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Egyptian-Israeli gas deal and a loss of strategy

Early on in the third millennium, Egyptian energy experts had warned their government of the consequences of continuing the strategy of exporting oil and natural gas for reasons associated with the imminent depletion of Egypt’s fuel resources, as well as the needs for the developments the Egyptian governments had announced aiming to achieve economic growth rates of no less than seven per cent.

With the successive governments continuing to export oil and natural gas without considering the needs of the future, we could consider the Egyptian governments’ dealings with natural gas as a waste of natural resources and selling the gas at prices lower than the average international selling price.

In 2008, Egypt became a pure importer of energy, and oil was excluded from the group of main resources for foreign currency. According to the estimates of the Central Agency for Public Mobilisation and Statistics (CAPMAS), Egypt is experiencing a crisis in providing energy in general, and specifically natural gas. This has been accompanied by a fall in production rates.

The CAPMAS data of November indicates that Egypt’s production of natural gas in September 2014 reached 3.011 million tonnes, and it fell to 2.686 million tonnes in September 2015. Egypt experienced a fall of 325,000 tonnes during this time, i.e. a 10.7 per cent decrease.

As for Egypt’s consumption of natural gas, the same report indicates that the consumption in September 2014 reached 2.962 million tonnes, and it increased to 3.071 million tonnes in September 2015, i.e. a 109,000 tonne increase, which amounts to 3.6 per cent.

The preliminary reading of the difference between the production and consumption of natural gas in Egypt may not suggest the presence of a serious problem. However, the fact that does shed light on the magnitude of the problem in Egypt is that the produced amount of natural gas is facing two challenges.

The first challenge is the share of the foreign partners, which reached about 40 per cent. The second is Egypt’s previous commitment to decades-long export agreements. These two issues greatly prevent Egypt from enjoying its share of gas production, despite the reduced production, which forces Egypt to import natural gas in order to meet its industrial requirements, as well as home use and other non-industrial uses.

Israeli deal

Last November witnessed the announcement of the signing of a Memorandum of Understanding between Egypt’s private Dolphinus Holdings and the owners of the Leviathan gas field, controlled by Israel. The energy crisis reflected on the relationship between Cairo and Tel Aviv.

After Egypt had been exporting natural gas to Israel since the mid-1990s, Egypt will start to import gas in 2019 and 2020, at a rate of four million cubic squares of gas per year for a period of 10 to 15 years.

Media outlets have reported that the Egyptian government is not a party in this deal and that it does not mind importing gas from any country in the world, including Israel.

The Egyptian Constitution stipulates that international agreements be presented before being put into effect. These agreements must be approved by parliament, but it seems that the government will escape this formality by transferring the relations regarding gas import to the private company.

Although the Egyptian government participated in the export of natural gas to Israel in the nineties, by means of the East Mediterranean Gas Company (EMG) owned by Hussein Salem, these contracts remained out of the sight of the Egyptian parliament, so it did not exercise its right to act as a monitor. This is despite the fact that the opposition before the January 25 Revolution insisted on preventing this agreement due to economic and national considerations.

There is another legal issue that will be an obstacle to the exportation of gas from Israel to Egypt. This problem has to do with the location of the natural gas in the Mediterranean Sea, as the agreement regarding this, signed between Egypt, Cyprus and Israel, drew Egypt’s borders outside the gas field.

However, this agreement will not be activated until it is approved by parliament. In light of the nature of the upcoming Egyptian parliament, this agreement could be passed, even though it will cause great economic and security losses for Egypt.

Just as Egypt exported gas via Hussein Salem’s East Mediterranean Gas Company in the nineties, the same is happening, as Egypt is now exporting via Dolphinus Holding, owned by a number of businessmen, led by Alaa Arafa, a textiles businessman and one of the beneficiaries of the Qualifying Industrial Zones (QIZ) agreement, which aims to build a closer relationship with Israel.

Future crisis

It seems that there is an Egyptian insistence on lacking an effective national strategy in the energy sector, which has been the case for decades. The energy issue is addressed only when needed, like when funding was given to the Egyptian General Petroleum Corporation to pay off its debt to foreign companies, reducing it from about $6 billion to $2.7 billion by the end of 2015. This is in accordance with a government programme. However, the payment of this debt was provided by means of what is known as debt consumption, meaning that the debt was transferred from debt to foreign companies to debt to local Egyptian banks.

Egypt has also headed towards imports by means of credit facilitations from Gulf allies or by expanding foreign debt. The government forgot what led it to its discovery of the large gas well on the coast of the Mediterranean by an Italian company last August.

Expert estimates over the past 10 years suggest that Egypt’s consumption of energy has grown by three per cent every year, but, in light of the decline in production and increase in consumption, they predict that these estimates will increase due to the funding crisis. This is expected to be the case at least in the medium-term.

The gas deal between Egypt and Israel, which is expected to go into effect in four years, is paving the way to very negative economic consequences, as in accordance with this agreement, the private sector will be allowed to import natural gas for itself or sell it to others. This will greatly raise the price of production in Egypt, adding a new obstacle for industry and investment.

The government’s task is not to obtain a means for the private sector to use the natural gas line or obtain the liquefaction boats that were recently rented. The government is responsible for planning, development, raising the living standards of the poor, improving the work market, achieving real growth rates, seeking to improve the GDP and the fair distribution of wealth.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.

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