The role of East-Mediterranean gas in the EU energy security

Prepared by/ safaa abd elbasset abd elAziz

Introduction:

– Over the last decade, The EU energy sector is facing energy security challenges in the natural gas sector, The EU is becoming increasingly dependent on Russia as a primary supplier. Dependence on Russian gas shows the flows of EU energy policy especially for the gas shortages during winters of 2006, 2009 and the ongoing war with Ukraine associated with Geo-political risks. On the other hand, the recent gas discoveries in the East-Mediterranean make a huge development in energy sector. It turned Egypt, Israel and Cyprus from energy importers into energy exporters, each of these countries possess a plentiful natural gas deposits to export.

The Egyptian gas production has been growing steadily since December 2017, when Zohr & Nour discoveries were announced, as the Zohr gas field is considered the largest gas discovery in the Mediterranean, containing an estimated 30 trillion cubic feet of gas

Research questions:

Can Egypt be Part of the Solution to Europe Energy Crisis?

Literature Review:

Previous studies and preliminary readings related to the topic of research can be divided into two axes, where the first axis is related to the concept of diversification through “the portfolio theory and diversification” in energy import sources to maintain the stability of the level of energy security, while the second axis, is related to the possibility of EU dependence on East-Mediterranean gas imports from “Egypt, Israel and Cyprus”.

– Study with a title: Diversification and Energy Security Risks “the Japanese Case”

By: S. HAYDEN LE SBIREL Associate Professor, Political Science, School of Humanities.

This article examined the relationship between diversification and energy security risks. The portfolio theory is used to conceptualize energy security as an insurance mechanism against disruptions to energy import markets, where diversification is a common response to the broad spectrum of risks associated with potential disruptions in energy imports.

Study with a title of: European Union energy supply security “The benefits of natural gas imports from the Eastern Mediterranean”:

By: Isabella Ruble  The study discussed the possibility of increasing the reliance of the EU gas imports on the East-Mediterranean countries as a part of its energy security policy. The study used quantitative and statistical analysis with the increased discoveries and investment activities in offshore oil and gas exploration and production for the years 2017–2042, which shows the potential of large quantities of natural gas available for exports.

Methodology:

This study used the quantitative method with deductive approach. Data used is primary data with descriptive statistics. in this context, the research analyzes the  Egypt and Europe Energy Security

Egypt and Europe Energy Security

Energy is an integral national security and a foreign policy determinant, it is insecurity affects the governing policies of any given country.

Definitions of energy security range from “the uninterrupted availability of energy sources at an affordable price” to the “physical security of energy infrastructure and supply chains facilities, to support for bio-fuels and renewable energy resources”. The United States of America defines energy security as “a function of availability, consistent access, and predictable pricing”.

Energy security has several aspects; long-term energy security mainly deals with timely investments to supply energy in line with economic developments and environmental needs. On the other hand, short-term energy security focuses on the capacity and capability of an energy system to react promptly to sudden changes in the supply-demand balance.

The outbreak of the COVID-19 pandemic, has had a multiplicity of economic and social effects on several domains, European countries were faced by a severe hike in the prices of natural gas. The price of importing natural gas hiked at a spot price of USD 31/MMBtu

(million British thermal units), which was nearly 6 times the average global price during the same month ($5.5/MMBtu)(7). In the same vein, the price of natural gas imports into Europe averaged from 1.5 to 2 times the average global price during the same month of the previous five years, which raised concerns pertaining to energy security of European governments.

