Good News for Egypt’s Gas Sector Could Be Bad News for Israel

The discovery of a giant natural gas field off the coast of Egypt is great news for that energy-starved nation, but it threatens to upend the grandiose energy dreams of neighbors like Israel and Cyprus.

Eni, an Italian energy firm, announced this week that it had discovered the largest gas field ever found in the Mediterranean, a “supergiant” basin that could hold as much as 30 trillion cubic feet of gas. If those early estimates are correct — and optimistic appraisals often give way to more sober analyses — it would be even larger than Leviathan, the giant offshore gas field that has fueled Israeli dreams of becoming a regional energy exporter. The new field, known as Zohr, will take at least three years to come online — and potentially longer if the country’s security situation continues to worsen — but it could then meet Egypt’s energy needs for decades and provide both an economic and political boost to President Abdel Fattah al-Sisi.

Finding new sources of energy is critically important for Egypt, which until a few years ago exported natural gas to Europe and neighbors like Israel and Jordan. But soaring domestic consumption and underinvestment in production forced Egypt to stop exports and begin importing; earlier this year, it started buying cargoes of natural gas from Russia and signed a deal to eventually import gas from Israel.

Now, none of those imports may be needed. More importantly, fresh supplies of natural gas could help Sisi keep power plants and factories running, no small matter in a place where electricity blackouts sparked the political turmoil that helped bring down two of Egypt’s former leaders.

“[Hosni] Mubarak fell during extensive power outages. [Mohammed] Morsi fell during power outages. And Egypt still has such a problem of stable electricity supply, and that is such a symbol of the lack of state strength,” said Brenda Shaffer, an energy expert at Georgetown University. Steady power supplies are needed for everything from powering water pumps for agriculture to keeping factories and air conditioners humming.

Eni’s new discovery, coupled with an announcement earlier this year by BP that it will invest $12 billion to develop existing Egyptian gas fields, amounts to a corporate endorsement of the economic reforms that Sisi has steadily pushed through. That includes paying off debt to foreign energy firms and starting to overhaul the domestic energy market by, for example, rolling back politically popular but ruinously expensive fuel subsidies. It also represents a vote of confidence in the Egyptian leader’s ability to quell a violent uprising by militants linked to the Islamic State, who have carried out deadly attacks in Cairo and throughout the Sinai Peninsula.

But if the gas find is potentially great news for Egypt, it could represent a blow to Egypt’s neighbors. Israel still has plans to turn its own massive offshore gas resources into a source of energy for the rest of the region. Israel and Egypt signed a deal last year under which Israel would export gas from the huge Leviathan field to Egypt; Israel inked similar deals to export gas to Jordan.

Now those visions are fraying: Shares in Israeli energy firms tanked in the wake of Eni’s announcement. Noble Energy, the U.S. firm helping develop Leviathan, insists that it is still well-positioned to meet the region’s energy needs despite the rival discovery.

“We believe the large regional demand — including in Israel, Jordan, and Egypt — is such that no single one of the region’s discoveries can fill it,” said a Noble spokesperson.

Cyprus, which had grand plans of its own to tap offshore gas fields and export fuel to Egypt and others, is putting a brave face on the news. Cypriot leaders, burned by disappointing drilling results in their waters so far, figure the massive Egyptian discovery augers well for the island’s own energy future because the Zohr prospect is just a few miles away from Cypriot waters and likely shares the same geology.

And the Zohr discovery won’t slam the door shut on Egyptian imports right away, leaving a few years of juicy prospects for other suppliers. Though Eni and Egyptian officials pledged to fast-track development of the field, it will take years to finance and build the infrastructure needed to fully tap it. Even that timeline could grow longer if Egypt’s security situation worsens, which could put a damper on foreign investment.

“Egypt won’t be able to satisfy its domestic demand until 2020 at the earliest, maybe not until 2025, even with this new discovery,” said Michael Leigh, a senior advisor at the German Marshall Fund of the United States. Even then, he said, Egypt will likely need additional sources of gas to feed the liquefaction export terminals that have been idled by recent gas shortages.

Even before Eni’s announcement, Israel had struggled to turn its energy potential into energy power. Israeli regulators, wary of creating a monopoly, put the kibosh on the firms developing Leviathan late last year and sought to force them to divest some of their holdings. After the Egyptian find, recriminations are flying inside Israel about the pace and shape of that country’s energy development. Seen in the larger context, though, Eni’s recent discovery, coming after another smaller find earlier this year and BP’s big investment, indicated that Egypt was getting its house in order sooner rather than later, dampening the long-term appeal of Israeli gas.

“Frankly, I never really thought that exports to Egypt were a done deal — you can’t lose something you don’t have,” Shaffer said.

In fact, she said, the Egyptian find could end up as a silver lining for Israel. By making the prospect of gas exports less likely, it could spur greater Israeli gas consumption at home. Cleaner-burning natural gas could displace coal at the country’s power plants, for example, and help power desalination plants.

“The region has to be a bit less greedy and start thinking of itself as a gas-consuming region, and not a gas-exporting region, because there are a lot of good uses for gas for prosperity in the region,” she said.

One final ripple from the Egyptian discovery could be a revival of talk about eastern Mediterranean countries supplying Turkey with natural gas. Both Cyprus and Israel looked at Turkey as a potential market, but politics as much as economics seemed to doom any deals. Turkey recognizes the northern part of divided Cyprus and has strong-armed recent Cypriot energy development with aggressive naval patrols. Turkey, still smarting from Israel’s foreign-policy moves, especially in Gaza, also seemed to rule out any energy trade with the country. But a gusher of gas in Egypt could push those two countries to search for a new-old export outlet.

If Egypt is off the table as an export market, and if there are political breakthroughs in Cyprus, “there might be a revival of interest in the Turkish option,” Leigh said.

Photo credit: BRENDAN SMIALOWSKI/AFP/Getty