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Monday, April 30, 2012

Egypt shoots itself in the foot

Robin Mills argues that Egypt shot itself in the foot by canceling its natural gas deal with Israel.
Whatever the reason for the decision, it has squandered one of the Egyptian energy industry's most precious resources. The one thing more important for gas customers than attractive prices is security. As Algeria discovered in the early 1980s and Russia and Ukraine in 2009, once a gas supplier gains a reputation for unreliability, it is very hard to shake off. With the pipeline bombings and now this contractual action, Egypt has squandered a lot of hard-won trust.

This incident marks the definitive end of a very successful period for Egypt's gas industry. Beginning in the early 1990s, Cairo liberalized its natural gas exploration policy, invited foreign investment, and developed new gas exports, including building liquefied natural gas (LNG) plants and pipelines to Israel and its Arab neighbors Jordan and Syria. Major new fields were found offshore in the Nile Delta, and in the two decades since 1990, gas reserves increased nearly sixfold and production almost eightfold.

But this policy had already run into trouble before the revolution. Low, fixed prices made new developments unviable, while encouraging demand to grow at 9 percent annually. Egypt's LNG plants are running below capacity, and its promising shale-gas potential and new offshore fields will not be exploited without price increases. Political paralysis in Cairo, however, makes it all but impossible to reform the subsidized domestic market.

The horizon of Egypt's gas sector is also steadily shrinking. Ambitious plans to expand the Arab Gas Pipeline as far as Turkey, to link it to the European market, have been relegated to the realm of dreams. It also remains to be seen whether prices to Jordan will be raised further or whether that deal too will be annulled. Hassan Younis, minister of electricity and energy, made it clear that the gas originally sent to Israel will now be diverted to the domestic market. But despite claims that Egypt could benefit from using the gas at home, the 2.1 billion cubic meters (BCM) shipped in 2010 is a small part of Egypt's total output of 61 BCM.

Israel will suffer some short-term pain for Egypt's decision. It has already begun contingency plans, however, stepping up output from its existing domestic fields and planning a fast-tracked LNG import terminal. It could be operational as early as the end of this year and would more than replace the lost Egyptian gas -- though at three times the price.

Additionally, while Egypt's gas future looks gloomy without major reforms, Israel's has been transformed by new discoveries in the deep waters of the eastern Mediterranean. The first big find, the Tamar gas field, is due to start production in April 2013. Egypt has thus given Israel a useful opportunity not only to escape from a deal that was about to become unnecessary, but also to claim damages and the moral high ground.
To whom else can Egypt sell gas at a reasonable price? How will they transport it?

Read the whole thing.

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