In the Pipeline

ABDALLA F. HASSAN | Business Today | July 2000

Following nearly seven years of on-again, off-again negotiations, a deal for the export of natural gas to Israel now seems on the horizon. The Egyptian government, which formally endorsed gas exports in November, has affirmed a commitment to supply the Israel Electric Corp. with cleaner-burning alternative to coal and mazut. With negotiations beginning in 1993, the process of hammering out an agreement for the much touted “peace pipeline” did not get serious until 1996, but political tension has so far hampered any tangible initiatives.

 

A framework for gas export to Israel has already been agreed on: Egypt and Israeli partners have formed a joint venture company called East Mediterranean Gas, headed by businessman Hussein Salem, which would be in charge of laying an offshore pipeline originating in Al Arish in North Sinai and supplying Israel. EMG is 60% controlled by the Egyptian General Petroleum Corp. and Egyptian banks. The remaining 40% is equally split between Salem and Israel’s Merhav Group. The gas will likely originate from east Mediterranean fields operated by U.K. oil giant BP Amoco and Italy’s Agip.

 

An offshore pipeline is technically simple. After an agreement is concluded, it would take another 17 months for gas to be online. Natural gas would be imported by the Israeli power utility, IEC, and at a later stage by another Israeli concern, to be chosen through a bidding process and expected to be formed in the coming year. The firm would import, set up the infrastructure and distribute gas to Israel’s industries and households.

 

Although roughly 40 billion cubic meters of natural gas reserves have been located off Israel’s shore, demand is expected to outstrip supply. “In 2002 we are going to need 2.5 billion cubic meters,” says Reuven Azar, first secretary of economic affairs at the Israeli Embassy. “In 2005 it is going to be about 5 billion cubic meters, and in 2025 it is going to reach 11.5 billion cubic meters.”

 

Within the past four years, Egypt discovered huge reserves of natural gas but did nothing to develop export. With Sameh Fahmy appointed oil minister in the last cabinet reshuffle in October, gas export became a critical government objective. Fahmy, formerly head of the Midor Project, a joint LE 1.4 billion Egyptian–Israeli oil refinery near Alexandria, aims to secure annual natural gas revenues of $3 billion.

 

Selling gas to Israel alone cannot satisfy Egypt’s need to maximize profits from its natural gas reserves. A policy timetable needs to examine short-, medium- and long-term export strategies, argues Tarek Heggy, a former chief executive officer at a major international oil company who now heads his own firm, TANA Petroleum.

 

“If you sell gas to Israel and the Levant, you will probably get anywhere from $300 million to $600 million dollars net income a year,” estimates Heggy. The potential of the market there will start with 400 million to 500 million standard cubic feet of gas a day at first, he says. “But I think it will go ultimately to 1 billion standard cubic feet a day.”

 

Yet with a comprehensive export strategy, the country can achieve $3 to $5 billion a year in net income from gas schemes, Heggy adds.

 

Egypt’s proven reserves comprise 40 trillion cubic feet, but estimates, according to seismic surveys, put actual reserves in the neighborhood of 120 trillion cubic feet. Gas exports to Israel via an offshore pipeline may also supply secondary markets in the southern Levant: Jordan, the Palestinians and possibly extending to Lebanon and Syria. Northwest Turkey is a target for Egyptian liquefied natural gas exports. BG and BP Amoco or among six groups competing for a contract to supply LNG to the country’s industrial port city of Izmir. The main competitors for the Turkish gas market are the central republics of Asia and Russia, which currently supply Europe with large volumes of natural gas.

 

Medium-term export initiatives to Italy not only tap the Italian market but — through an extensive and interconnected gas grid — the rest of Europe as well. Long-term, Egyptian gas exports may reasonably find a market in the Far East through LNG schemes, says Heggy. Japan, China and India are the main gas buyers in the region. With the brisk pace of economic development in Asia, Egypt could carve out a niche in a market whose primary gas sellers are Australia, Brunei, Malaysia, Qatar, Abu Dhabi and Iran.

 

Possessing sizable reserves, the four key players in gas production in Egypt are BP Amoco, Shell, Agip and British Gas. Agip is constructing a pipeline to connect offshore gas fields around Port Said with Al Arish. The nation’s gas reserves are found in the Mediterranean basin, the Delta and the Western Desert. Natural gas was first discovered in the Nile Delta region in the late ’60s, but developing this energy source, which cost hundreds of millions of dollars, if not billions, was ignored until 1988 when the first agreement to encourage international oil companies to explore for gas was formulated and signed.