Charles Ellinas — 19/06/2015
Gas development delays and low prices endanger Egyptian deals for Cyprus and Israel. Israel’s Globes highlighted this issue and problems affecting gas sales to Egypt.
Gas development delays and low prices endanger Egyptian deals for Cyprus and Israel. Israel’s Globes highlighted this issue and problems affecting gas sales to Egypt.
In May 2014, the Tamar partners signed a letter of intent with Union Fenosa, which operates the gas liquefaction facility in Damietta in Egypt, to supply the company with 70 bcm over 15 years. But that was delayed as a result of regulatory problems in Israel.
Now the situation is very different and the deal is slipping away. A senior executive at Union Fenosa told Globes: “If Israel wants to export gas to Egypt, it has to take matters in hand and push gas exports ahead as fast as possible”. He added, “Global natural gas prices are falling and will continue to fall, and Israel has to act quickly.”
Union Fenosa is now unwilling to pay for a gas pipeline connecting the Tamar reservoir to the facility in Egypt. At stake is a $2 billion expense that the Tamar partnership did not foresee and which complicates the deal even further.
When asked why Union Fenosa had reversed its commitment about building the pipeline, the same executive answered that he was unwilling “to respond to internal conversations with companies. In recent months, we have continued holding talks with the companies at Tamar, and even visited Israel several weeks ago. I can say that the situation between us and the Tamar partners is complicated and difficult. The negotiations between us have reached an impasse.”
In the meanwhile, a report recently published by international consultancy company Ernst & Young indicates that Egypt’s priority to supply gas to its local economy, combined with the shaky state of the country’s gas reserves, and its debt to the gas companies, will lead Royal Dutch Shell to sell British Gas’s (BG) liquefaction facility in Idku.
“If Shell does sell BG’s business in Egypt, the deal between Leviathan and BG is in danger,” Van Leer Institute Chazan Center for Social Justice and Democracy research fellow AmnonPortugali told Globes. “The Leviathan partners and BG have already been negotiating for over a year. The minute Shell sells BG’s business to a third party; the entire matter will be in trouble… Obviously, the company that buys the facility can also decide to buy Israeli gas, but no one can be sure of that, and exports to Israeli gas to Egypt will be delayed by several years in any case.”
The Leviathan partners signed a letter of intent with BG last June to supply 105 bcm of gas to the BG liquefaction facility at Idku, Egypt, for 15 years. The value of the deal is estimated to be $30 billion. About one sixth of the gas reserves at Leviathan will be exported in this huge deal, which is designed to make development of Leviathan Phase I viable.
However, no final agreement has been signed by BG and the Leviathan partners due to the regulatory problems in Israel. Now that Shell has entered the picture, the question arises whether such a deal can exist at all in the future.
Globes said the partners in Tamar and Leviathan declined to respond to its report.
In the meanwhile the Egyptian newspaper Daily News reported that the Israeli Energy Minister said that Egypt has to import gas from Israel at approximately $7-$8 per mmBTU, but there was no response from Egypt. When all other costs are added, at such a price LNG from Idku or Damietta, using Israeli gas, will be loss making by as much as $3-$4 per mmBTU.
Similar problems would apply to gas from Cyprus. With Noble expecting about $5-$6 per mmBTU at the FPSO, once the cost of the pipeline to Egypt is included this would rise to about $7-$8 per mmBTU. Once all other costs are added, ie liquefaction, transportation to Europe and regasification, LNG from Idku or Damietta would be sold at a loss.This would be the case as long as gas and LNG prices remain low, which may be the case for the rest of this decade.
It is clear that delays, recent developments and low oil and gas prices are now endangering the gas deals with the Egyptian LNG plants.
Source: http://in-cyprus.com/egypt-gas-deals-not-good-for-cyprus/
