Egypt: Natural Gas, Pipelines, And The Gas Exporting Countries Forum

By Exclusive to EWI | by J. Millard Burr
Wednesday, January 25th, 2012 @ 9:27PM

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In mid-November terrorists active in the northern Sinai Peninsula blew up and thus shut down the Arab Gas Pipeline that provides Egyptian natural gas to Israel and Jordan. The saboteurs had been forced to dig a deep hole in order to reach the pipeline buried under six feet of sandy waste.  It was the seventh such attack in 2011.

The first attack on the Arab Gas Pipeline was carried out in early February 2011.  It happened only twelve days after the initial confrontation in Cairo that pitted anti-government protestors against the security forces of aging Egyptian President Hosni Mubarak. (Kamal Al-Hilbawi, an Egyptian Muslim Brotherhood leader was quick to blame the attack on Israel.)  Because the explosion damaged the pipeline well before it reached the El Arish distribution station in northeastern Sinai, it halted supplies to both Israel and Jordan. The attack was downplayed in Jerusalem despite the fact that Israel was then receiving 40% of its natural gas supplies from Egypt.

Importantly, the distribution of Egyptian natural gas to Israel and Jordan had been a constant reminder of the benefits that derived from the Camp David peace accord of 1979, and the “sabotage” was a strong indication that the neutrality of the Sinai Peninsula, and the security of the Egypt-Israel border, could no longer be taken for granted.

The seventh explosion was located 25 miles west of el-Arish, again in the far northeast of the Sinai Peninsula.  And once again the Arab Gas Pipeline was shut down, and the movement of natural gas to Israel and Jordan ceased.  Ironically, the attack occurred only days before the pipeline administration was to install hi-tech surveillance and detection equipment the length of the pipeline in Egypt.  And it occurred only two weeks after the pipeline had been reopened after the flow of gas had been shut off for three months.  Egyptian officials admitted that through October 2011 the pipeline attacks had cost direct losses in excess of $80 million — and that did not even include the loss of income from sales of gas to Israel and Jordan, nor for the Egyptian natural gas that passes by pipeline through Syria and Lebanon.

To make matters worse, before the pipeline could be repaired “saboteurs” were blamed for an eighth explosion to damage the pipeline. And it occurred just hours ahead of the country’s first free election since President Hosni Mubarak was ousted.

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In Amman, frustrated government officials stated that Jordan could no longer afford the Egyptian outages that cost the economy some $2 million a day. (Arutz Sheva, Israel, November 10, 2011) The explosions in the Sinai had been so disruptive that Jordan, which had used Egyptian gas to generate 80 percent of its electricity, had begun to limit its dependence on Egyptian gas.  And despite the increased cost, it had begun to buy oil and diesel fuel from other sources for use in its Aqaba power plants.

Israel, for its part, was less dependent on Egyptian gas, but it too depended on the source to generate 40% of the country’s electrical use. For now, Israel has been forced to replace the imports from Sinai with more expensive purchases on the spot market. Consequently, in August the Israel Electric Company hiked electricity prices by nearly 10%, claiming that costs had risen because contracted Egyptian gas was not reaching Israel. Like Jordan, Israel had also begun to seek new energy sources while it avidly peruses locally developed alternatives to Egyptian gas.  Extensive Mediterranean gasfields had been located and surveyed, and despite the geopolitics that impact the offshore region Israel was determined to access the precious resource.

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With regard to Israel, apparently bereft of fossil fuel resources, since its founding it depended on expensive imports to meet its energy needs. However, with the start of a new millennium the government took steps to secure a dependable supply of natural gas and end the nation’s dependence on coal-fired plants.  The problem seemed resolved once Egypt began to produce natural gas from offshore fields found north of Port Said.  Egypt then began to construct a pipeline to move natural gas across the northern Sinai Peninsula to El Arish, located on the Mediterranean coast and very near the Gaza strip.  Once that was completed, it was no great feat to construct an undersea pipeline to the coast of Israel north of Gaza.  The result was of dual benefit:  The gas provided a substantial economic return to Egypt, and it would cut in half the Israeli cost for energy per kilowatt-hour.

