Stepping off the gas

As the Intifada rages, Egypt seems to have decided not to sell gas to Israel. That leaves it with few options. Jasper Thornton reports
Something's afoot when The New York Times and The Washington Post show an interest in Egypt's gas prospects. Last week, Abeer Allam, in The Times, remarked that the Intifada was scuppering chances that Egypt and Israel would close a gas deal. She quotes Hamdi Abdel-Aziz, a spokesperson for Egypt's petroleum ministry, saying there is no chance of Egypt working on a gas pipeline to Israel while the Intifada rages. The Post quoted an anonymous Energy Ministry official saying all plans to sell Egyptian gas will, from now on, "be 100 per cent Arab." Such reporting may feed the US appetite for evidence that the Intifada benefits no one. But whatever the ideology, political and commercial moves of late do seem to have scuttled any chance of Egypt winning a windfall gas deal with Israel. And analysts are none too keen on Egypt's other export options.
First the good news: Egypt has over 53 trillion cubic feet of proven gas reserves. This is plenty, for domestic and export requirements, according to the Petroleum Ministry, which, in late 1999, told foreign gas producers to look to sell abroad, not to Egypt, which had gas to cover its needs for several years. Regionally, the biggest export prize is Turkey, which will need 44 billion cubic metres of natural gas in 2005, and 52 billion a year by 2010, according to the Middle East Economic Digest. Turkey itself can provide 12.5 billion cubic metres of gas; Egypt hopes to provide a big dollop of the rest. It should be in a strong position: Turkish Ambassador Aykut �etirge told Al-Ahram Weekly that his country, "needs gas now, desperately," and is keen to buy Egyptian.
But things aren't so simple. �etirge added, "In three years, we won't be desperate." He also remarked, "We will buy gas at our borders, considering price, above all." In other words, Turkey cares little for how the gas is delivered. But it does want it cheap. And it needs it now.
There's the rub. Delivering gas from Egypt to Turkey cheaply is far from straightforward. Unlike Iran, a major rival, Egypt is hardly close to Turkey. One plan is to send a pipeline to Jordan and thread it up through the Levantine states. The first phase of this is underway, with the Belayim Petroleum Company building a line from Al-Arish to the Jordanian port of Aqaba. This route avoids Palestinian complications, and Jordan has agreed to buy 3.9 billion cubic feet of gas a year from Egypt, which would help pay for the line. But the advantages end there. Although Jordan's gas supplies furnish only 12 per cent of its energy needs, the rest of Jordan's energy demand is met by cheap oil from Iraq. The gas will provide a surety against that cosy arrangement stopping. But Jordan's real interest in the gas is sending it on, either through a pipeline heading north, or by shipping liquefied units of gas from Aqaba. "Jordan will reap millions of dollars in transit fees," said Jordanian Petroleum Minister Wael Sabri, a few months ago. But transit fees will hike the price of the gas when it reaches Turkey. Beyond Jordan, Syria's stuttering economy will need little gas, as will Lebanon's. So there is slim chance of big earnings offsetting the cost of extending the pipe to Turkey's border. That may be why the US energy department calls the idea of sending a line to Turkey through Jordan "questionable."
Israel, on the other hand, wants Egyptian gas. And with an economy five times the size of the Levantine states' combined, a line through Israel to Turkey would be far more financially feasible, analysts say. This option was first mooted in 1995 at a MENA conference, when Italian company ENI suggested a "peace pipeline," connecting Israel and Egypt. ENI has already built a line from the Sinai gas fields to Al-Arish, 30 kilometre from the Israeli border. The East Mediterranean Gas Company (EMG), an Israeli-Egyptian consortium, was set up to pursue the plan. That plan staggers on stage every now and again (most notably when the Israeli Electric Company said in January that it would buy 1.7 billion cubic metres of gas a year until 2012 from Egypt) but each time it shuffles off to the wings again, without any performance of note. Still, the plan retains high-level backers. When former US Ambassador to Egypt Daniel Kurtzer moved to his new post in Tel Aviv, he announced that reviving the deal was a priority. That shows its importance: EMG's main rival for the market is a US firm, Samedan. But despite this support, the EMG plan remains lamed. Explanations range from technical problems, to political inappropriateness, to pricing squabbles. But whatever the causes, with the Intifada in full cry, the moment is unlikely to ripen any time soon.
