent share. Other partners include Israel’s Isramco Negev 2, two subsidiaries of Israel’s Delek Group and a subsidiary of Israel’s Dor Alon Group. The Tamar partners have already signed smaller deals to supply gas to the Palestinian Authority and Jordan’s Arab Potash Company and Jordan Bromine Company but have otherwise failed to find international markets for Tamar’s production. Turkey remains a potential customer for Tamar gas, but any deal with Turkish energy firms would come with its own political baggage, given the strained relations between Turkey and Israel.
Leviathan, a second Israeli offshore gas field, is owned by the same partners as the Tamar field. With twice as much gas reserves as Tamar, Leviathan is expected to go online in 2017 though financing has yet to be arranged due to the absence of large, long-term contracts with buyers. The Leviathan partners are expected to announce an export deal with foreign partners within three months. Tamar and Leviathan are expected to meet Israel’s domestic energy needs for at least the next 25 years.
The last natural gas deal between Egypt and Israel ended badly, with both parties entering arbitration before the International Chamber of Commerce (ICC) this year to resolve outstanding financial claims. In this earlier case, natural gas exports from Egypt to Israel were repeatedly interrupted by attacks by militants on the al-Arish to Ashkelon pipeline. The attacks began shortly after the January, 2011 overthrow of President Hosni Mubarak and continued even after the Egyptian General Petroleum Corporation (EGPC) and the Egyptian Natural Gas Holding Company (EGAS) terminated their agreement with Israel’s East Mediterranean Gas (EMG) over a payment dispute following an Egyptian declaration of force majeure they claimed would excuse them from meeting their supply obligations.[1] By this time, there was massive popular opposition to continuing a deal to supply Israel with gas at below market prices that many Egyptians viewed as a prime example of the corruption that permeated the Mubarak regime.
There has been some discussion of using the existing pipeline to carry Israeli gas to Egypt until a proposed undersea Tamar to Damietta pipeline has been completed, though it seems likely the pipeline would again be the target of Bedouin and Islamist militants operating in the Sinai (al-Jazeera, May 8). Residual anger over this earlier contract is likely to help generate opposition to any new Egyptian gas project involving Israel. However, if the deal goes through, militants will have much greater difficulty interrupting the submarine pipeline than the exposed pipeline running through the Sinai Peninsula.
Egypt is trying to deal with severe energy shortages during a politically sensitive time. Natural gas is used to generate most of the nation’s electricity and blackouts have become common since the 2011 revolution. With steadily diminishing production and an inability to attract sufficient investment to develop remaining reserves, Egypt is finding it impossible to meet both heavily subsidized domestic demand and its export commitments (Reuters, May 6; al-Bawaba, May 7). Several gas-producing Gulf nations supporting Egypt’s political transition have supplied Egypt with $6 billion in free fuel to ward off potential popular unrest created by energy shortages this summer (Reuters, May 6).
With Egyptian natural gas now being diverted to the domestic market, UFG’s Damietta plant has been offline since December 2012 (al-Jazeera, May 8). A second Egyptian LNG plant located at the Mediterranean port of Idko is operated by the British-owned BG Group, the losing bidder on the Tamar gas deal. Like the Damietta plant, the Idko plant is also running well below capacity due to supply shortages and was unable to export any gas during the first quarter of 2014. The Egyptian government’s decision to divert natural gas supplies to the domestic market is estimated to have cost Unión Fenosa and the BG Group billions of dollars in lost revenue and has prevented both firms from meeting their commitments to customers in Europe and Asia.
Following the U.S. imposition of sanctions on Russia, European countries dependent on Russian gas imports are now seeking alternative supplies, mainly from nearby Algeria. After Egyptian negotiations with Algeria’s government-owned Sonatrach were halted when European markets began expressing interest in Algerian gas following the Crimea crisis, Egypt turned to Russia’s Gazprom Company for supply, reaching an agreement to import Russian liquefied natural gas beginning this summer (Daily News Egypt, May 13). The favorable payment terms offered by Russia may be viewed as part of its effort to re-establish influence in Egypt and other parts of the Middle East.
It remains uncertain whether any of the Israeli gas exported to Egypt would find its way to gas-hungry Egyptian markets or what the reaction of the Egyptian public might be to such a development. In the meantime, Unión Fenosa has brought its own complaint before the ICC over the Egyptian failure to maintain contracted payments as per its agreement and it is possible the BG Group will follow suit with reference to Egypt’s failure to supply its Idko LNG facility with natural gas. The BG Group has already declared force majeure for its Egyptian operations because of the government’s gas diversions and a $4 billion debt owed by the Egyptian government. Egypt has already faced 19 arbitration cases from international energy firms since the 2011 revolution, with most of these remaining unsettled. In the meantime, factories, businesses and retailers are all forced to reduce their hours of operation, damaging an already struggling economy. Alternatives to gas are being sought to supply Egypt’s energy needs as the high consumption summer months approach, including the use of coal and low-grade polluting petroleum products (Zawya [Dubai], April 15).
Note
1. Force Majeure refers to a party to a contract being relieved of their obligation to fulfill terms of a contract due an event or circumstance beyond the control of the party concerned that has resulted in the party failing or delaying its contractual obligations in circumstances that could not be prevented or overcome by the standard of a reasonable or prudent person or party. It excludes such relief (normally intended to be only temporary) in cases of negligence or malfeasance.
This article was published in the May 15, 2014 issue of the Jamestown Foundation’s Terrorism Monitor.