A Gas Discovery in Egypt Threatens to Upend Mideast Energy Diplomacy – Stanley Reed/The New York Times

by Newsstand

The Italian energy company Eni knew it was taking a big risk this summer when it spent $60 million on an exploratory rig and began drilling more than 100 miles off the coast of Egypt.

Eni’s gamble worked. The company, using drilling rights from the Egyptian government, found what it called a “supergiant” natural gas field. It may be the largest discovery yet in the Mediterranean and is one of the world’s biggest new gas finds in years.

Egypt’s becoming more energy-independent could sidetrack efforts — backed by the United States — to use energy diplomacy to improve relations between Israel and its Arab neighbors. Israel has its own ambitions for offshore natural gas, including a long-gestating plan to sell gas to Egypt.

Mr. Descalzi met recently with the Egyptian president, Abdel Fattah el-Sisi, to discuss next steps. And on Thursday, the Eni chief plans to visit Jerusalem in an effort to persuade the Israeli prime minister, Benjamin Netanyahu, that there are still opportunities for Egypt and Israel to jointly prosper by developing their gas fields.

Even before the Zohr discovery, Israeli officials had been divided over how to proceed on the gas front. And the government has been distracted lately by a wave of violence between Israelis and Palestinians.

But Mr. Descalzi says he envisions Israel and Egypt eventually collaborating, exporting gas to Europe and other parts of the world, perhaps in the form of transportable liquefied natural gas. He notes that nearby Cyprus, where another offshore gas field has been found, might be another candidate for a regional partnership.

The Zohr field “has created a big opportunity,” Mr. Descalzi said in a recent interview. “We can make a big eastern Mediterranean hub.”

In written answers to questions from The New York Times, the Egyptian minister of petroleum and mineral resources, Tarek el-Molla, outlined a similar vision. “Egypt is eligible to play a significant strategic role with regard to gas discoveries in the East Mediterranean region,” Mr. Molla wrote.

Not everyone shares that optimism. But the Egyptian economy could use the lift.

Egypt has a per-capita income of about $3,500 and is growing only about 3 percent a year. That is far too slow for the country to climb the development curve quickly enough to meet the needs of its 82 million people — and it is below the 5 percent growth rate achieved before the ouster of the country’s longtime ruler, Hosni Mubarak, in 2011.

The Mubarak government, whatever its growth record, made Egypt an energy underachiever, even though the Nile Delta holds ample deposits of both oil and gas, which have long attracted foreign energy companies. While not an OPEC member, Egypt is a relatively significant producer of oil, extracting about 700,000 barrels a day — similar to Malaysia and Argentina.

But the Mubarak government’s efforts to appease the populace by keeping energy prices artificially low had an unintended drawback: It diminished market incentives for the foreign companies that extracted much of the oil and gas. The Egyptian government also tended to be slow to pay the companies, further damping their enthusiasm. That is why Egypt has had to import oil and gas in recent years to meet its needs.

The government of Mr. Sisi, who took power in 2013, has tried to fix that problem by raising domestic fuel prices and by cutting its back payments to oil companies by about half, to less than $3 billion. Earlier this year, the energy giant BP agreed to spend $12 billion to develop a large quantity of offshore gas for the Egyptian market. Now, the Eni discovery might stoke further interest in exploration, analysts say.

With a big new supply of natural gas, Egypt might be able to stop burning oil to generate electricity and start exporting the petroleum instead. New domestic supplies of natural gas would help conserve scarce foreign currency resources and might spur investment in gas-fired factories and electric power plants. And natural gas exports might follow.

“Egypt has undergone a remarkable transformation of fortunes — it looks like it has got its energy policy back on track,” said Martijn Murphy, an analyst at energy consultants Wood Mackenzie in Edinburgh.

But Egypt’s good fortune could come at the expense of its much richer neighbor. Eni’s trove could threaten Israel’s ambitions to tap its own giant offshore gas field, called Leviathan.

Israel is already self-sufficient in natural gas by dint of a smaller offshore field — Tamar, discovered in 2009 — that serves the country via pipeline. Noble Energy, an American company that operates Tamar for the Israeli government, discovered the bigger Leviathan field in Israeli waters in 2010. Leviathan has potential reserves far exceeding Israel’s own needs.

Encouraged by the Obama administration, Noble reached preliminary deals last year to export gas to both Egypt and Jordan, a move approved by Mr. Netanyahu as a way to earn money and strengthen ties with former enemies.

Much of the Israeli gas for export would be converted to liquefied natural gas at two Egyptian facilities that are already in place on the Mediterranean coast. Those facilities have sat idle during Egypt’s domestic shortage. But Mr. Descalzi, whose company co-owns one of the installations, predicted that Egypt would be interested in using the terminals to export gas obtained from Israel, from the Zohr field or eventually from Cyprus, and to send the product by ship to Europe and beyond.

But negotiations to complete those deals have bogged down, in part because Israel’s antitrust commissioner has been blocking development of the Leviathan field over concerns about giving Noble too dominant a role in the country’s gas industry. Now some Israelis — including the country’s energy minister — have worried aloud that their country has hesitated too long. With Zohr, they fear, Egypt might no longer see a need for the Leviathan gas.

“If we continue to procrastinate,” Yuval Steinitz, the Israeli energy minister, told Parliament in September, “it is possible there will no longer be a need for Israeli gas in Egypt and Jordan.”

For months, Mr. Netanyahu has been working to clear the way for Noble and its partners from the Delek Group, an Israeli conglomerate, to develop Leviathan in return for concessions that would include a reduced stake in Tamar.

Israeli lawmakers approved the prime minister’s proposal by a nonbinding vote in September. But Mr. Netanyahu, who holds a one-seat majority in Parliament, has not yet succeeded in persuading the economy minister, Aryeh Deri, to push through the agreement.

Mr. Deri has said that he does not oppose the deal, but that he did not want to be the first Israeli economy minister to overrule an antitrust commissioner. To clear the way, Mr. Deri said in a television interview last weekend that he would be willing to resign.

Executives from Noble, impatient over the delays, have warned that they have the option of taking the Israeli government to international arbitration. “Noble Energy remains fully prepared, and is well positioned to take the actions necessary to protect the value of its assets,” Noble’s chairman, president and chief executive, David L. Stover, said in a statement last month.

Noble says that once the Israeli government signs off, the company could lock up agreements with customers like Jordan and Egypt, and might be able by the end of the decade to have gas flowing from Leviathan.

Analysts say there is still room for Israeli gas in Egypt’s plans. But participants in the talks on Israeli gas exports say that Egyptian officials, buoyed by the Eni discovery, might now take a tougher line.

Mr. Molla, the Egyptian minister, dismissed those concerns. “It is unlikely that the recently achieved Zohr discovery” would affect negotiations between international companies operating in Egypt and those producing gas in Israel, he wrote.

But Amit Mor, chief executive of Eco Energy, an Israeli consulting firm, said he worried that time might be passing Israel by. Unless the government moves quickly, he said, “we might lose an opportunity here.”

A Gas Discovery in Egypt Threatens to Upend Mideast Energy Diplomacy – The New York Times