Diagram 1: Rocketing Natural Gaz Prices

More recently, the greatest risk facing global supply chains has shifted from the pandemic to the Russia-Ukraine crisis, which broke out in early 2022 and the consequent geopolitical and economic uncertainties it  created. The two countries play a decisive role in the global energy market as the region contains abundant oil and gas resources. Oil prices have spiked reaching their highest levels since 2008 as the US and European allies sanctioned Russian oil imports, a move which may further disrupt global supply chains beyond the pandemic. In light of the outbreak of the crisis, natural gas prices have soared around  the world since late

February, and since then Europe has been particularly affected by the sharp hike in prices. The European Union obtains approximately 40% of its natural gas needs from Russia. In the absence of an accessible alternative and in case the provision of gas supplies is obstructed, the EU countries hope to decrease their dependence on Russian gas imports by two-thirds in 2022 as part of its plan for independence from Russian fossil fuels by 2027.

Diagram 2: Prices of Oil and Gas post-Russian-Ukrainian Crisis

Can Egypt be Part of the Solution to Europe Energy Crisis

At the national level, Egypt has demonstrated a strong will to be part of the solution, which has been reflected through various tools. The first tool is the discourse of Government of Egypt (GoE); Egyptian Minister of Petroleum, Eng. Tarek El-Molla said that Egypt aimed at boosting its gas exports to European markets to secure some demand in light of the current conditions and challenges facing global markets. Recently, expectations of Egyptian officials that natural gas exports of the country will rise to 7.5 million tons by the end of June 2022, as the country seeks for becoming a regional hub for energy trading. Secondly, Egypt aspires to increase its exports to Europe through two natural gas liquefaction stations in Idku and Damietta on the northern coast with an export production capacity of 1.6 billion cubic feet per day.

In January 2022, Washington made a decision to withdraw its support for Subsea pipeline designed to supply Europe with natural gas from the eastern Mediterranean via Greece⁷. The pipeline was proposed in 2013 and was supposed to go into operation in 2025; however, work on the ground came to a halt due to technical difficulties, environmental considerations, and other feasibility issues.

Thus, the Egyptian “Political Will” is further supported by the availability of the infrastructure. Evidently, the two natural gas liquefaction stations in Idku and Damietta on the Northern coast convert natural gas from a gaseous to a liquid state. This process facilitates the movement of natural gas where it can be loaded onto ships and exported, rather than pumping it into pipelines. According to data from the Ministry of Petroleum and Mineral Resources, Idku and Damietta plants have an annual production capacity of 7.2 million and 4.8 million tons, respectively. In 2021, Egypt had the highest income from LNG exports in 10 years, with revenues rising by 550 per cent, to USD 3.9 billion, up from USD 600 million in 2020. Egyptian LNG exports to Europe soared during this period as well, reaching 2.04 million metric tons, compared to a mere 270,000 metric tons in 2020.

Egypt’s infrastructure capacity can be expanded by adding new liquefaction trains to Idku and Damietta, as the required

infrastructure is already in place. Such expansion would be cost-efficient and can be achieved within a timespan of three years. This would allow Egypt to export to European markets that have access to liquified natural gas (LNG) regasification plants in place, such as Italy, Spain, France and the entire area of northwestern Europe.

Furthermore, the availability of infrastructure is further strengthened by the distinguished geographical location of Egypt, which enables it to provide part of the natural gas needs of Europe and Asia. Egypt does not derive its current position as an emerging LNG exporter or its prospective role as a major player in the gas market from its production or huge reserves, as most significant LNG-exporting countries do, but rather due to its geographical location, being surrounded by smaller exporters, gas liquefaction potential, and its strong ties with the EU. Egypt’s close geographical proximity to both Cyprus and Israel, which both aspire to export their surplus gas production to Europe, encouraged the conclusion of agreements between each of these countries and Egypt. GoE signed agreements with a number of regional partners, namely Greece, Israel and Cyprus.

The agreements to pave the way for increasing the volume of gas imports, and then reexporting it to Europe after its liquefaction at Egyptian liquefying stations. Accordingly, these agreements state that Cyprus and Israel will export their surplus to Egypt’s gas liquefaction complexes in Idku and Damietta, where Egypt will then liquefy the gas and export it to the EU.

