Of all the options that have been explored to facilitate the export of Israeli natural gas, the use of Egypt’s two existing LNG plants makes the most economic and strategic sense. Egypt has essentially run out of the natural gas needed to supply its substantial LNG processing capacity, as declining production and growing domestic demand has necessitated the diversion of its gas supplies to meet local needs.
By our calculations, Egypt was only able to make use of 23% of its 12.2 million tons per annum of combined processing capacity at its plants in Idku and Damietta last year. This was a drop from 42% utilization in 2012, and the future looks even worse, with Egypt’s Ministry of Petroleum predicting that local consumption will start to outstrip production by next year. BG Group was compelled to declare force majeure earlier this year when it could not meet European customer commitments due to insufficient output from its Egyptian operations, and Egypt’s tab with locally operating multinational energy companies has been ballooning as a result of its need to pay market prices for gas diversions in excess of its production sharing allotment.
Egypt relies on natural gas to produce most of its electricity, demand for which has been growing at the very rapid rate of 10% per year. Egypt is also one of the world’s top consumers of compressed natural gas (CNG) for transportation, which fuels almost 200,000 of its vehicles. Energy costs and shortages were a primary driver of the “Arab Spring” protests that toppled Egyptian President Mubarak, among others, and Egypt’s government cannot afford to allow its energy situation to get out of control. Finding an alternative source of natural gas to feed its severely under-utilized LNG plants, which represent an investment of many billions of dollars, would allow it to meet its local energy needs, honor its production-sharing commitments to multinational producers, restart the significant public revenue flows from LNG production and reverse its fast-growing national debt.
The Egyptian export route makes a great deal of sense for Israel as well. Egyptian President Abdel Fattah el-Sisi’s government and its media could not have more clearly expressed their opposition to Hamas and its actions during the recent escalation of Gaza’s conflict with Israel. For an Arab country to effectively side with Israel in a war is unprecedented, especially the most populous Arab nation in the world, and the recognized leader of Sunni Muslim countries in the Middle East. Egypt should also be credited with the relative quiet that has existed along the Sinai border during the conflict. Egyptian military and intelligence cooperation has undoubtedly played a key role in preventing the opening of this additional front, in spite of Hamas’s efforts.
Many commentators correctly pointed out that the nascent Egyptian-Israeli alliance has been promoted by a shared interest in countering the Muslim Brotherhood and its Gazan affiliate, Hamas. Some have also alluded to a shared desire to stop Iran from fulfilling its nuclear ambitions. But the two nations’ joint interests extent well beyond security. It is now clear that negotiations on a gas export deal are well underway and may be concluded by the end of this year.
If they succeed, Israel’s natural gas industry will be able to convert its gas into globally exportable LNG without having to make the enormous investment required for LNG processing facilities. The cost of an undersea pipeline to Egypt will be substantially lower by comparison, and time to market would also be a fraction of that required for the construction of new LNG facilities. This option would not only generate a much higher expected return on investment, but would also considerably reduce security and environmental costs and risks for Israel.
Furthermore, this energy partnership between Egypt and Israel would fundamentally align the energy futures and interests of the two countries, in a unique and unprecedented manner. This would represent the first case, to our knowledge, of an LNG industry in a given country being supplied largely by natural gas feedstock imported from another country. Israel is known for its innovation in areas such as high-tech and medicine, and it is only natural that the Start-Up Nation has helped find a novel and inventive solution within the LNG industry as well. And in this case, it may even provide an opportunity to forge a stronger alliance with Israel’s most important neighbor.