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From El Arish the 36″ Arab Gas Pipeline was extended to Jordan, and the official opening was celebrated by President Mubarak and Jordan’s King Abdullah II on 27 July 2003.  Phase 1 of that project entailed a 150-mile length that connected El Arish with Taba in the Egyptian Sinai, and Taba with Aqaba, Jordan.  The final leg was completed after ten miles of undersea pipeline (that reached a maximum depth of nearly 3,000 feet) was laid. (The subsea length had obviated the need to cross Israel territory in the Negev.) The cost of the so-called First Phase was said to be $200 million; still, the project was expected to return to Egypt some $500 million annually within five years. An even greater return was expected once plans were completed to push the pipeline forward to Syria and then Lebanon.

The pipeline’s Phase 2 continued from Aqaba port to El Rehab, Jordan, at a point 15 miles south of the Syria border.  That 240 mile $250 million project was completed by 2006, and was constructed by a consortium of Egyptian companies that including EGAS, Petrojet, and the Egyptian Natural Gas Company (GASCO).  GASCO, founded in March 1997 was the lead agency with a history of involvement in gas transmission, processing, distribution and marketing.  Throughout, the Egyptian companies would operate, develop and maintain the pipeline for a period of 30 years, with an optional extension period of 10 years. After that the pipeline would be transferred to Jordan. It was the first time Egyptian petroleum sector was involved in a project located outside of Egypt.

Next, Phase 3 would continue from El Rehab through Syria to its border with Turkey, and then sweep left to arrive at Panias and Tarablous in Lebanon.  In October 2009 that pipeline extension from Dabbosia, Syria to Lebanon, and Tripoli’s Dir-Ammar power station was supplied for the first time with Egyptian natural gas. An extension into Turkey was to be the subject of further (and still pending) discussions.

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While Egypt’s natural gas pipeline is owned and administered by GASCO, the East Mediterranean Gas Company (EMG), an Egyptian-Israeli company, has operated its Israel length.  In 2005 GASCO and EMG signed a 20-year deal, which would provide Israel a continuous and dependable supply of natural gas, and the arrangement worked well until 2011. EMG itself is represented on the US NASDAQ stock exchange by AMPL, the Ampal-American Israel Corporation.  AMPL is a holding company with numerous investments and actually owns only 12.5% of EMG. 

It was following the 12 July attack on the Sinai pipeline, the sixth such event, that GASCO was forced to shut down for some time the movement of natural gas to EMG.  Neither the EMG station at El Arish nor EMG’s pipeline were damaged in the attack, but Gasco could no longer service its customer. Following the July attack the Israel Electric Corporation announced that it would need 3-3.5 billion shekels to make up for the disruption of gas supply and the shift to more expensive sources to create electricity.  When the parent Egyptian Gas Company (EGAS) announced it would be unable to make gas deliveries the Israeli market was immediately impacted.  And in the United States the AMPL price on the NASDAQ fell 2.6% to $0.32 — Giving it a market capitalization of only $18 million. Then, following the November attacks, it was not until January 2012 that EGAS was able to resume “partial” shipments to EMG.

Dismayed by its loss of service, in October 2011 EMG initiated legal action against two Egyptian state-owned entities, EGPC and EGAS, and for good measure, the Israel Electric Corporation.  EMG submitted a request for arbitration with the International Chamber of Commerce (ICC), asking it to rule on its demand for compensation; it claimed restitution was due because, “Egyptian gas suppliers had failed to supply gas that they contractually committed to supply to EMG under the parties’ Gas Supply and Purchase Agreement and its amendment.” EMG urged the ICC tribunal to “issue an order that EGPC/EGAS perform their obligations under the Contract and a declaration that EGPC/EGAS are not entitled to terminate the Contract.”  It was noted that AMPL and other EMG shareholders had “taken the formal steps required to initiate international arbitration procedures against the Government of Egypt under several bilateral treaties for the protection of investments.”  How and when the legal process will end is anyone’s guess.

In a final insult, in December AMPL announced that Midroog Ltd. (an affiliate of Moody’s Investors Service) had downgraded Ampal’s Series A, Series B and Series C debentures listed and traded on the Tel Aviv Stock Exchange.  Given the continued interruption of Egyptian gas supplies to the EMG. They were lowered by three notches, (from BA3 to B3) and were given a “negative” outlook given the very real possibility of even larger losses in the future.

