Israel in talks to export gas via Egypt

British Gas, Eni and Union Fenosa want to build a pipeline from their Egyptian LNG installations to the Leviathan field.

"Is the Israeli government committed to ensure the flow of gas from Israel to Egypt?" This is the fascinating question raised recently by Egyptian government sources as talks warm up for the sale of Israeli gas to Egypt's liquid natural gas (LNG) installations. It could be said that the question tests the limits of hutzpah but there can be no doubt that Egypt has good reason to discuss the matter.

In 2005, the Egyptian government signed an agreement with the Israeli government, binding it to ensure the flow of gas from Egypt to Israel at all times and in all circumstances. Two years ago the Egyptian government made a mockery of the agreement and its commitments, ignored the agreement and allowed Egyptian companies to cancel the gas supply agreement to the Israel Electric Corporation (IEC) (TASE: ELEC.B22) through EMG.

As a result the Israeli economy suffered huge economic damage - direct damage alone was estimated at NIS 20 billion. For the past two months Israeli electricity consumers have been paying this damage in full in their bi-monthly electricity bills, which rose 25% and even more to finance the IEC's purchase of more expensive fuels to produce electricity instead of the missing Egyptian gas. The Israeli government took the blatant violation of this agreement submissively. "It's just a commercial deal," Israel's assertive Foreign Minister Avigdor Liberman said disingenuously.

Is the Egyptian gas scandal set to return for a second round except the other way around. This time the deal would probably be completely different. In the last round the IEC and private Israeli companies bought natural gas from Egypt in dubious deals that stank of personal corruption in the Egyptian authorities. This time the deal would have solid economic justification but could fall victim to Egypt nationalist public opinion and become another wretched example of the lack of logic in the Middle East.

Egypt is desperate for gas

Egypt has 77 trillion cubic feet in proven gas reserves - double Israel's reserves and enough to last the Egyptian economy for over 40 years at the current rate of consumption. But after committing just about every mistake possible, Egypt has reached a point where it is desperate to import natural gas. Gas consumption in Egypt is increasing at a dizzying rate due to its subsidized price while gas production remains flat. International energy companies are not interested in investing in developing new gas fields in Egypt because the government will only pay them $2-3 per thermal unit an amount that doesn't even cover their exploration and development expenses for the fields. The Egyptian government has already run up heavy debts to these companies totaling $6 billion and the Egyptian Energy Minister has promised to pay only 25% of this debt.

The amount of gas being produced by Egypt is still larger than its consumption but the gap is closing quickly and there is less and less gas for export. This particularly harms Jordan which still has an agreement with Egypt to import gas, and the energy giants that invested billions in building LNG facilities to export liquid natural gas to Asia, Europe and other markets British Gas, Eni (Italy) and Union Fenosa (Spain), which together produced 4.7 million tons of liquid gas in 2012, 33% of their overall supply. The owners of the installations are believed to be buying the gas for $6, spending $2 to make it into liquid and are selling it for $12-14. This means the installations are losing $2-3 billion annually and the situation is only getting worse.

Dream deal

In these circumstances the possibility of exporting Israel's Leviathan gas via the Egyptian LNG installations could be a dream deal. The owners of the installations would build a pipeline to the Israeli field at their expense and save losses of billions of dollars. The Leviathan partners that fear investing vast sums in building onshore or floating installations can sell their gas for $6 per thermal unit with almost no investment. The Egyptian government can remove the threat of a huge compensation suit and substantially improve its attractiveness to foreign investors and the Israeli government would enjoy earlier revenue from profits on taxes. All sides would profit from an Israel export gas deal via Egypt.

However, above economic logic there are thorny political problems. The Egyptian authorities fear the reaction of the mob and the Muslim Brotherhood to a gas purchase deal from Israel. Two months ago the Egyptian Energy Minister published a strenuous denial to Israeli Energy Minister Silvan Shalom's comments on the radio that Israel is interested in exporting gas to Egypt. Talks to formulate a deal were not halted and Israeli politicians have managed to keep their mouths closed. In the next six months Egypt will choose a new parliament and appoint a new president and government. Sources involved in the talks say the deal could mature towards mid2014, on the assumption that Egypt will be more politically stable by then.

Published by Globes [online], Israel business news - www.globes-online.com - on December 24, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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