War in Gaza won’t change the outcome for East Med Gas Pipeline (EMGP) project

The East Med Gas Pipeline project had already lost too much momentum before the region fell into conflict

WHAT: Rystad Energy believes war between Israel and Hamas will discourage investment in the EMGP.

WHY: Israel’s last government had been pursuing other gas export options with Egypt, which was keen to send more LNG to Europe.

WHAT NEXT: Armed conflict will disrupt Egypt’s LNG business – and plans for Gaza Marine.

On October 19, Olumide Ajayi, a senior LNG analyst for the London Stock Exchange Group (LSEG), informed Reuters that Egyptian stocks of LNG for export had started to run low since the outbreak of war between Israel’s armed forces and Hamas in the Gaza Strip.

Citing shipping data, he noted that a tanker hoping to load LNG at Egypt’s Idku natural gas liquefaction facility had recently turned away for want of supplies. Rather than fill up in Egypt, the vessel headed for Algeria’s Arzew LNG plant instead, he stated.

Ajayi explained that the tanker had diverted from Egypt to Algeria because Chevron, the US-based operator of the Tamar field offshore Israel, had halted production and suspended shipments through the East Mediterranean Gas (EMG) pipeline from Ashkelon to Arish in light of the armed conflict in Gaza. These events have reduced the volume of gas available for processing into LNG for export, he told Reuters.

Egypt had been hoping to resume LNG exports before the end of October, he added. The North African country has not delivered any LNG to foreign customers since July, since domestic demand has been high enough to justify to keeping all domestic production and Israeli imports at home.

Prior to the suspension, he noted, about half of all the LNG exported from Egypt had been going to the EU and the UK.

Rystad predicts regional disruption

Ajayi happened to be speaking just one day after Oslo-based Rystad Energy published a note positing that the escalation of armed conflict in Gaza was likely to have serious and disruptive consequences for regional natural gas markets.

In a note, the consultancy indicated that it expected development work at Israel’s offshore gas fields to be suspended or ramped down in the event of a prolonged war. And since Israel extracts more gas than it consumes, it explained, the closure of these offshore fields would halt exports to neighbouring Egypt and Jordan, both of which would suffer from the consequent reduction in supplies.

In turn, Rystad said, the closure would in the short term affect the European markets that have started to buy Israeli gas processed into LNG at Egypt’s Idku and Damietta plants. Moreover, it suggested, this turn of events would in the longer term probably discourage investment in the East Mediterranean Gas Pipeline (EMGP), a proposed export link that would carry gas from Egypt, Cyprus and Israel to Europe.

In the meantime, the consultancy added, shutdowns and export suspensions would also slow the pace of development work at the fields, while also forcing Israel to revert to using imported coal and crude oil to generate electricity.

EMGP already off the table

Ajayi’s report of disrupted tanker loadings seems to lend weight to Rystad’s analysis and predictions of disruption in regional gas markets. NewsBase suspects, though, that the consultancy has somewhat missed the mark with respect to long-term consequences for EMGP.

In an official sense, this pipeline has been under discussion for years and continues to be discussed under Israel’s current government. Unofficially, though, the project – which envisions the construction of a conduit along a 1,900-km route that lies partly in disputed territory, in waters up to 3,000 metres deep and at a cost of at least €6bn ($6.36bn) – has probably been dead in the water for at least a couple of years.

The administration of US President Joe Biden has sometimes tried to take credit for sinking it by signalling in early 2022 that it would not support construction of the link. By that point, however, Israeli and Egyptian officials had already begun discussing other options that were likely to prove easier, quicker and cheaper to execute than the proposed long-distance, deepwater EMGP link to Greece – including a short local subsea pipe to supplement an existing onshore line – for moving Israeli gas to Egyptian LNG plants for liquefaction and subsequent export to Europe.

They were highly motivated to continue these discussions following the Russian invasion of Ukraine in February 2022, as this event provoked strong concerns about European energy supplies. In turn, this strong motivation led to the signing of a three-way memorandum of understanding (MoU) between Israel, Egypt and the EU in June 2022. The document aimed to establish a basis for launching Israeli gas exports to Europe via Egypt, and it has indeed served to open the door for such shipments.

The hope of Israel’s previous government, headed by the centrist Yesh Atid faction, was that the MoU pave the way for expanding gas cooperation with Egypt (and the EU) in the future. However, Israel’s current government, headed by the rightist Likud faction, has not shown as much interest in this prospect, perhaps because of its own preoccupation with contentious domestic political issues.

Under these circumstances, EMGP has made no discernible progress over the last two to three years. Officially, discussions have been ongoing, and all of the parties that signed an MoU on the project in mid-2020 – Greece, Cyprus and Israel – remain committed. On a practical level, though, there seems to be little optimism about the pipeline’s future. As such, it may be difficult to dissuade investors further, per Rystad’s concerns.

Impact on Egypt – and Gaza

Under other circumstances, EMGP’s failure might have relatively little impact on Egypt.

After all, officials in Cairo have been hoping to reap the benefits of increased gas imports from Israel – namely, the chance to secure gas market share in Europe by securing additional feedstock for the country’s LNG plants. But with armed conflict brewing, this gamble is not likely to pay off any time soon.

Moreover, war is almost certain to derail the deal that Egypt was hoping to strike in the near future for the development of Gaza Marine, a gas field off the coast of the Gaza Strip. This is a disappointment for Egypt, and it compounds the economic catastrophe facing the enclave’s population of 2mn-plus.