Natural Gas from Egypt to Israel and Jordan

A phrase often repeated during the Arab Spring “be careful of what you wish, it may happen” now finds its starkest manifestation in Egypt, a country profoundly tortured by horrible politics and corruption, with a burgeoning population and not nearly enough natural resources. Islamic fundamentalism is certainly not be the worst thing that can happen to that country.

Surpassing 80 million last year, Egypt’s population has more than doubled since independence, posing a most intractable problem. Unemployment among Egyptian youth, including university graduates, could be the largest fraction in the world, certainly topping 50%, even if reliable numbers are not available.

For a while, Egyptian energy production and exports were the great hope for the country despite being affected by the Mubarak regime’s problems and, in retrospect, its razor-thin fragility. Energy was supposed to be center stage of the nation’s transformation. To knowledgeable observers, the country’s oil and gas were always affected by physical constraints, regional and local politics, and an inability to manage all. Yet, energy resources were marshaled during the last 20 years. For a while they helped but fizzled before too long.

Oil, which flirted with production of 1 million barrels per day in the mid 1990′s dropped to less than 800,000 barrels per day. With consumption increasing at a torrid pace, it quickly surpassed production and exports declined to zero. Egypt became a net importer of oil. Instead of making money, it has to pay oil producers.

Natural gas was presumed to be different. After gas was discovered in 1935, it climbed to 1.5 Tcf per year in the 1950s but then declined sharply. After massive discoveries in the Nile Delta, production increased again, climbing to 2 Tcf per year. According to some experts, it may still have room to expand to 2.2 Tcf per year. Egypt Gas claims even more potential production but the reliability of those estimates should be considered wishful thinking more than professional calculation. Domestic demand from a population that size is always one step away from overwhelming any export balance. As it is today, Egypt theoretically exports 2.1 Bcf per day, about 38% of total production, or 760 Bcf per year. Of this, 450 Bcf is exported as LNG and the rest by pipeline. The important pipeline was the one going north to Jordan.

The situation got far more complicated when a branch of the pipeline entered Israel, inevitably involving it in Egypt’s energy equation.

Recent events have made shambles both of the whole notion of a secular regime and of any pretense of handling business with Israel as business as usual.

After a number of terrorist attempts, a blast in the Sinai last February halted natural gas exports via pipeline to Israel and Jordan. A 15-year, 160 million cubic feet per day natural gas contract became instantly jeopardized and any Israeli notion of Egypt as a business partner collapsed unceremoniously. It is an obvious nuisance for Israel, but the imbalance in military and economic strength between the two countries is so overwhelming that there is little chance for the two countries to assume a hostile posture any time soon, excluding of course the occasional rhetorical flair in the new Egyptian parliament.

The situation with Jordan, a regime that is not viewed very favorably by the new Egyptian power structure, is serious. Jordan has been receiving 230 million cubic feet per day of natural gas from Egypt, accounting for 80% of its power generation needs. Power generation which Jordan has converted to natural gas assuming Egypt would remain a reliable source of fuel. Unless it swallows its pride and tries to negotiate with Israel, there are no foreseeable alternatives to meet Jordanian energy needs.

This is all because Israel is actually sitting pretty. After massive discoveries of gas over the last two years, it has embarked on a breakneck pace of development. Noble Energy, the main operator for the Israeli discoveries has just announced that it will meet and even beat production forecasts in April 2013 from the Tamar field, Israel’s second largest discovery. At least one platform earmarked for Tamar is expected to eventually produce 1.2 Bcf per day, dwarfing any imports from Egypt. Israel will not only be independent but will evolve into a major exporter of LNG.

Like so many things in the Middle East, reality and the sense of fairness change overnight.