The impact of Zohr on the development and export of East Med gas

The discovery of the Zohr offshore gasfield complicates the export of east Mediterranean gas to Egypt, though it does not necessarily rule it out. Egyptian production is declining, and demand is rising, fuelled by economic development, low prices and a fast growing population.

Zohr, in addition to other fields expected to be developed by 2020 (West Nile Delta, North Alexandria, Atoll), will reduce and probably also eliminate the need for imports by the early 2020s.

Until then, Egypt will still need to import gas. Which leaves the door somewhat open for East Med gas, less expensive than LNG. But, the short timeframe makes this option challenging, particularly that two of the three gas fields in question (Aphrodite and Leviathan) are not expected to be developed before 2019-2020. In the rush to supply the local Egyptian market before the need for imports dissipates, Tamar appears to have an advantage. But even here there are challenges: the only agreement being negotiated between the Tamar partners and clients to supply the local Egyptian market is the preliminary deal with Dolphinus for the supply of 5 bcm of gas over three years. Two obstacles stand in the way: The Egyptian decision to freeze gas imports talks following the ICC ruling in favour of Israeli companies (which required Egypt to pay $1.7 bln), and EMG’s unwillingness to cooperate under current conditions ( EMG being the operator of the pipeline that will be used to transfer the gas). Both can be managed if there is a will.

For Cyprus in particular, there is the possibility to pipe gas to another regional market via Egypt: Jordan, a market with a rising gas consumption and looking for an alternative to relatively expensive LNG imports. But this would involve using a pipeline that was the target of over a dozen attacks since 2011. Chronic instability in this part of Egypt is a major challenge.

In addition, since much of Zohr will be absorbed by the local market, this leaves two Egyptian LNG plants still needing to be refilled. This situation puts Israeli and Cypriot gas in competition, with, on the one side, an advantage for Tamar, already in production, possibly offset by the less “problematic”, from a socio-political perspective, Cypriot gas. Also in favour of Cypriot gas was the acquisition by BG of a stake in Block 12, which improves the prospects of sending Aphrodite gas to Idku. Though it remains to be seen what Shell intends to do with the LNG facility.