Egypt’s Natural Gas and Israel

There was another bomb attack yesterday on the natural gas pipeline that transports 1.7 billion cubic meters of Egypt’s natural gas to Israel every year for an estimated $200 million. That amounts to around 3% of Egypt’s total gas production, but feeds anywhere from 20% to 45% of Israel’s demand (based on conflicting news reports), principally for electric power generation. This follows a successful attack in early February that shut the pipeline down until March 16; in neither case were the attackers identified.

The Egyptian government signed a 20-year agreement with an Egyptian-Israeli joint venture company East Mediterranean Gas in 2005 to pipe the gas across the border near the Mediterranean coast city of El-Arish (and Gaza). The unlikely agreement was settled at the time under the influence of three factors: low worldwide gas prices, recent mining discoveries in the shallow water north of the Delta doubling Egypt’s gas reserves, and a neoliberal spirit prompting experiments in free-trade economic cooperation with Israel, like Qualified Industrial Zones that allowed Egyptian and Israeli companies to produce component parts for the same products (usually textiles) and ship them without customs duties.

The deal was settled in spite of strong, continuing nationalistic opposition to any trade with Israel. This has only become possible, of course, since the resumption of diplomatic ties after the Camp David accords, which President Sadat settled in 1979 with President Carter and Israeli Prime Minister Menachim Begin ending a state of war with Israel that had lasted since its creation in 1948. As the price of natural gas increased exponentially in 2006-2008 and new Egyptian industrial projects started consuming the excess gas, Egyptians began to complain about the very low rumored (but confidential) prices Israel was paying for its gas. Protest culminated in a 2008 lawsuit in which an Egyptian judge ruled in favor of shutting down the pipeline; the government appealed and later negotiated an allegedly higher price with EMG in 2009. In light of the changing leadership after February 11 in the Cabinet, and the attacks on the pipeline, the Petroleum Minister has reopened negotiations to increase the price further.

The Daily Star has a good overview of the current negotiations, but many key bits of information – namely, the sale price of the gas – are still unknowns. Assertions about the global market price of natural gas are difficult to make, because unlike crude oil, natural gas is expensive to ship long distances. It only really became possible in the last decade with the invention of Liquified Natural Gas (LNG) technology, which chills the methane into liquid at -162 C. While locally produced gas around the world sells around $2-3 per million BTUs (the standard unit), index prices at the US’ largest LNG “regasification” facility in New Orleans are currently $5, and frequently soar higher than that.

Fossil fuel energy, and in particular gas, is therefore frequently the subject of nationalistic debate. It is a “national resource,” but its value is based on two things alone: the large capital investment necessary to produce and transport the stuff, especially from a risky offshore area (right, BP?), and a market willing to buy it. At the time the government settled its contract with Israel, Egypt’s supply was satisfied, and the international oil companies that engineer the mining were even sharing the high profits from the LNG exports with the government. But with excess gas flowing, its most cost-effective use was to sell it right away, and Israel was a willing buyer. At the time I was researching natural gas here in 2005-6, the capped domestic price was $2.65 per mBTU, but it was also the bare minimum that the international oil companies working off the delta shore would accept for their investment. It would make sense that Israel has been paying at least that much since the beginning, but it’s possible that the parties settled a lower price to take excess supply of Egypt’s hands (or because of other shady dealings).

Unfortunately, because of the nature of large-scale infrastructure investments in the gas industry, sales agreements tend to be decades long, and now Egypt is having some seller’s regret. Egypt is seeing natural gas it now needs at home exported as LNG (principally to France) in deals it has made with BG, Shell and Petronas in exchange for their billions in production investment. And the irony that this Israel pipeline bypasses the Gaza Strip, now starved of goods and energy because of an official Israeli blockade since 2008, goes without saying.

Interested in learning more about Egypt’s natural gas industry? Here’s a PDF of my in-depth feature story in Business Today Egypt magazine from July 2006.

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About ericschewe

PhD, History. This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 Unported License.
This entry was posted in Economy, Egypt, Oil. Bookmark the permalink.

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