Egypt Looks to Offshore Gas Field for Growth and Influence

Egypt Looks to Offshore Gas Field for Growth and Influence

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CAIRO — President Abdel Fattah el-Sisi likes to flaunt his plans for modernizing Egypt, like the flashy new administrative capital rising from the desert outside Cairo. But most Egyptians view his rule as a time of painful belt-tightening, with soaring inflation, a currency crash and cuts to subsidies that have made fuel, electricity and water more expensive.

Now there is a ray of hope emerging a hundred miles offshore.

It comes in the form of a windfall natural gas discovery with the potential to lift Egypt’s limping economy, build a new commercial alliance with Israel and maybe, even, revive the country’s diminished regional clout.

Egypt’s gas push is part of a tectonic shift in energy and geopolitics. Natural gas, long a poor cousin to oil, is gaining importance and becoming a tool for countries to leverage power and prestige. Advances in the shipping of liquefied gas have made it a global fuel and strengthened the hand of countries that until recently were not major energy exporters, including the United States and now Egypt.

The flood of new gas has been bad news for traditional exporters, particularly Russia, which has had to slash gas prices to maintain sales to Europe. Many European countries have long sought to reduce their dependence on Russia and are eager to establish new suppliers even if that means doing business with autocratic states like Egypt or Qatar, a longstanding gas supplier embroiled in a bitter diplomatic feud with its Persian Gulf neighbors.

In recent years the eastern Mediterranean has become one of the world’s hottest offshore drilling zones, with a string of major gas discoveries in the territorial waters of Israel, Lebanon and Cyprus. Egypt struck the jackpot in 2015 with the discovery of a giant reservoir known as Zohr that has developed into one of the largest single gas fields in the Middle East.

“We have scored a goal,” Mr. Sisi said in a televised speech last year. “I’ve been dreaming about it for four years, that we become a regional hub for energy.”

Egypt now produces a record 6.3 billion cubic feet of gas a day — up by more than 30 percent since 2016 — making it one of the biggest producers in North Africa and the Middle East. In January, for the first time in several years, Egypt exported more gas than it imported. Exports are still a trickle, and Egyptian citizens have yet to see much benefit, but the government has hopes for an export-fueled boom.

Oil companies plan to expand gas production by more than 40 percent in Egypt this year and are optimistic about the eastern Mediterranean more broadly.

Last week Exxon Mobil announced yet another gas discovery in the waters of Cyprus that is similar in size to two other large fields nearby. The United States Geological Survey has projected that enough gas will eventually be found in the eastern Mediterranean to meet regional and European power demand for decades.

“Egypt is one of the best places, along with Cyprus and Israel, to drill not only because of the discoveries but because it is close to Europe and Europe is increasing its gas use,” said Claudio Descalzi, chief executive of Eni, the Italian energy giant that is developing the Zohr field. “Egypt has all the ingredients to make it successful.”

Energy giants have been flocking to Egypt in part because the government in 2015 raised the price it would pay companies for their gas by more than a third.

BP invested more money in Egypt over the last two years than any other nation, and is adding $1.8 billion this year. All told, foreign oil companies are putting an estimated $10 billion into the country this year.

Egypt’s new gas fortune is fortified by the fact that it has the only two large-scale gas export terminals in the eastern Mediterranean, which were built during a prior era of gas riches. The terminals, which cool gas into liquids for export by tankers, have been largely mothballed since 2014 when domestic consumption overwhelmed production.

Royal Dutch Shell and Eni, which have ownership interests in the terminals, plan to have them fully operational this year. They also hope to use them to re-export gas produced by neighboring countries that do not have such terminals.

“We see a new dawn in Egypt,” said Michael Stoppard, chief strategist for global gas markets at IHS Markit, an energy consulting firm. “We don’t see this as a flash in the pan.”

The gas boom could help Egypt geopolitically, too, allowing Mr. Sisi to strengthen economic ties with Israel and Jordan while becoming an indispensable partner to Europe.

A meeting in Cairo in January signaled the extent of his ambitions.

Representatives from six Mediterranean countries and the Palestinian Authority agreed to create a regional gas organization to coordinate regulations on pipelines and commerce. The meeting included Israel’s energy minister, Yuval Steinitz, who was on the first official visit by an Israeli minister to Egypt since the 2011 Arab Spring.

Egypt and Israel have been quietly cooperating for years in the fight against Islamic State militants in Sinai. Now they have bolstered their partnership in energy. Last year the Israeli oil company Delek Drilling and Noble Energy of Houston signed a deal to pipe $15 billion of Israel’s offshore gas to the Egyptian export terminals. There are plans to reopen a pipeline between Israel and Egypt through Sinai that shut down in 2012.

“The fact that Israeli natural gas will be exported to Europe via Egypt facilities, the fact that we are speaking to each other,” Mr. Steinitz said in an interview, “make this an access for peace.”

Also in January, Egypt struck a deal to provide half of Jordan’s gas needs by pipeline, replacing imports of more expensive liquefied gas. The Sisi government is also working to resume exports to Lebanon by another pipeline that has been inactive for years.

But if gas can bring countries together, it can also stoke tensions. For example, Turkey and Cyprus have been squabbling for years about drilling in disputed waters. The pipeline through Sinai was attacked by militants in the 2000s and early 2010s. And the new Egyptian-Israeli energy relationship could be diminished if Israel builds a proposed undersea pipeline to Europe.

The gas windfall has the potential to stabilize Egypt’s precarious, debt-laden finances and help clean up its polluted air. The government is pushing drivers to convert vehicles from diesel and gasoline to cheaper, cleaner natural gas. So far, 250,000 of the country’s 10 million vehicles have made the switch.

But there’s little sign of the gas windfall on the streets of Cairo, where the government has failed to dent high unemployment or halt a slide in public services.

A few weeks ago, Mohamed Ramadan took his taxi to a government-financed garage to have it converted from gasoline to compressed natural gas. The government is offering financial incentives and building filling stations.

Mr. Ramadan estimated the conversion would save him 50 percent on fuel expenses, which would help him make his car installments and pay school fees for his three children. But he worried that inflation would wipe out most of what he saved.

“It really doesn’t make much of a difference, because everything else is getting more expensive,” he said.

Like many developing countries, Egypt has a mixed record of sharing the benefits of mineral wealth. In the 2000s, Egypt’s ruler at the time, Hosni Mubarak, frittered away export earnings from an earlier gas boom on energy subsidies while doling out lucrative contracts to cronies.

By 2009, the boom was over, and oil companies shipped out their drilling rigs. In 2012 a court sentenced Hussein Salem, a business tycoon and Mubarak confidant, to 15 years in prison for his part in a scheme involving a manipulation of gas sales to Israel that was estimated to have cost Egypt several billion dollars. (Mr. Salem, who was living in Europe, avoided prison.)

Egypt’s economic and demographic problems have worsened since then. Youth unemployment is around 34 percent, and the population is growing by a million people every six months and is expected to surpass 100 million later this year.

Even energy executives warn that Egypt could squander its gas wealth if the government doesn’t cut electricity and gas subsidies to control rising domestic energy consumption.

Gas discoveries are a “sizable gift,” said Ahmed Heikal, chairman of Qalaa Holdings, a leading energy investment company. “But if you receive a gift from God you have to use it wisely.”

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