Why Isn't Egypt Joining Israel's Natural Gas Deal Party?

The contrast between how Israel and Egypt reacted to Monday's agreement should serve as a warning to anyone looking forward to a grand new era of energy cooperation

David Rosenberg
David Rosenberg
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The gas pipeline leading from Egypt to Israel was blown up west of al-Arish, North Sinai, February 5, 2012. Up to that point the pipeline had already been blown up 12 times.
Pipeline from Egypt to Israel is blown up for the 13th time, Feb. 5, 2012Credit: REUTERS
David Rosenberg
David Rosenberg

It seemed like one big noisy party on Monday when the partners in the Israeli gas fields Tamar and Leviathan announced an agreement to export gas to Egypt. Their shares skyrocketed on the Tel Aviv Stock Exchange and the deal was lauded by none other than the prime minister.

But the revelers should have been looking next door in Egypt itself, where it was the silence was deafening.

Dolphinus Holdings, the Egyptian buyer, declined to comment. One analyst wondered why President Abdel Fattah el-Sissi would risk allowing such a controversial deal to be made public just before a presidential election, and cynically concluded that the president was confident he could deal with any protests.

Petroleum Minister Tarek El Molla seemed to be holding his nose over the whole affair. “We don’t mind importing gas from Israel, but we have terms,” he said, referring to an outstanding dispute over compensation due Israel for Egypt's cutting off gas supplies six years ago.

The deal could herald a great new era of energy cooperation, as everyone in Israel is hoping, but it depends on whether economics or politics wins out. This being the Middle East, I wouldn't bet much on the economics horse.

A thoroughbred, on paper

That horse is a thoroughbred, on paper. The eastern part of the Mediterranean Sea is sitting on top of a huge reservoir of natural gas. Israel has the Leviathan and Tamar offshore fields, Cyprus its Aphrodite and Egypt the giant Zohr field – altogether some 1.89 trillion cubic meters of gas. And there's almost certainly more to be found, including in Lebanon and Gaza.

The Middle East doesn't need all that energy, but Europe is only a pipeline away. If all of these emerging gas powers could team up, the economics of exporting the gas look reasonably good.

Europe wants the gas because its own reserves in the North Sea are dwindling and because it wants to reduce its reliance on Russian energy.

The only problem is how to deliver the gas.

One option, which Israel and other East Mediterranean countries agreed to back in December, is to build an undersea pipeline from Cyprus to Greece to Italy. Another option is be a more modest pipeline to Turkey, which would consume some of the gas itself and send the rest on to Europe. Turkey, a big gas market in its own right, would also like to reduce its reliance on Russia.

The third option is to forget about pipelines altogether, liquefy the gas and send it by ship to Europe, or wherever in the world there's demand.

As it happens, Egypt is home to two liquefied natural gas plants – both shuttered for now - that could be supplied from Egypt's newly discovered Zohr field, and/or from Israel and Cyprus.

All of the above is why Israel was in such a party mood this week. The gas in question hasn't been explicitly slated for liquefaction and export by Egypt, rather for use by big domestic commercial and industrial users at home. But the optimists can at least point to it as a sign of Cairo's willingness to do business with Israel.Would a bookie bet on that nag?

Now let's look at that sorry old nag of Middle East politics. It's a pitiable creature, but the fact is she beats our economics thoroughbred by lengths every time they face each other.

Any deal involving Turkey as a conduit or customer for gas runs up against Ankara's refusal to accept Cypriot sovereignty over its gas, on the grounds that the breakaway Turkish Cypriot state deserves its fair share. The Turks have even played with a little gunboat diplomacy to make sure they are understood.

Ankara also has frosty relations with Israel that have so far precluded any bilateral deal and it's not on good terms with Egypt either.

A pipeline to Europe would literally skirt the Turkish barrier, but the problem is that it could cost an enormous 6 billion euros and have to traverse deep waters and a long route. It might not be technically viable, much less financially viable.

That leaves Egypt's LNG plants. On a technical level, they offer an attractive solution: Israel's and Cyprus' gas fields are nearby and even if Egypt finds more gas to cover not only its domestic needs but for export, it would be a win-win situation for all the countries involved by turning Egypt into the joint exit point for all the region's gas.

But here's that old nag of politics pulling ahead: Turkey is doing its utmost to block any deal with Cyprus, and the chilly reception Israel got in Egypt this week doesn't bode well for a future of energy cooperation.

Six years ago Cairo had no hesitation in backing out of its contract to export gas to Israel because it was so politically unpopular. The pipeline was a favorite target of Egyptian bombers and regime opponents who accused the government of selling the gas out a knockdown price.

In Israel, Netanyahu and others see energy cooperation as enhancing strategic ties with our neighbors and making Israel into an indispensable partner.

But, as we are slowly learning with the fight Israel is waging with the Gulf powers against Iran, mutual interests can only go so far. As long as Israel is a "partner," you do business because you have to, not out of true friendship, and the nag of politics will always be a contender in the race.



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