BNP Paribas: Egypt is the 16th largest gas-reserve holder, can it become the regional energy hub it aspires to be?

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As Egypt inaugurates the launch of the first stage of its giant Zohr gas field in the Mediterranean on Wednesday, it is time to revisit BNP Paribas’s economic research report published in the 2nd quarter of 2017.

The report stated that “Simultaneous gas discoveries in offshore Egypt, Israel and Cyprus have opened a new opportunity for regional integration because discovered volumes seem to exceed domestic market capacities in the respective countries. Egypt’s bid to become a regional energy hub is built on three pillars: strategic location on key trade routes, proximity to resource-rich countries with relatively saturated domestic markets and advanced export infrastructure.

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The report highlights the existence of two liquefied natural gas plants in the two flanks of the Nile delta with an aggregate export capacity of around 12 million tonnes per annum (MTPA) and capable of exporting 1.7 billion cubic feet per day (BCF/D).

However, the report predicts three constraints against Egypt becoming this regional energy hub, first the geopolitical sensitivity between Egypt and Israel on one hand and Cyprus and Turkey on the other. Secondly is the limited financial capacity to invest in a regional hub strategy, which entails linking East Med gas fields to Egypt and laying multi-billion-dollar subsea pipelines that could be co-sponsored by the national oil companies of host countries, including Egypt, hence requiring large capital expenditure outlays. The third constraint to regional energy integration is regulatory uncertainty in host countries. The report doesn’t neglect to mention the substantial investment injected into Egypt’s electricity sector, raising the capability of the Egyptian grid from current off-peak surplus of 4GW that will rise to 8GW with the full commissioning of mega plants in 2018.  This surplus also opens the way to export electricity to neighbouring countries as part of the energy hub plan. Nevertheless, this plan comes with its own challenges; primarily, dependence on gas feedstock (delayed execution of energy diversification strategy), limited marketing destinations for surplus electricity and limited financial capacity of the Egyptian power sector. The report concludes that Egypt’s ability to navigate through geopolitical and financial risks, including current account vulnerability, is what should eventually make its energy hub ambition a reality.

In 2017, Egypt passed law 196 that states in regulations section 3 that one of the main aims is to “attract and promote investment in gas-market activities, and encourage a climate of competition in order to establish a competitive gas market”. This means that private firms will be able to import, distribute and store natural gas in Egypt, under the supervision of a state regulatory body. According to Petrolium Economics the deregulation measures will greatly enhance the flexibility of the Egyptian gas market, creating a liberal atmosphere conducive to Egypt becoming a regional gas hub. This kind of flexibility is absent, for example, in Turkey, another country that aspires to this role.

On the other hand, the European Council on Foreign relations published a report in April 2017 titled “Pipelines and Pipedreams: How the EU can support a regional gas hub in the Eastern Mediterranean.” In which the report outlined that large natural gas discoveries in the eastern Mediterranean have raised hopes that the region could serve EU energy needs, helping it to fulfil its goals of energy diversification, security, and resilience. However, there are commercial and political hurdles in the way. Cyprus’s reserves are too small to be commercially viable and Israel needs a critical mass of buyers to begin full-scale production. Consequently, regional cooperation – either bilaterally or with Egypt – is the only way the two countries will be able to export.  The report concluded that there are now two options for regional exporting: to build a pipeline that connects Israel and Cyprus to southern Europe, or to create a network of pipelines into Egypt, from which gas could be liquefied and exported. The report finally recommended that the EU should explore regional prospects by strengthening its energy diplomacy, developing more projects of common interest, working to resolve the Turkey-Cyprus dispute, and incentivising reforms in Egypt.

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