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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian is an energy and utilities consultant who has worked with several major international energy companies. He has an LL.M. from VU Amsterdam University…

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This High-Profile Gas Deal Upends Regional Geopolitics

The discovery of major energy deposits in the Eastern Mediterranean has raised the region's importance to consumers in primarily Europe. The promise of wealth and energy security is driving competition and cooperation between littoral states and great powers. An unexpected success story is a partnership between Egyptian and Israeli private energy companies. Although a deal was signed in February 2018 to export gas from the Middle East to North Africa, complications have caused delays. Recent events, however, have led to a breakthrough and the resumption of activities

A game-changing deal

The discovery of significant gas resources of the coast of Israel improved the country’s energy security by decreasing dependence on foreign producers. The substantial size of the gas fields created the opportunity to become an energy exporter for the first time in the country’s history. Therefore, Delek Drilling and Texas-based Noble Energy made use of the moment to sign an agreement with Egyptian Dolphinus Holdings to export Israeli natural gas to Egypt under a ten-year contract worth $15 billion.

The deal, however, was hampered due to political and technical impediments on both sides. According to Ahmed el-Shami, professor of feasibility studies at Ain Shams University, “Israel was finding a major obstacle in providing an offshore pipeline to supply gas produced at Israeli offshore fields Tamar and Leviathan to the Egyptian grid.” The companies, consequentially, decided to buy a stake in Eastern Mediterranean Gas (EMG) to facilitate the deal. Related: Vietnam Tests China’s Patience In The South China Sea

The recent agreement between EMG and Israel's Europe Asia Pipeline Co. finally cleared the way for gas exports to start on short notice. The deal allows the former to use a terminal in Israel to transport gas via an EMG owned pipeline from Ashkelon to el-Arish in the Sinai Peninsula.

A win-win situation

Despite the political and societal opposition in Egypt regarding doing business with Israel, Cairo stands to gain significantly. The Arab nation will increase its revenue from charging private companies for the transportation of natural gas. Egypt will also gain on a strategic level in two ways. First, exporting the Israeli gas as LNG will strengthen the country’s reputation as an energy hub. Especially European countries stand to gain as they're trying to wean themselves off Russian gas. Secondly, Egypt’s energy security is further strengthened as relatively cheap becomes available to households and businesses.

Another benefit for Egypt is the reduction of the fine Egyptian companies were required to pay due to the ruling of an international arbitration court based in Geneva on December 4, 2015, concerning contract breach. Egypt’s General Petroleum Corporation and Natural gas Holding Company suspended the export of gas to Israel’s Electricity Authority following the unrest during the Arab Spring in 2011. The Court decided to grant the Israeli side $1.8 billion in damages sustained. Related: Solar, Wind Are Now Cheaper Than Coal In Most Of The World

However, the involved parties were able to reach a ‘friendly agreement’ under which the settlement was reduced to $500 million as the Egyptian side was able to connect the issue with the new export deal. According to Tharwat Ragheb, professor of petroleum and energy engineering at the British University in Egypt, "this is a dazzling success for Egyptian diplomacy. Israel has a ruling. However, Egypt managed to reduce compensation and reach a settlement agreement."

Energy politics in the region

Although the export agreement is a bilateral deal between Egypt and Israel, it could have consequences for the wider region on two related issues.

First, Egypt will be supplied with gas from the Leviathan and Tamar gas fields off the coast of Israel. These deposits contain the lion’s share of that country’s newfound energy wealth. Israel, however, is also engaged in diplomatic talks with Cyprus and Greece for cooperation on energy topics including a possible subsea pipeline via Cyprus and Greece to Europe. The export agreement with Egypt lowers the chances of any such project coming to fruition as the longevity of production from the gas fields is reduced when two instead of one export pipeline needs to be filled. This would also affect profitability. Thus the first pipeline becoming operational will enjoy an advantage over its competitor.

Secondly, increased cooperation between Egypt, Israel, and Cyprus is strengthening relations and creating an informal bloc of interdependent states. Especially Turkey stands to lose due to Ankara’s confrontational policies vis-à-vis the collaborating countries. In a recent trilateral statement, Turkey was condemned due to its “unlawful actions in the Aegean Sea and the Eastern Mediterranean, in particular the escalating provocative and illegal drilling activities, seismic surveys, and military presence in Cyprus’ maritime zones.” The bloc's unified position could, therefore, be an advantage when dealing with Turkey.

Although, the discovery of energy deposits opens a new chapter in economic development, political and security-related hurdles remain.

By Vanand Meliksetian for Oilprice.com

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