“Supergiant” gas field could transform Egypt’s energy industry

“Supergiant” gas field could transform Egypt’s energy industry

The discovery of a massive natural gas field could take pressure off of Egyptians suffering from a historic energy crisis. But the find throws into question a pending deal with Israeli companies to import gas and takes pressure off the Egyptian government for much-needed reforms.

On August 30, Italian energy giant Eni announced that it discovered a massive natural gas field 200 kilometers off of Egypt’s Mediterranean coast. The company reported that the Zohr field could hold as much as 30 trillion cubic feet of gas which, if confirmed, would make it the largest natural gas discovery in the Mediterranean to date.

The news is welcome for Egyptians, who are enduring a year-long energy crisis—the worst in decades. Writing for the Brookings Institution, Robin Mills explained how the Egyptian power grid is operating far over capacity, leading to constant shortages.

Inadequate upkeep of the grid under the reign of former President Hosni Mubarak compounded the problem created by an artificial increase in domestic demand: decades of energy subsidies that diverted investment to energy-intensive industries.

Egypt already produces over 2 trillion cubic feet of natural gas annually, and for years was a net gas exporter. But after the turmoil following the January 2011 revolution, exports declined by nearly 30%, and Egypt became a net importer in 2015. Gas produced domestically was also directed toward the domestic market to meet the intensifying energy demand—by 2012, gas provided more than 50% of Egypt’s energy needs. This met domestic demand, but in the process sacrificed long-run investment and modernization.

The new field would not immediately resolve Egypt’s energy crisis. Italy’s Eni would not start drilling until 2016 and would likely not pump gas until 2017. But the find could be enough to serve most, if not all, of Egypt’s domestic energy needs.

Fakhri al-Faqi, a professor of economics at Cairo University, told Al Arabiya that the Zohr field would “[satisfy] the country’s natural gas demand for at least 35 years.” Speaking to the Financial Times, Eni CEO Claudio Descalzi said that Egypt would not need to import gas for at least 10 years.

Israeli gas deals in jeopardy

Israel’s natural gas exporters stand to lose the most from Egypt’s “supergiant” discovery. Rami Ayyub explained for GRI how, prior to the Zohr find, Israel was positioned to become one of the most significant natural gas exporters in the Mediterranean.

The Egyptian Energy Ministry was in negotiations with Noble Energy and Delek Group to import gas from Israel’s Leviathan and Tamar fields—the development of which was contingent on the expectation of strong Egyptian demand—but those negotiations are being held up by Israeli regulators. Not surprisingly, share prices for the two companies fell upon news of the discovery in Egypt.

Now the discovery of the Zohr field, which could end up serving most or all of Egypt’s energy needs, throws the deal into question. Egyptian Minister of Petroleum Sherif Ismail assured investors that the discovery would not impact the negotiations, but the longer the deal is held up by Israeli regulators, the more the companies’ bargaining position erodes, meaning less of a return for investors on the final deal.

Israel’s position as an energy exporter is further threatened by the potential reopening of Iran’s energy industry to global markets. The US Congress avoided a vote to block a deal to limit Iran’s nuclear program in exchange for lifting crippling economic sanctions. As long as the IAEA verifies that that Iran is implementing their part of the agreement, oil and gas will begin to flow again. Iran is positioning itself to become a major supplier of natural gas to the European Union once sanctions are lifted.

Good for Egypt’s government, bad for Egyptian governance

Successful development of the Zohr gas field could ease Egypt’s energy crisis, improving the lives of Egyptians suffering from daily blackouts in the hot summer months. But while that would reduce the short-term burdens on normal Egyptians, the longer-term impact on governance in Egypt could very well prove to be negative.

Any reduction in pressure on Egypt’s government means less pressure for reform. While President Abdel Fatah al-Sisi already pushed through difficult cuts in food and energy subsidies, aided in part by persistently low oil prices, Egypt is in desperate need of more fundamental reforms—corruption, regulation, and the centralization of power under the executive all threaten to make the Sisi presidency as ineffective at delivering broad-based prosperity as Mubarak’s .

Instead, the Egyptian government and those connected to it stand to benefit most from discoveries like the supergiant Zohr field, with very little reaching normal Egyptians.

About Author

David Wille

David Wille works for a research center affiliated with George Mason University, where he is pursuing an MA in economics. Prior to graduate school, David was a retail banking research analyst at a Virginia-based consulting company and was a Fulbright Scholar in Egypt until 2011. He writes about the political economy of the Middle East.