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Here's How Egypt Could Screw Things Up a Bit For Israel

The newly discovered Zohr field off the coast of Egypt could fulfill the country's electricity needs for a decade — and eliminate a need for Israeli gas supplies.

by Eva Hershaw
Sep 15 2015, 8:36pm

Photo by Gregorio Borgia/AP

When Italy's state-owned Eni announced in late August the discovery of a "world class supergiant," a massive natural gas deposit in the Zohr Prospect 120 miles off the Egyptian coast, the North African country cried eureka. The Italians flexed, boasting their growing industrial prowess, and Israel, which had plans to sell its own natural gas to Egypt, balked. The Zohr deposit, which would double Egypt's existing reserves, has been billed as the largest natural gas discovery ever made in Egypt and in the Mediterranean Sea.

"It's a very important day for Eni and its people," Claudio Descalzi, Eni CEO, said in a statement after paying an urgent visit to Egyptian President Abdel Fattah Al-Sisi to break the news. They had found at least 30 trillion cubic feet of gas, sitting at a depth of 4,757 feet. If Eni is right, Egypt will need to look no further than within its own borders to meet national energy needs for the next decade.

But as Eni moves to carry out a more thorough appraisal, a number of significant impediments could upend its — and Egypt's — ambitions. As gas prices remain in a slump, to a large degree due to a glut in global supply, companies are not looking to take on additional risk. This concern is compounded in Egypt, where four years after the 2011 revolution that toppled President Hosni Mubarak, and following a military coup that overthrew an elected government, the country remains politically and economically unstable under el-Sisi. While there are high hopes that Zohr could offer some economic relief, creating a more self-reliant Egypt, analysts say that will largely depend on how authorities manage the opportunity.

"It is no slam dunk," Tim Boersma, the acting director of the Energy Security and Climate Initiative at the Brookings Institute, said. "It will take a number of years, a number of agreements, and stable conditions to bring it online."

Related: Cairo Blackout Causes Chaos Amid a Continued Energy Crisis

Eni, for one, will have to be convinced that the Egyptian market is safe. The company has been working in Egypt since 1945, when it first entered into business with then-president Gamal Abdel Nasser. Today, it remains the largest hydrocarbon producer in Egypt, with an estimated daily equity production of 200,000 barrels of oil equivalent. But the country's political instability has taken its toll on foreign investment, and Eni may opt to export a portion of its find rather that relying solely on the domestic Egyptian market.

"Given the difficulties that Egypt has been facing since the collapse of Mubarak's regime and the low oil price environment, Eni is likely to have stronger bargaining power at the negotiating table," said Carole Nakhle, director at Crystol Energy and an expert on international natural gas markets. Fluctuations in the cost of natural gas are inevitably tied to the price of oil, she added, as natural gas is often extracted in conjunction with oil by the same rigs, in the same areas.

Natural gas production in the country has steadily declined over the past decade, while its infrastructure has aged due to weak investment. Egypt's once self-reliant energy market has been pushed to import natural gas in recent years as the population continues to grow. Currently, Egypt is the largest oil and natural gas consumer in Africa, but the growing demand has come at a high cost to the state, which spent $18.2 billion on oil subsidies and $1.8 billion on electricity subsidies in the 2013-2014 fiscal year, according to the US Energy Information Agency.

"The subsidies may not go away so quickly," Steven Cook, a senior fellow for Middle East and Africa Studies at the Council on Foreign Relations, said. "As much as they distort the energy market, they are a means of political control."

And as the government moves to cut spending through energy reforms, the Zohr field presents an opportunity to lessen dependence on regional exports. "In the long run, Egypt will no longer need the kind of assistance it has received from its Gulf allies to keep its lights on," Cook added.

While Cook does not expect the finding to dramatically rearrange regional geopolitics, the finding does come as a disappointment to Israel, which had ambitions to fill Egypt's growing demand with natural gas from its Leviathan field, which is located 80 miles off its coast and estimated to contain 22 trillion cubic feet of natural gas. If Eni can sell the Zohr gas to Egypt, that market will no longer be available to Noble Energy, the Texas-based company that is developing the Leviathan field for Israel.

"If we assume the new field can be developed, and if operators can agree with the Egyptian government, that would be a major setback for the operators of the Leviathan field," said Boersma, who added that Israel would be forced to piece together smaller buyers, rather than counting on a single, large market such as Egypt.

Related: There's a Big Energy Story Unfolding and It's Not About Cheap Oil

Last week, the Knesset passed the regulatory framework needed to develop the Leviathan field, while Noble shrugged off speculations that the Zohr discovery would impact their own growth in the region. In a statement, the company said that their natural gas fields, including Leviathan, "remain very well positioned to help meet Egypt's strong domestic demand and export needs," adding that "no single one of the region's discoveries" could fill the Middle East's rapidly growing demand.

As Noble moves forward with the Leviathan field, Eni continues in negotiations with Egyptian authorities. If all goes well, the gas from the Zohr deposit will be brought to shore within the next three to four years. And Egypt has expressed its hope to be self-sufficient again by 2020. But as Simon Henderson, the director of the Gulf and Energy Policy Program at the Washington Institute for Near East Policy, points out, the extent to which Egypt will be able to capitalize on this find will depend on the guarantees it is able to offer.

"Energy companies do not want to make deals unless they can see as far into the future as possible, and for a gas field, that's 15 to 20 years," Henderson said. "Eni will certainly have to take a bet that the Sisi government will survive, or that the evolution of the Sisi government will be a sufficiently smooth transition of power for it to remain a viable market."

Watch the VICE News documentary Egypt Under Sisi here: 

Follow Eva Hershaw on Twitter: @beets4eva

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