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A change of course

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A discussion held 10 years ago about East Mediterranean gas would have focused on Egypt. It would have concentrated specifically on the quantity of pipeline gas that Egypt could export regionally and the capability of its two LNG terminals to compete for customers in Europe, North America, and Asia. Fast forward to today, and any discussion of East Mediterranean gas would consider when Egypt will cease to be a significant LNG importer, as well as the prospects for gas exports from Israel and Cyprus. So how, in less than a decade, have the region’s circumstances changed so markedly? And what is the next decade going to look like?

Egypt’s change of fortunes

By 2006, Egypt’s gas sector was highly successful. The LNG liquefaction plants at Idku and Damietta had been operating for several years, having been constructed at a low cost per t of capacity and rapid schedule that were close to industry-leading. Pipeline gas exports had been negotiated with Israel and an offshore pipeline constructed to deliver gas into Ashkelon. This was a politically significant and valuable commercial agreement between the two countries. This gas supply supplemented Israel’s own modest gas production and allowed it to continue expanding its power generation fleet’s reliance on gas.

During that time period, Navigant Consulting Inc. was helping the Jordanian government to negotiate pipeline gas imports from Egypt. An agreement to import up to 3 billion m3/yr was realised in 2003, with first gas being delivered to the steam turbine power plant in Aqaba. The gas pipeline crossed Egypt’s Sinai Peninsula. An offshore segment then headed to Israel, whilst the Jordan-destined branch turned south toward the Gulf of Aqaba. Despite the relatively short distance to Jordan, the crossing of the Gulf of Aqaba was technically complex, requiring one of the world’s largest pipe-lay vessels due to the steep offshore gradient. The geography of the Gulf of Aqaba would also come to affect the construction of Jordan’s LNG import terminal approximately 10 years later. Like Israel, Jordan converted its power plants to gas; the independent power projects, developed by a consortia led by both KEPCO and AES, were built as efficient combined cycle gas turbines (CCGTs). In 2006, authorities were considering the development of gas distribution businesses in both Aqaba and Amman to deliver low cost Egyptian gas to residential, commercial, and industrial consumers.

In Egypt, gas was supplied to new power plants and a growing petrochemical industry. However, all was not well in the Egyptian gas industry; production declines at older fields were starting to bite. The low price offered by Egypt for domestic gas production in a world of US$140/bbl of oil did little to incentivise exploration activities. Meanwhile, highly subsidised gas prices encouraged rapid increases in domestic consumption, and the commercial structure of the production-sharing agreements offered to energy companies were looking increasingly uncompetitive.

By 2010, these issues were beginning to create problems for Egypt and its gas customers, with deliveries to Jordan and Israel becoming somewhat unreliable. However, the serious problems kicked off in 2011. With the Arab Spring spreading across North Africa, the government of Egypt was overthrown. The new regime had different priorities to that of its predecessor; gas supply to domestic consumers was ranked above exports, which declined rapidly. As a result, the LNG liquefaction facility at Damietta was mothballed almost immediately. The Idku facility continued to export cargoes for some time, as it was supplied directly from a producing gas field, but eventually even that supply was diverted for domestic consumption. Pipeline supplies to Jordan became highly intermittent and effectively ceased by the middle of 2012. This created massive problems for the Jordanian government, as it was forced to buy expensive gasoil to operate its new fleet of CCGTs. The gas supply deal with Israel was cancelled. Although substantial, the impact in Israel was mitigated to some extent by its rising gas production.

By 2013, Egypt’s gas shortage had become so severe that it had to rapidly implement an LNG import facility on the Red Sea. At the same time, Navigant was assisting Jordan in implementing its own LNG import terminal at Aqaba to replace the now absent Egyptian gas supplies. Jordan later signed a deal to allow Egypt to import additional LNG cargoes via the Aqaba terminal, to be delivered to Egypt using the now reversed pipeline across the Sinai. A second Egyptian LNG import facility followed and a third facility is being considered.

Gas developments in Israel and Cyprus

While Egypt was struggling with growing gas demand and declining production, Israel’s gas industry was developing rapidly. A consortium led by Noble Energy discovered Tamar, Leviathan, and other smaller gas fields. Tamar was developed quickly to meet domestic demand as Egyptian supplies faltered. Israel also implemented an LNG import terminal to supplement domestic production, especially during the summer peak demand months.