In the same vein pertaining to arrangements on the regional level, Egypt currently imports about 450 million cubic feet of gas per day from Israel for purposes of reexport. Furthermore, Egypt, Cyprus and Greece have demarcated their maritime borders and exclusive economic zones among the countries to facilitate exploration of gas in the region.

 According to estimates by the US Geological Survey in 2017, the region holds between 340 trillion and 360 trillion cubic feet, worth between USD 700 billion and USD 3 trillion.

In fact, the deepening relations between Egypt and Greece can open up further opportunities to export energy to European markets. A Memorandum of Understanding was signed between Egypt and Greece, which includes three major areas of cooperation. The areas are liquefied natural gas (LNG) trading, research and exploration activities, and the linking of the two countries’ natural gas pipeline networks. In light of Greece’s geographical location which can act as the main gateway to Europe for Egypt’s energy exports, as it lies between Egyptian gas fields and ports and continental Europe.

Egypt aspires to raise the quantity to 600-650 million cubic feet per day by the end of the first quarter this year. Egypt is also in talks with the EU on increasing natural gas supplies to Europe in the short and medium terms, however, there are fears that Europe might not have the necessary number of terminals to receive more LNG imports. Nonetheless, it is expected that until 2030-2040, demand for gas will continue to exist inside of the EU and the UK, where Egypt will be at the top of the list of possible LNG and natural gas exporters to Europe.

The regional institutional base for cooperation among Egypt, Cyprus, Greece, Israel, Italy, Jordan and the Palestinian territories, led to the establishment of the East Mediterranean Gas Forum (EMGF) in January 2019. This consequently turned into an official intergovernmental body aimed at creating a regional market for gas, rationalizing the cost of infrastructure, offering competitive prices, and securing part of the energy supplies to global markets.

The complications in the availability of alternative suppliers of natural gas to Europe enhances Egypt’s capacity to be part of the solution to the global energy security. Norway’s production of natural gas has gradually declined since 2017

which in turn led to a noticeable reduction in its gas exports that was evident before the outbreak of COVID-19 – a reduction of 7.8% between 2017 and 2020¹². In comparison to Norway, Algeria’s natural gas exports saw a more dramatic decline of 17% during 2019¹³, a trend exacerbated by domestic protests, internal political turmoil combined with the outbreak of COVID-19, led to a decline in Algeria’s natural gas exports during 2020 by more than 8% compared to 2019¹⁴. Estimates of Algerian natural gas exports remain speculative given that the final statistics for the year 2021 have not yet been published. However, political tensions between Algeria and Morocco, which is one of the main transit states for Algerian gas to Europe, suggest that Algerian exports may not reach the level of 2020. Political tension between the two countries prompted Algeria to sever its relationship with Morocco in August 2021 and terminate contracts to supply natural gas to Europe through the Maghreb–Europe Gas Pipeline that links Algerian gas fields and terminals in Spain through Moromco.

As an alternative to the Maghreb-Europe pipeline, Algerian authorities are pursuing an ambitious plan to export gas to Europe through the Medgaz pipeline, which connects Algeria with Spain through a pipeline under the Mediterranean. However, it is important to note the differential in the capacity of the two pipelines to pump gas may prevent the realization of these ambitions. The Medgaz pipeline’s capacity would be 8 bcm of natural gas annually which is 4.5 bcm less than the existing Maghreb- Europe pipeline’s capacity, which is 12.5 bcm of gas annually. These issues are concerning given that the EU is the main market for Norwegian and Algerian gas exports. Overall, the EU’s imports of Russian natural gas have represented 40% of the EU’s total gas imports compared to Norway’s 30% and Algeria’s 13%, respectively. It is worth noting that Russia was providing 47% of the EU’s imports of gas before the outbreak of the Russian- Ukrainian crisis.

