Egypt’s financial future and stability could be in jeopardy if the country fails to secure a loan from the International Monetary Fund (IMF) very soon. At present, Cairo’s financial reserves are being depleted very rapidly, even while the country’s oil and gas sector is booming as a result of high oil and natural gas prices. Europe’s energy crisis, the continuation of the Russian invasion of Ukraine, and global shortages of natural gas and other energy commodities have pushed hydrocarbon revenues in Egypt to record levels. At the same time, new natural gas discoveries are made in the East Med, as reported by Cyprus and Italian oil major Eni, while Israel is willing to ramp up its gas exports to Europe, using Egypt as a springboard.
Israeli sources reported that the country’s natural gas production has increased by 22 percent in H1 2022, hitting levels of 10.85 billion cubic meters year-on-year in June, of which 42 percent is currently being exported. The Israeli government has been pushing for increased gas exports, with an eye on current and future demand in Europe. The increase in volumes can be attributed to rising production at the Tamar and Leviathan offshore fields.
In the coming months, Israel looks to increase volumes even further. In June, the country signed an MOU with Egypt and the EU to boost East Med offshore gas production and exports. Israel’s effort to boost gas exports is not going to end Europe’s energy woes, but it at least fills some of the gap left by the drop in Russian gas imports.
Israeli and European eyes are also on the ongoing discussions with Lebanon, as the expected flows from Israel’s Karish field are currently constrained due to Beirut’s objections. Both countries are still discussing a maritime border demarcation. Once this matter is resolved, Karish flows will also be heading via Egypt to Europe.
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Elsewhere in the East Mediterranean, Italian energy major Eni, this week, reported a major offshore gas discovery in Cyprus. The Italians stated that the reservoir, holding more than 800 feet of net pay, could hold a total reserve of 2.5 Tcf of natural gas. The first exploration results of the Cronos-1 exploration well are pushing Eni now to consider a fast-track approach to bring the field online. The new discovery is next to the Calypso-1 discovery, which is expected to contain between 6-8 Tcf of natural gas. One major hurdle to the development of the gas resources is Turkey’s attitude towards the Island, as the whole area is claimed by Cyprus and the not-recognized Turkish Republic of Northern Cyprus, the Cypriot part currently being occupied by Turkey.
Both developments however could be positive events for Egypt, as all flows will be linked to Cairo’s Nile Delta-based LNG liquefaction plants. Cairo’s interest in regional stability is clear, as it looks to become the main regional gas export hub.
The current influx of LNG and other commodity revenues, however, is not enough to keep Egypt afloat for long. Financial experts are worried that Cairo’s hope of reaching an IMF loan agreement is ill-founded. Even though Egyptian politicians are positive about reaching a deal very soon with the IMF, the agreement might not be enough to stabilize the struggling local economy or fill the coffers of the Egyptian Central Bank. Egypt, mainly due to mismanagement, but also due to the Ukraine war, is facing extremely high food and fuel import bills. To make matters worse, international investors are pulling out of local debt markets. Normally, Arab Gulf states, such as Saudi Arabia, the UAE, or even Qatar, could come to the rescue. Until now these countries have committed around $22 billion in deposits and investments in Egypt, but more is needed. At a five-country Arab Summit, surprisingly without the presence of Saudi Arabia, new deals are expected to be made.
If no new debt deals will be reached, and if the IMF loan proposals end up being disappointing, a possible new devaluation of the Egyptian Pound is imminent. The IMF and others already have requested a more flexible exchange rate for the Pound in order to reduce Egypt’s funding gap. International financial advisors have indicated that Egypt will need an IMF package of at least $15 billion, to stabilize its economy during the next 3 years. At the same time, pressure is building to reduce subsidies on food and energy. Reducing subsidies may not be negotiable for the Egyptian government, as doing so will result in major instability and possible unrest. In the meantime, core inflation rose to 15.6% in July.
On the diplomatic front, large steps are being made towards improving international cooperation between East-Mediterranean countries. After Israel and Turkey have restored full diplomatic relations, Cairo and Ankara now seem to be the next parties for rapprochement. Rumors in Egypt about renewed cooperation with Turkey have not been muted, and Turkey’s president Erdogan’s remarks about a new era of cooperation have not been rebuked. While there are some major obstacles to restoring relations, such as Turkey’s involvement in Libya, Hamas, and the Muslim Brotherhood, or Cairo’s support of Greece, Cyprus, and Israel, both parties stand to benefit from mutual cooperation and access to international energy markets.
Still, Egypt wants to mitigate the re-emergence of Turkey in the region, while Ankara is looking to be part of the East Med gas boom. Erdogan also sees a danger in a strong East Med Gas Forum (EMGF), which doesn’t include Turkey, and is built on a quartet of Egypt-Israel-Greece and Cyprus.
Despite the geopolitical rivalry, both Turkey and Egypt are facing financial headwinds, and improving energy ties and regional stability is in the best interest of both countries.
By Cyril Widdershoven for Oilprice.com
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