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In Egypt itself the pipeline has been the subject of much recent debate, most of it focused on the argument that Egypt was receiving a bad deal in the price of natural gas sold to Israel.  The anger boiled over in October 2010.  Then, the Egyptian weekly “Al Ahram” reported that an organization called “No to the Gas Setback” was planning to sue top Egyptian government officials who had just agreed to a new pricing arrangement for natural gas reached by Egypt’s East Mediterranean Gas Company and Israel Corp. According to the Israel Corp, a contract to extend the sale of gas for twenty years was signed, and it would return to Egypt an estimated $5 billion over that time.

Members of the No to Gas movement were enraged by the sale price. It argued that beginning in 2004, it was the fourth agreement signed with Israel.  The opponents claimed that “other agreements” negotiated after 2008 had been characterized by both secrecy and lack of transparency. No to Gas was particularly unhappy because its demands that gas be sold at the international market price, and that gas deals be renegotiated every year, were not met.  The No to Gas people then threatened to sue senior officials at the Egypt Ministry of Petroleum (who had political immunity). The movement’s effort to bring greater transparency and a better price to the sale of Egyptian gas was very shortly thereafter overtaken by the revolutionary events of January 2011.  And once the Mubarak administration was removed from office it seemed apparent to observers that new contracts for Egyptian gas would have to be negotiated.

As noted above, Egypt and Israel did not have long to wait before pipeline protests held in Cairo, Alexandria and Port Said were trumped by saboteurs operating in the Sinai.  And once Mubarak was deposed, it seem that few Egyptians were pleased with the arrangements made either by his administration or the interim government that followed. However, when Mubarak was brought to trial before the Supreme State Security Court in January 2012 to review the sale of gas to Israel, his lawyers denied that gas had been sold to Israel below market price.  Mubarak’s lawyers argued that he had done nothing illegal, and the Supreme Administrative Court found that the export of gas to Israel “was a sovereign decision, and that Mubarak’s only role was to approve the deal.”  In fact, Mubarak had actually opposed aspects of the most recent gas contract, and he had met with Israel Prime Minister Ehud Olmert to work out a new agreement more favorable to Egypt.  Consequently, the price for Egyptian gas under the new contract doubled the price originally agreed on. (Al Masry Al Youm, Egypt, 21 January 2012)

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Practically lost amid the myriad analyses regarding recent events in Egypt, the 2 June meeting at Cairo of the Gas Exporting Countries Forum (GECF) received little attention.  For some observers is seemed some GEFC members were determined to create the natural gas equivalent of the OPEC oil cartel.  For public consumption, Egyptian Oil and Mineral Resources Minister Abdullah Ghorab claimed that GECF members were continuing to “promote dialogue between gas producing countries.”  Ostensibly, the members were gathering in Cairo to review events in Egypt, including the recent diminution of Egyptian gas exports. (“GECF meet kicks off in Egypt today – The Egyptian Gazette, Thursday, June  2, 2011.)

Annual meetings of gas producers were dated from 2001 and a general meeting held in Tehran.  That gathering was followed by meetings at Algiers in 2002, and at Doha in 2003, 2007 and 2009.  (Meetings outside of the Middle East were held in Moscow and Port of Spain.) Overall, the GECF Executive Board manages the affairs of the Forum and meets twice a year, or as needed. In turn, its Secretariat carries out its executive functions.  At the Cairo meeting the Forum began the process of “formalizing its organization,” and it was decided to make Doha, Qatar the home of its secretariat. Its first “summit” was then scheduled for November 2011 in Doha. There, nine members — Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya, Nigeria, Qatar, Russia Federation, Trinidad and Tobago, Venezuela, and Oman (admitted in late 2011) would be joined by Observer Members, Kazakhstan, Norway and Netherlands.

While there was little reporting on the Cairo event, the Egyptian media trumpeted that the meeting itself sent a “symbolic message” of assurance to world investors that the “Egyptian investment climate was stable and had restored its balance and regional role after the January 25 revolution.”

As with the OPEC petroleum exporters cartel, the GECF was meant to ensure that members would obtain the best value possible from their gas resources.  As the GECF organization itself put it, it would, “Promote the appropriate dialogue among gas producing and consuming countries to ensure appropriate balance in the sharing of risk associated with the gas markets and fair pricing for both producers and consumers.”  That boilerplate aside, the GEFC existed to, “Promote the acquisition and exchange of technology and experiences, and to equip Member Countries with the know-how to efficiently and effectively exploit their gas resources to the benefit of their country and peoples.”

