Natural gas discovery could see Egypt become major exporter

Natural gas has been an important part of Egypt’s energy mix and economy for decades. It was first discovered in the country in 1967, and a find was then made a year later offshore. Egypt fully utilised the resource, going from being predominately hydro driven to mainly gas based, and became an exporter of the product. At one time, Egypt sold its gas to Israel, Syria and Jordan with further plans to sell to Lebanon and Turkey. But increasing domestic demand, combined with plateauing production from ageing wells, underinvestment as a result of macroeconomic uncertainty and a lack of new discoveries, caused domestic supply to drop below demand. In 2012 Egypt had become a natural gas importer.

Imports

Since then, the country has been forced to import in great quantities and is scrambling to make sure it has enough fuel to keep the country running. In 2015, three regasification facilities were hired. Egypt started to import gas from Israel via a US company at international market prices, and the country went in search of new sources. The numbers are significant: the value of imports of liquefied natural gas (LNG) are expected to hit $3.55bn in 2015 and 2016. It seemed the mix would be permanently changed and that Egypt had become a gas importer for good.

The first imports of natural gas were approved in late 2012 for the second half of 2013, and an import terminal was set up on the Red Sea in 2015. That year, the country aggressively purchased LNG from foreign suppliers and the Ministry of Oil said that the country would be buying 55 cargoes of natural gas or four or five cargoes a month for a year.

New Discoveries

But just as the country started to import gas, a new find changed everything. Towards the end of 2015, press reports started to suggest that the Zohr natural gas field could tip the country back into the ranks of natural gas exporters, with the 30trn cu feet discovery by Italy’s Eni possibly increasing proven reserves by 40%. While it usually takes some time to develop a field, given Egypt’s experience and the political will to get the market back into balance, Zohr could be producing by 2018 and could get the country back into natural gas surplus by 2020. The Zohr discovery represents a step forward for Egypt, which has long failed to properly exploits its resources, and provides clear evidence that the country’s energy programme is back on track.

Imports Still Needed

In late 2015, the government noted that the massive Eni find would not stop the planned imports of natural gas from Cyprus and Israel. The country is keeping all of its options open and making sure it is not caught short. In early 2015, Egypt and Cyprus signed an memorandum of understanding for Egypt to import natural gas from Cyprus within the next six months.

Improved Pricing

There is still room to improve the country’s effectiveness at exploiting its natural wealth, most notably in terms of pricing. Egypt generally fixes the price it pays for gas at $2.65 per million British thermal units (Btu). While that price is in line with what is paid in the US, it is much lower than what is paid in Europe and Asia. The price is especially low given the conditions in Egypt, and the deep Mediterranean in particular.

In September 2015, the Egyptian Natural Gas Holding Company agreed to pay Eni $4-5.88 per million Btus for gas from Zohr. While this partially solves the problem of keeping international companies in the exploration and production game, it creates a whole new set of complications.

However, the output of the Eni project will be fully dedicated to domestic consumption. Rather than having some of its production hived off for export to make up for the low rates being paid in the home market, the company can sell all the output domestically given the price being paid and given the high demand in the domestic market. The supply cannot come soon enough to Egypt’s eager consumers.