Noble and its partners began searching for development options for the much larger Leviathan gas field, initially focusing on LNG exports to Asia or Europe (The North American market that had originally been targeted by Egypt’s LNG terminals had long since vanished as a result of North America’s shale gas revolution).

Then, Israeli domestic politics intervened. Noble’s successful exploration programme had transformed Israel’s energy sector. A consequence, however, was that a single consortium now controlled the vast majority of Israel’s newly discovered gas resources. That fact caused Israel’s monopoly commission to review the status of the gas industry and, in particular, the status of Noble’s consortium. The review turned out to be a long and protracted process, during which the development of Leviathan was essentially put on hold.

In Cyprus, Noble’s consortium had discovered another large gas field: Aphrodite. Once again, LNG exports seemed like an ideal route to market. However, a combination of economics and geopolitics has held back Cyprus’ gas ambitions. Although Aphrodite is a substantial resource, it is not big enough by itself to justify a world scale LNG liquefaction plant. Noble needed to find more gas – or others active in Cyprus (e.g. Eni and Total) needed to do the same. Unfortunately, that has not yet happened. One factor is that the domestic energy market in Cyprus is very small. Unlike in Israel, Noble was not able to develop Aphrodite initially for domestic consumption and then consider further export opportunities.

Geopolitics also complicates any gas development in Cyprus. Whilst the Cypriot government had identified a number of exploration blocks to the south of the island, Turkey (which controls the north of the island) had also identified a number of blocks. Many of these blocks overlapped, including those held by Noble and Total.

Gaza Marine

Well before the discovery of significant gas resources in either Cyprus or Israel, BG Group discovered the Gaza Marine field offshore from Gaza in 1999. Development of the resource was complicated by the political relationship between the Palestinian Authority and Israel. BG negotiated for several years to supply gas to Israel and Gaza. A CCGT power plant was developed (initially by Enron and completed by CCC) in Gaza with a view to utilise the gas from Gaza Marine. That process essentially came to a halt when Hamas came to power in 2007. As a result, Gaza’s power plant has never received any gas and has had to burn expensive gasoil instead. BG tried again in 2012 after the Egyptian pipeline contract to Israel was cancelled, but Noble’s development of Israel’s own Tamar field meant that Gaza Marine remained undeveloped. Shell’s recent takeover of BG is unlikely to aid the development of Gaza Marine, as Shell is seeking to divest US$30 billion of assets – Gaza Marine is probably on the disposal list.

Now and the future

The Egyptian gas sector may be about to take another change in direction. Eni’s recent discovery of the giant Zohr gas field may, along with other recent discoveries, bring Egypt’s gas supply and demand back into balance. The fast-track implementation of Egypt’s two LNG import projects and the progress being reported on Zohr suggest that a turnaround in Egypt’s fortunes could be reasonably rapid. A pause in the execution of the third LNG import facility may be further indication that Egypt is heading back on track. The Zohr discovery, just to the south of Cyprus’ maritime border with Egypt, has also increased interest in Cyprus’ recent licensing round.

Will Egypt return to exporting significant quantities of gas? Yes, but the source of the exported gas is unlikely to be Egypt’s own gas fields. Shell’s recent agreement with Cyprus and its investment in Cypriot gas resources suggest the probable import of Cypriot gas for re-export as LNG from Egypt’s mothballed Idku liquefaction terminal. Both Idku and Damietta have reportedly been running at bare minimum throughput and exporting a cargo occasionally to keep the units cold. With the supply of Cypriot gas, these facilities could return to something close to full capacity. The economics of this approach should be attractive for all of the companies and governments involved because investment in the export terminals has already been made and Cypriot gas is looking for an economically viable route to market. Development of Aphrodite for export via Egypt should also enable gas to be supplied to Cyprus’ domestic market, lowering its high electricity costs.

Leviathan also appears to be moving forward. Noble’s recent announcement of two agreements to supply customers in Jordan, as well as possible further gas sales in Israel, should enable a final investment decision (FID) to be made in 2017. Like Cyprus, interest in Israel’s latest licensing round appears strong. Domestic Israeli gas consumption has the potential to grow and access to Egypt’s other LNG terminal at Damietta may provide a cost-effective export route.

There is no doubt that the East Mediterranean is a challenging place to do business, where economics take a back seat to geopolitics more often than not. However, after a tumultuous decade, recent developments point to a brighter future for the region’s gas sector.

Written by Richard Bass, Navigant Consulting Inc.

This article was written for LNG Industry’s February issue and abridged for the website. Subscribers can read the full February issue by signing in


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