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Abu Dhabi, UAEMonday 22 October 2018

Gas find is a badly needed source of relief for Egypt

Last week’s giant gas find off Egypt's Mediterranean coast promises to revive the economy and end an energy crisis that bedevilled the last two presidents.

Napoleon once said: “I have plenty of clever generals, but just give me a lucky one.” The Egyptian president and former general, Abdel Fattah El Sisi, would earn Napoleon’s approval.

Last week’s giant gas find off his country’s Mediterranean coast promises to revive the economy and end an energy crisis that bedevilled the last two presidents. It is a remarkable stroke of luck for the Egyptian government and, if used well, ordinary Egyptians, but a bad omen for regional gas competitors.

The field, named Zohr, Arabic for midday, was announced by the Italian major Eni, Egypt’s leading oil and gas producer. At an estimated 30 trillion cubic feet of gas, it is the largest field found in the Mediterranean, increases Egypt’s reserves by half and could produce up to 3 billion cubic feet of gas per day starting in 2020. Egypt produces only 4.35 billion cubic feet per day while demand is as high as 7.8 billion cubic feet, so Zohr would almost fill the gap.

Egypt has been suffering a worsening gas and power crisis since the 2011 revolution, but the seeds of its trouble were sowed years before. Subsidised gas prices to consumers caused rocketing demand, while new field developments in deeper water were uneconomic. Unpaid debts to oil companies have also deterred investment. Electricity cuts were eased this summer, but only by diverting gas away from industry, worsening economic troubles.

The Zohr find continues Eni’s remarkable run of exploration success. While nearly all major oil companies are struggling to increase production, the Italian company has found 18 billion barrels of oil and gas combined around the world in the past 10 years, two-and-a-half times the next-best rival company.

The discovery is also good news for the companies exploring the surrounding area – BP, Italy’s Edison, the Irish junior Petroceltic and Total just over the border in Cyprus. Shell, though, which in 2011 gave up the block now held by Eni, will be cursing its fate.

The discovery is bad luck for regional competitors. The petroleum minister Sherif Ismail has indicated that Zohr will serve Egypt’s domestic market, so the country’s two LNG plants at Damietta and Idku, which previously liquefied gas for export to southern Europe, will continue to lie idle for lack of feedstock. But it does seem to end the controversial prospects of Israel’s own large offshore finds supplying Egypt or at least being re-exported by restarting the LNG plants.

Israeli exports were already doubtful because of years of political wrangling and procrastination in Tel Aviv. If it could improve security in Sinai, Egypt could also seek to pre-empt Israeli gas supplies to Jordan, which it supplied until its recent shortage, and so help rebuild its regional clout. Zohr may also extend into Cypriot waters, allowing the island state finally to develop its own resources.

Many Egyptians on social media have been sceptical they will benefit, recalling the allegedly corrupt gas export deal with Israel through which cronies of the former president Hosni Mubarak profited. With Zohr’s gas mostly destined for the domestic market, skimming off profits will be more difficult, but some rare transparency would still help build confidence.

The government will need to manage expectations over the next few years before production starts. About US$5bn of annual revenue, some of which will go to cover Eni’s costs and profits, will help narrow but not eliminate a budget deficit that stands at $31bn for this fiscal year. Egypt needs to continue its push for cutting subsidies, improving energy efficiency and promoting solar and wind power.

If used well, this giant find could assist economic revival, and bolster the current government as well as Cairo’s regional standing. Zohr may not bring Egypt into the midday sun just yet, but it is at least light at the end of the tunnel.

Robin Mills is the head of consulting at Manaar Energy and the author of The Myth of the Oil Crisis.

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