All pipelines lead to Egypt

14 November 2018
14 August 2018, Week 32, Issue 750

Egypt’s stated desire to be a regional energy hub moved closer to reality last week, with reports that a deal was nearing on natural gas exports from Israel’s offshore Tamar and Leviathan fields to Egypt through the existing East Mediterranean Gas (EMG) gas pipeline.

This news follows reports earlier this month that an agreement was also close on transporting gas from Cyprus’ offshore Aphrodite field to Egypt by subsea pipeline, some of it new-built and connected to existing infrastructure. 

Furthermore, on August 9, Egypt signed a contract on resuming gas exports to Jordan. 

Offshore fields

Tamar and Leviathan are being developed by Houston-based Noble Energy and Israel’s Delek Drilling, while Aphrodite is operated by Noble, with Delek Drilling and Royal Dutch Shell as partners. 

The Israeli gas would be delivered to Egypt’s Dolphinus Holdings, which will distribute the gas to Egyptian industries. Under a contract signed between Noble, Delek and Dolphinus earlier this year, the Egyptian firm will receive 64 bcm of gas from the Tamar field over a 10-year period, making the deal worth US$15 billion.

The Cyprus-Egypt accord advances the ongoing intergovernmental agreement process between the two countries that will legalise pipeline shipments of Aphrodite gas to the LNG processing facility at Idku, from where it will be exported. Shell operates the underused plant at Idku, which can produce 7.2 million tpy of LNG from two trains. 

Noble and Delek have been negotiating gas sales with Cairo and with Egyptian companies for several years. The snag with the Dolphinus deal had been an arbitration case brought by Israel Electric Corp. (IEC) after Egypt halted supplies, in 2012, stopping flows through the EMG pipeline. A Swiss arbitration court awarded IEC US$1.76 billion, which Cairo was reluctant to pay. The two sides have since agreed to reduce the amount to US$470 million, which will be amortised over 15 years, thus enabling the new gas deal to go ahead.

Earlier this year Egypt passed a law allowing private companies to import natural gas, a step that was necessary if Cairo is to become a gas hub.

Noble and Delek are in the process of establishing a joint venture company based in Cyprus, and their Egyptian partner, East Gas, will set up a company in the Netherlands to partner with the Noble-Delek company. A new joint venture in the Netherlands will then buy 37% of East Mediterranean Gas Co., which owns the EMG pipeline. Those shares are held by Israeli businessmen Sam Zell and Yosef Maiman, who also sued Egypt for halting gas supplies through the pipeline. The purchase of their shares settles their arbitration cases.

Shipments of Tamar and Leviathan gas are anticipated to begin in the first quarter of 2019 and gradually increase to 6 bcm per year. The Israeli imports will help reduce Egypt’s reliance on LNG imports and help it return to exporting gas. 

Jordan

As the giant Zohr gas field ramps up production along with other fields in the Egyptian offshore, Egypt expects to produce 6.5 bcf (184 mcm) per day by the end of the year. This will allow it to channel gas to its LNG export facilities and, in 2019, resume exports to Jordan via the Arab Gas Pipeline (AGP).

A statement issued last week said amendments had been agreed on the 2004 deal, under which flows had been exported to Jordan. Egypt’s gas exports to its neighbour may be able to cover 10% of the latter’s power requirements, with total needs of 330 mmcf (9.35 mcm) per day. 

Egypt’s gas flows to Jordan began declining in 2009 and ended entirely in 2011. As a result, Jordan was forced to increase its use of heavy oil for power generation until, in 2015, it began importing LNG. In 2017, it received 3.31 million tonnes of LNG, while 6.18 million tonnes went to Egypt. Supplies to Jordan come under a five-year deal with Shell. 

Egypt plans to halt imports of LNG this year, while Jordan may bring these to an end in 2020. This would remove around 10 million tpy of demand from the market. Egypt’s two plants, at Damietta and Idku, have total nameplate capacity of 12.2 million tpy. 

Aphrodite

Further developments on the Cyprus-Egypt deal should take shape before the end of this year. An official signing of the agreement between government officials is scheduled for the autumn, but in the meantime the Cyprtiot government intends to consider a request by the Aphrodite partners to change the terms of the production-sharing contract (PSC), which gives the government a 60% share of the revenues from gas sales. 

The companies have proposed an effective swap, giving them 60% and reducing the government’s share to 40%. The partners argue this PSC would not provide them with a satisfactory return on investment. The change in the contract would reduce the government’s take by around 2.5 billion euros (US$2.85 billion) over an 18-year production period.

Further negotiations between Nicosia and the partners on the field are due in September. The challenge of finding a compromise to allow Aphrodite to be developed, while securing access to Idku, and the government revenue question is significant. 

Few details about the development of Aphrodite and the pipeline construction are clear. The most likely option is that it would involve the laying of a pipeline to the field, which lies 180 km offshore, at a cost estimated at around US$1 billion.

Outlook

Prospects for the much-discussed East Mediterranean gas hub are coming together. The first hurdle, following the gas discoveries, was a question of political will and resolving legal impediments. These have been largely settled, although some issues are outstanding, such as Turkey’s disputes with Cyprus over some gas sites. 

The next step will be one of infrastructure and financing. Egypt’s existing gas links – with pipelines to Israel and Jordan, and two LNG plants – position the country well to play a central role in exploiting regional finds. The question of financing may pose some difficulties but the sums involved are relatively manageable and there is likely to be appetite for such plans. 

Security is likely to be a concern, particularly in the Sinai, where Egypt’s ability to maintain peace has sometimes come into question. In general, though, plans are making progress and there are grounds for optimism. v

Edited by

Ed Reed

Editor

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