Gas in the middle of the Mediterranean

Gas in the middle of the Mediterranean

Giuseppe Acconcia
Giuseppe Acconcia | Journalist focusing on the Middle East
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The latest agreement between Egypt and Cyprus further establishes the importance that blue gold plays in the energy strategies within the Mare Nostrum. Key players, especially countries on the eastern side, first and foremost Israel, look to Cairo as a possible key partner for the development of new export routes

On August 31, Egypt and Cyprus signed an agreement on the export of gas from the Aphrodite gas field of the eastern Mediterranean island to the North African country. The gas will be able to be used for both the domestic Egyptian market and for exports abroad. The agreement could speed up the relaunching of important Egyptian infrastructure, for years used only for domestic supply, but could also be overshadowed by the activation of Zohr IX, planned by January 2020. Not only that: Cypriot hopes could be downsized by a possible increase in Israeli exports in the Egyptian gas market. All this in a stalemate for the country’s economy, which is awaiting a billion-dollar loan from the International Monetary Fund (FMI) in exchange for reforms and privatizations which have caused several protests in Egypt.

A new strategy for Egyptian gas

When Zohr IX becomes operational, Egypt will be able to export its gas to Israel and Cyprus. The Egyptian gas market, following the crisis caused by the political instability that hit the country, especially the Sinai region, could again look to Europe following the activation of the supergiant gas field. Soon after the discovery of Zohr IX, Cyprus and Egypt had signed a preliminary agreement on energy. Specifically, Cyprus has wanted to enter the gas export market since the discovery, in 2011, of the Aphrodite gas fields, which is expected to have a potential of 127 billion cubic meters. Yet, the exploitation itself of Zohr IX could downsize the external demand for Egyptian gas, thwarting the aspirations of the Cypriot government. In this case, an alternative for Cypriot gas could involve the use of already-existing Egyptian infrastructure. If the Zohr IX exploration project is completed, for instance, it would be possible to connect Aphrodite to the Egyptian gas pipeline. This could only take place following the reactivation of the Egyptian terminals of Idku and Damietta so far suspended due to the intention of the Cairo government to use the country’s gas only for the domestic demand. Also weighing on the new balance in the eastern Mediterranean are the Israeli giants, Leviathan and Tamar, which have in recent years signed billion-dollar agreements with the British company British Gas and Spain’s Union Fenosa. If Israel can sell its gas to Egypt, there would only remain a minimal amount for Cyprus to be able to export to Cairo. An overall increase in production, equal to 12 billion cubic meters per year, could also be achieved in the event of enhancing the technical capacity of the Egyptian terminals, so far promised by the Cairo’s Ministry of Energy but as yet not carried out.

The first tranche of the loan from the International Monetary Fund (FMI)

The Egyptian economy is experiencing a long financial crisis but could significantly benefit from the relaunching of gas exports. For three years, Egyptian President Abdel Fattah al-Sisi has promised to leverage new foreign investments which, however, are failing to materialize. However, after months of talks, on September 9, the Egyptian authorities received a first tranche of $1 billion from the total $12 billion loan, promised to Cairo by the International Monetary Fund (FMI) and still under negotiation. The IMF’s demands concern the privatization of banks and state-owned enterprises (including the oil and electricity sectors) for a total of 49% of the domestic market (against the 20% promised by Cairo), together with a greater degree of flexibility in the market for changes that could result in the devaluation of the Egyptian pound (from EGP 8.78 per dollar to EGP 12.90 per dollar). For their part, the Chinese and Saudi authorities have promised further loans for a value of $5-6 billion. The reforms needed to obtain the IMF loan were materialized firstly with the law on public sector employment, approved by the Egyptian Parliament on July 26, which also provides for the introduction of a fee for value-added tax (VAT) which should result in increased revenues in anticipation of a growth in public spending. On August 12, hundreds of textile company workers, entrepreneurs and operators demonstrated against the government’s tax policies. According to the participants in the protests, the new measures could cause an increase in prices of raw materials which would lead to the closure of many factories in the industry. As early as last year, the draft law on public sector employment led to widespread protests. Therefore, on January 26, 2016, the Egyptian Parliament requested to amend the law which was later definitively approved. The agreements on gas between Cyprus-Egypt and Israel could redraw the balance in the eastern Mediterranean. However, there are still many unknowns regarding the activation of the supergiant gas field Zohr IX, along with the impact of an increase in gas exports from Israel. The Egyptian economy could only have positive effects by a relaunching of gas exports, which have been stalled for years. In the short term, the IMF loan could aid economic recovery after years of crisis which has affected the country. However, the widespread protests following the law on public sector employment are delaying the conclusion of the bilateral negotiations with the international body.