Recent goings on at MIDOR, the Middle East Oil Refinery, near Alex, are revealing of the fate of Egypt-Israel cooperation. Most of the players in MIDOR are also involved in EMG, according to an analyst, speaking to the Weekly who declined to be named. Hussein Salem, the Egyptian businessman who part-owns EMG, held shares in MIDOR until two years ago. Merhav, an Israeli energy company, owns part of EMG, and did own 14 per cent of MIDOR. Sameh Fahmi, Egypt's petroleum minister, was once chairman of EMG, and vice-chairman of MIDOR.
For a while, MIDOR seemed such a paragon of Arab/Israeli cooperation, that the European Investment Bank, whose lending criteria demand regional cooperation, awarded the company a $300 million loan in April.
Cooperation didn't last. In May, Merhav sold its stake in MIDOR to the National Bank of Egypt. Merhav's chairman, Yossi Maiman, told the press that the reasons were purely financial. But a significant cause of those feeble financials has been politics, an analyst from an energy company based in Egypt told the Weekly. Apparently Merhav's poor performance was the result of Gulf Arab states refusing to sell oil to the refinery because of their displeasure at Israeli involvement. For a time, the MIDOR refinery ran at 50 per cent capacity. Until Merhav withdrew, the refinery was not a viable operation. The analyst added that Merhav's withdrawal from MIDOR may reflect "a parting of the ways between Egyptian and Israeli joint business efforts."
The withdrawal is part of a trend. During the 1990s, $1.221 billion-worth of goods were traded between Egypt and Israel. Last year that figure plummeted to 337 billion. The recent plan announced to send Egyptian gas to Libya, reveals how stagnant the possible deal with Israel has become.
It may yet revive -- A Reuters analyst speculated that Merhav sold its stake in MIDOR to invest in EMG. And a senior source, who is extremely close to negotiations between Egypt and Israel, strongly disagreed that the deal was dead. "A deal of some sort will be signed, quietly, possibly as soon as two months from now, certainly by the end of the year," he said.
But even then, it may be too late, at least for the moment. Israel has started looking at other possible gas sources. The Israeli Electric Company in April said it would start negotiating with EMG rivals, the consortium comprising Samedan and the Israeli Yam Thetis, for gas. The energy analyst who spoke to the Weekly, remarked, "it is interesting that IEC is planning to buy half the amount of gas from Yam Thetis/Samedan as it was due to buy from Egypt before the Intifada made such a deal impossible. It may be an effort to nudge Egypt; or the Israelis may just be fed up with Egypt's dithering." There is gas offshore Gaza, too. Although the Palestinians have yet to speak to the Turks, according to Ambassador �etirge, Israeli analysts are sure the Palestinians will eventually supply Israel, further limiting Egypt's chances. Ha'aretz energy correspondent Amiram Cohen told Egypt's Oil and Gas North Africa Magazine, that when the political crisis quiets, "In a year or two, I guarantee they [the Palestinians] will be selling gas to Israel. They have more than enough to supply everything Israel needs." If Egypt holds out until the Intifada ends, it may, ironically, have a new rival to contend with.
As for Turkey, rivals are pressing Egypt there too. Ambassador �etirge told the Weekly, "In three years, the earliest time at which the Egyptians could reach us, we will no longer be desperate for gas. Iranian gas is already flowing, we are buying more Russian gas, and there will probably be Azeri gas by then too." But he added that in deference to maintaining friendly relations with Egypt, an important regional partner, Turkey would still like to buy Egyptian. And in the medium term, Turkey would need "perhaps 80 billion cubic metres a year" in "12 years," and could act as a hub to other markets, like Bulgaria and Romania, for Egypt's gas." It is rumoured that Egypt has tentatively spoken to these last two.
It is Egypt's good fortune to enjoy abundant gas reserves. But fate has a dry sense of humour. Selling gas to Israel, analysts say, is the most cost-effective way of getting Egypt's gas to the lucrative Turkish market. Certainly more so than going through Jordan and Syria. But the last time a deal with Israel was imminent, politics intervened. Should the current faltering continue, Egypt may lose the Israeli market. This in turn will lessen chances of getting a big wad of Turkish money, apart from the pennies of strategic alliance alms-giving. Liquefying gas is an option: Egypt struck deals with the British BG and ENI earlier this year to develop two liquefaction plants, at Damietta. But they won't open until 2004, and even then exports will remain costly, and slight. All this worries analysts concerned about Egypt's ailing energy sector, not to mention its lack of hard currency. But then again, most Egyptians may feel this is all a small price to pay for supporting the Palestinians and the Intifada.
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