Thus, it is likely that Egypt will play a key and growing role in meeting the EU’s LNG needs, especially given the country’s geographical location and that the country’s surplus natural gas production could reach 1.6 bcf per day in 2021. In addition, Egypt’s production capacity is 7.2 bcf compared to its consumption of 5.6 bcf. If maintained, this would translate into an annual surplus of 16 bcm or 584 bcf which is enough to produce 12.2 million tons of LNG based on the current liquefaction capacity, even without partnerships with Cyprus, Greece, or Israel. This represents around 15% of the needs of the EU, which imported 108 bcm of LNG – about 80 million ton – in 2019, according to the latest figures published by the European Commission.

For the time being, Egypt is not connected to the EU by gas pipelines; thus, its exports can only be in the form of LNG whereby some European countries may not be able to process due to a lack of infrastructure at the present time.

The said countries include Germany, the Netherlands, Italy, and Belgium, which are heavily dependent on piped natural gas (PNG) imports. Such heavy dependence on PNG imports raises an important question whether these countries lack the necessary infrastructure to switch to LNG for use(24). Second, Europe’s LNG terminals have limited capacity to receive more supplies as the US increases shipments of LNG, and thus, only a limited number of cargo shipments can be absorbed by existing infrastructure, but not significant supply. Third, Egypt’s gas exports in 2021 amounted to about 6.5 million tons, worth USD 3.9 billion which were concentrated in Asia and Europe. However, in order to increase the Egypt’s export capability, the two gas liquidation plants in Idku and Damietta need to enhance its capacity with no delay.

To conclude, energy has a myriad of security implications and therefore, energy security has become a vital national security and a foreign policy determinant. International shocks such as the outbreak of the COVID-19 pandemic, and the Russia-Ukraine crisis had dire global economic effects and more recently have raised concerns pertaining to European energy security.

While Europe is heavily dependent on Russian natural gas, which amounts to 40% of European natural gas imports, the EU has initiated a plan to decrease its dependence on Russian energy imports by 2027. Accordingly, Europe can achieve its goal through importing more piped natural gas (PNG) or liquefied natural gas (LNG). However, existing European and natural gas producing countries could not fully supplant Russian exports. In this vein, Egypt has a unique opportunity to become one of Europe’s primary sources of natural gas, in light of Egypt’s capacity to export LNG through the two natural gas liquefaction stations in Idku and Damietta on the northern coast, with an export production capacity of 1.6 billion cubic feet/day. Although Egypt has demonstrated a strong political will which is manifested in a number of multilateral and bilateral agreements, distinguished geographical location, and adequate infrastructure capacity, there are constraints that need to be overcome in order for Egypt to capitalize on its significant capabilities.

Conclusion

Energy security has several aspects; long-term energy security mainly deals with timely investments to supply energy in line with economic developments and environmental needs. On the other hand, short-term energy security focuses on the capacity and capability of an energy system to react promptly to sudden changes in the supply-demand balance.

The outbreak of the COVID-19 pandemic, has had a multiplicity of economic and social effects on several domains, European countries were faced by a severe hike in the prices of natural gas. The price of importing natural gas hiked at a spot price of USD 31/MMBtu

(million British thermal units), which was nearly 6 times the average global price during the same month ($5.5/MMBtu)(7). In the same vein, the price of natural gas imports into Europe averaged from 1.5 to 2 times the average global price during the same month of the previous five years, which raised concerns pertaining to energy security of European governments.

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(12) Ibid.

(13) Reuters. (2022, January 11). U.S. voices misgivings on EastMed gas pipeline -Greek officials.

Reuters. https://www.reuters.com/business/energy/us-voices-misgivings-eastmed-gas-pipeline-greek-officials-2022-01-11/

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(19) CEIC Data, ‘Algeria Natural Gas: Exports’. https://www.ceicdata.com/en/indicator/algeria/natural-gas-exports

(20) Ibid.

(21) Ibid: CEIC Data, Algeria Natural Gas: Exports

(22) Ibid

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