5 October 2018
Gina Cohen
Practical steps have been taken that could eventually enable gas from Israel’s offshore to be piped to Egypt
Israel's Delek, the US-based firm Noble and Egypt's East Gas have established a company (Emed) to buy 39% of the 26in, 90km (56-mile) East Mediterranean Gas pipeline for $518m. This investment, combined with a transportation agreement, will provide the partners with the exclusive rights to use all the pipeline's capacity.
Of the $518m, the Leviathan and Tamar offshore gasfield partners will each pay $125m, whilst Delek and Noble will each pay another $60m. Most significantly, the East Gas company, which also owns the pipeline from Aqaba in Jordan to el-Arish in Egypt, will invest $148m, which is a considerable amount for Egypt. This strategic partnership with a leading Egyptian infrastructure owner provides "skin in the game" and an Egyptian umbrella for the entire transaction to sell Israeli gas to Egypt.
Leviathan gets first rights to transmit gas in the EMG pipeline. Namely, if capacity in the line is low, then the first 3.5bn cubic metres a year is for Leviathan and the second tranche of 3.5bn cm/y is for Tamar. If Tamar can't pipe all of this volume, the capacity automatically reverts to Leviathan.
This includes the ability to transmit additional Israeli gas in the 10bn-cm/y East Gas-owned pipeline from Aqaba to el-Arish.
Convergence of circumstances
Interestingly, the project is moving ahead at a most opportune time, when a convergence of global and local circumstances is making it possible to sell Israeli gas to Egypt.
Global demand for gas is growing. Bloomberg New Energy Finance predicted that global demand for liquefied natural gas would increase from 284m tonnes a year in 2017 to 450m t/y in 2030, while analyst Sanford C Bernstein puts this figure at 575m t/y.
Gas prices in Europe are already high and are entering the winter season under strain, with a significant risk premium priced into the forward curve. Global LNG prices have risen to a level that make exports via the fully amortised Egyptian LNG facilities economic once more.
Egyptian production has reached 69bn cm/y, of which Zohr provides 20bn cm/y. Output is expected to increase to 28bn cm/y when it reaches full capacity next year. This has finally caught up with domestic consumption (65bn cm/y in mid-September 2018) even enabling a few cargoes of LNG to be exported from Idku. However, over the past five years, 75% of the gas has been used by the power sector, whilst the non-power sector (industrial, petrochemical, residential and transportation) demand for gas used to amount to 43% of total demand before the crisis.
Field depletion
In addition, despite increased gas production, aging fields are depleting and consumption is anticipated to grow. The power sector alone has seen construction completed two months ago by Siemens of another 14.4 gigawatts of gas-operated power stations, and moving forward Bloomberg New Energy Finance believes that Egypt's gas power generation will increase 4% a year, which will lead to power demand for gas rising 44% by 2025 to reach 74.4bn cm.
As more gas becomes available from both Egyptian sources and imports from Israel and Cyprus, the non-power sector will also recover. It's assumed that demand will reach 15.5bn cm in 2025, amounting to a total 90bn cm of gas consumption by 2025 for all sectors.
Another factor which entered into play in September, is the fact that Union Fenosa Gas was awarded $2bn in an arbitration ruling from the World Bank's International Centre for Settlement in a case involving the idled Damietta LNG plant. The ruling will help to ensure that the terminal will be in a position to resume LNG exports in 2019.
All this means that Egypt (barring a major discovery) will barely have enough gas for its own consumption, let alone being able to export 17bn cm/y.
EMG advantages
For Israel, the Egypt venture is the speediest of all options to export significant volumes of gas, with no transit countries en route. Linking Israel to a major market is one of the main aspects to incentivise future exploration
For its part, Egypt will be able to replace more expensive fuels in its power mix and leverage its strategic location to tap into new markets for its LNG. Because of the location of the two LNG plants, just north of the Suez Canal, cargoes can economically be sent to buyers in both the Atlantic and Pacific basins. Egyptian LNG can be a competitive source of supply to Europe, the emerging markets in South Asia and the Middle East.
One common misconception needs to be clarified: the EMG pipeline was never bombed; the line that was blown up is the 36in line from el-Arish to Port Said in Egypt's northern Sinai. The Egyptians have been restoring stability in the area and this line has been operating unhindered the last few years.
Downsides
Despite the optimism, a number of questions remain unanswered. The tolling fees to use the EMG and the Jordanian to Egypt line aren't yet known and may be high. Then, Egypt's infrastructure needs to be upgraded to feed into the two LNG facilities. Also, the $2bn arbitration debt owed by Egypt to Israel Electricity Corporation needs to be resolved.
The deadline for fulfilling the conditions precedent is end-June 2019. What's important to remember in the meantime is that an opportunity was missed in 2014 when the memorandum of understanding was signed to export gas to Egypt because of differences over the gas outline. Between April 2015 and September 2018, Egypt imported 24.9bn cm of LNG, gas which Israel could have supplied to Egypt at a higher price than the average gas price in Israel and considerably lower than the LNG price paid in Egypt.
To ensure that another opportunity isn't missed, the Israeli authorities should lend their support to this project and enter into government-to-government agreements.
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