The GECF announced it would continue to work for what it called a “fair” gas price but denied that the organization was created to control prices or form a cartel similar to the Organization of Petroleum Exporting Countries (OPEC). It was assumed that the GECF would eventually play an important role in coordinating market activity of liquefied natural gas (LNG) because its member were the world’s leading procurers.

Until very recently, the GECF members accounted for some 70% of the world’s current proven reserves of natural gas.  Russia was the world’s largest gas producer, accounting for 30 per cent of global reserves, and Qatar was the largest exporter of LNG with a production capacity of 77 million tons a year.  Tangentially, the GECF accounted for 38% of the pipeline trade and 85% of the production of liquefied natural gas.  The three most important members were Russia, Iran, and Qatar; the latter had once accounted for some 57% of global gas reserves.

Unfortunately for the GECF, natural gas statistics, even data a year old, is suspect due to the explosive increase in gas production in the United States over the last two years.  In fact, in Cairo the United States was the unseen “elephant in the room.”

The first summit of the Gas Exporting Countries Forum met at Doha for one day only on 15 Nov 2011. It had been announced that Iranian President Ahmadinejad would be present, but in the end he was a no-show. Nevertheless, among those present were Egyptian Petroleum Minister Abdullah Ghorab, Algerian President Abdelaziz Bouteflika and the leader of Libya’s National Transitional Council, Mustafa Abdel Jalil.  All members were cautiously optimistic, as the demand for natural gas, which had dropped by 2.1 per cent in 2009 due to the global economic recession, had rebounded in 2010.  It had risen by 7.3 per cent thanks in great part to Japan increasing its LNG imports following the March tsunami and subsequent crisis in its nuclear energy production.

It seemed hardly possible that in a single day the members could achieve either the status of a cartel capable of fixing the price of natural gas, or one able to peg the price of gas to the price of oil. The Emir of Qatar, Sheikh Hamad bin Khalifa Al-Thani, had opened the summit by complaining about disparities that existed between oil and gas prices even despite the rise in gas consumption in recent years. World gas demand dipped in the wake of the global financial crisis but the GECF says it rebounded last year, rising 7.3 per cent, mainly due to Japan boosting LNG imports after its March tsunami and nuclear crisis. How the disparity was to be overcome was anyone’s guess.

Gas might be the fastest growing energy source, but an effort to create an OPEC-like cartel was doomed by the enormous potential that now exists in the United States and Canada.  Not surprisingly, the participants accomplished little other than to agree that a “fair price” was needed for gas if the twelve members were to finance the estimated $400 billion per year required through 2035, “to meet the growing appetite for gas.” Following the meeting, Russia announced that it was prepared to host the 2nd GECF summit in 2012.

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An indication of just how difficult a role the GECF has, was a recent Times of India report which stated that, “Israel, which suddenly finds itself flush with natural gas, has offered to export it to India. The offer was made by Israeli finance minister Yuval Steinitz to the Indian government…”

Israel!?  If India was expecting that resource-poor Israel would soon export natural gas from its subsea Mediterranean find — which was contested by Lebanon and Cyprus — then one can be forgiven for visualizing that the GECF is but an ephemeral phenomenon.

 

POSTSCRIPT:

Until very recently there existed a common misperception that the United States was running out of domestic natural gas, and it was doing so very quickly.  Price spikes, such as were seen in the 1970’s and in the early to mid-2000s, seemed an indication of that fact.  However, those two spikes were not caused by waning natural gas resources but by other forces at work in the market.

In fact, there are enormous deposits of natural gas still in the ground in the United States and Canada, and there are enormous technological advances in play that will bring more of the domestic resource to market. In 2007 the US National Petroleum Council estimated there were 1,451 Trillion cubic feet (Tcf) remaining in the U.S. In contrast, only four years later the Energy Information Administration estimated that there were 2,543 Tcf of technically recoverable natural gas in the United States alone. And that figure seems sure to grow.

As the United States can be expected to become a major player in the liquefied natural gas export market, the GECF nations can expect more uncertainty ahead.  And as for Israel, it had better begin soon to tap its natural gas resource if it hopes to capture a significant share of the India market, which is now up for grabs.

J. Millard Burr, a Fellow at the Economic Warfare Institute, authored with Robert Collins, Alms for Jihad; Revolutionary Sudan and many other publications, and is a former State Department official.


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