Opinion

Israel Selling Gas to Egypt: Mark of the Real New Middle East

The economic case for Egypt to import Israeli gas is overpowering, but this is the Middle East and politics may still upset everything

File photo: Egypt President Abdel Fattah al-Sissi.
AFP

Are we witnessing a historical and fundamental change in relations between Israel and its Arab neighbors?

The signs include the quiet but obvious warming of ties between Israel and Saudi Arabia in the last few years, as both countries face a common enemy in Iran. But now Israel is about to undertake a much more fundamental test of its acceptance (not welcome, heaven forbid) in the Middle East.

The test in effect began on Wednesday, when Israel’s Delek Group and Noble Energy of the U.S. signed an agreement taking a stake in the abandoned EMG pipeline running between Egypt and Israel.

The energy business at once offers the prospect of big economic benefits for everyone involved, but could end up coming to nothing if the region’s volatile politics gets in the way.

'Peace pipeline' or pipeline in pieces

The pipeline was originally built a decade ago to export Egyptian gas to Israel, but it fell victim to violence and politics. It was attacked time and again byterrorists: every time it would be repaired, it would get blown up again. Finally it was shut down for good in 2012 by the Egyptian government, then led by the Muslim Brotherhood.

The idea now is to use the same pipeline to export Israeli gas to Egypt.

Despite all the wonderful words about “peace pipelines” and turning the Eastern Mediterranean into a regional energy hub, it’s far from clear that politics won’t rear its ugly head again.

The business case for the pipeline is unassailable. Not only Israel, but Egypt and Cyprus have discovered lots of natural gas in Mediterranean waters in recent years, and it’s almost certain that more will be found. If the three countries can work together, it would solve a lot of the logistical and political problems of finding markets for their gas and add up to a win-win for everyone involved.

Egypt will be putting in the Zohr field with its estimated 850 billion cubic meters of reserves, which has begun producing. Israel, of course, has Tamar (280 BCM) in production and Leviathan (626 BCM) ready to go in 2020. Cyprus has its Aphrodite field (140 BCM) in development. That’s the supply situation.

On the demand side, Egyptian gas consumption is booming and the country has turned from being a gas exporter to a gas importer in recent years (which is another reason why Cairo backed out of its export commitments to Israel in 2012).

The giant Zohr field will mainly go to domestic use. But there are prestige and power that comes with being a hub for energy, and Cairo is ready to effectively boost its capacity by importing gas and re-exporting it. The country has two idle terminals for producing liquefied natural gas. That liquefied gas could be sold to Europe.

Being an energy hub would create jobs and give Cairo a badly needed source of tax revenues.

And Europe is interested. Its own sources of natural gas, in the Netherlands and the North Sea, are gradually being tapped out. European leaders are wary about needing to rely on importing gas from Russia and the risk that Putin might turn off the spigot in a political dispute.

That’s unlikely, but the danger is so immense that it's not something any responsible policymaker would want to ignore. There’s also burgeoning demand in China and India, which could also take LNG.

A beautiful friendship

For Israel, the alternative to using the existing pipeline to Egypt is to build a new one to Italy, via Cyprus and Greece.

While economic conditions are making the idea seem increasingly viable, at this point, the pipeline would be a huge technical challenge – 2,200 kilometers long, at depths of three kilometers under the Mediterranean and a cost of no less than $7 billion. It might not even work. Egypt is a better bet as a conduit.

What might get into the way of this beautiful natgas friendship is, as I said, politics.

The pipeline passes through the north of the Sinai, which is still ridden with Islamic State and other terrorist groups, who might easily start blowing it up again.

More fundamentally, while officials in Cairo and Amman (Jordan has also begun to import Israeli gas) may appreciate the economic benefits of energy cooperation, among the general public, the Israel is still seen as the enemy. There is little trade, virtually no investment and near-zero tourism between Israel and even the neighbors with which it is formally at peace (Egypt and Jordan), and it isn't only because neither Egyptians nor Jordanians could easily afford an Israeli holiday.

In other words, the political base for this energy cooperation is precarious, and could collapse with the smallest push – a change in government, widespread popular protests or a revolution. That’s a very big risk in the gas business, which is built around long-term contracts and big infrastructure investments.

In the case of the pipeline deal, Delek and Noble are paying $518 million for their share of the pipeline and the deal they have to sell gas to Dolphinus Holdings is a 10-year, $15 billion contract.

Then there is Turkey and its fraught relations with Cyprus and Israel.

The economic mess that President Recep Tayyip Erdogan has created may cause him to lay low or put economic issues ahead of politics. Or, it might make him even more aggressive as a way of distracting Turks from the country’s problems. Erdogan’s threats could delay or even prevent development of Cyprus’ Aphrodite field.

The economic case seems overpowering, but as the scorpion in the old joke explained after he stung the frog who was carrying him across a stream, killing them both, “Sorry, this is the Middle East.”