The Israel-Hamas war is a crisis but, in terms of energy, what happens is dependent on the extent and duration of the fighting. The concern is that the main combatants may have more reasons to prolong than stop the war. With no solution in sight, there is always a risk that the conflict could develop into a wider confrontation with potentially global consequences. So far both Hezbollah and Iran have refrained from any direct involvement. But if the civilian death toll in Gaza carries on rising, the risk of wider conflagration increases. Right now, it is characterized by extreme uncertainty.
In global energy terms, industry’s current base–case appears to be that the conflict will likely be largely contained to Israel and Gaza.
For the East Med, these happenings cast a shadow over the future development of its abundant gas resources. A long-running conflict could delay projects and final investment decisions and cause doubts and concerns in the minds of international investors that the geopolitical risk is too high.
Israeli gas supplies to Egypt
For about five weeks after the start of the Gaza conflict, following shut-down of the Tamar gas platform Israeli gas supplies to Egypt were suspended, exacerbating the country’s already dire energy problems. The fact that this led to immediate power cuts and temporary reduction of gas supplies to energy-intensive industries, including fertilizers, shows how dependent Egypt has become on Israeli gas imports.
Lack of any new major gas discoveries since Zohr in 2015, and faltering production, coupled with ever-increasing energy demand due to its fast-growing population, has left Egypt exposed to energy shortages. Gas production has been declining for three-year now and it is still declining. Combined with its continuous economic problems, energy security and the economic crisis will be major issues at the country’s forthcoming presidential elections, scheduled to be held in December.
But, at least for now, Israeli gas supplies have been restored to normal, pre-war, levels, and the EMG pipeline is back in operation. This is enabling Egypt to resume some LNG exports, including to the EU. In June 2022, the European Commission, Israel and Egypt agreed to a supply of LNG to the EU up to 2030 to help it replace Russian gas.
In 2022 Egypt exported about 10billion cubic metres (bcm) LNG to world markets, accounting for less than 2 per cent of the global LNG trade. About 7bcm went to Europe, contributing about 5 per cent to EU’s LNG imports in 2022. Even though this is a small proportion of EU’s LNG imports, any disruption adds to its overall supply concerns. However, with gas storages in Europe at full capacity, this would not have any immediate impact.
Egypt’s LNG revenues in 2022 were over $8billion, helping shore-up its economy and foreign currency reserves. These are expected to be substantially lower in 2023.
Importance of East Med gas
First, lets put East Med gas in context. Current East Med gas reserves constitute only about 2 per cent of global gas reserves. Even for Chevron, the biggest gas player in Israel, the share of East Med gas in its global portfolio is only about 6 per cent . Nevertheless, all majors are operating in the region and see it as important to their global hydrocarbon business.
Mike Wirth, CEO Chevron, confirmed in October, that the Israel-Hamas war would not alter Chevron’s plans for the East Med. Wirth added that the company is taking a view “measured in years and decades” as it develops projects.
The company plans increasing gas exports to Egypt from about 8bcm/yr in 2022 to about 20bcm/yr by 2027. This has already been sanctioned by the Israeli government.
In addition, as part of Leviathan’s Phase-2 development, Chevron is considering installing a floating liquefaction facility (FLNG) at Leviathan to produce 4.6million tonnes/yr for export to global markets, particularly to Asia, as well as expand production for export to the domestic market and to Egypt. The question, though, is when will Chevron take these plans forward? Will prolonged conflict in Gaza cause long delays?
Egyptian gas production may see an upturn in about three years. Eni hopes to restore higher production at Zohr, but also to start production from the newly-discovered 280bcm Orion-1 gasfield in the Eastern Mediterranean part of Egypt’s EEZ. Chevron/Eni also hope to develop the 100bcm Nargis gasfield, north of Sinai, over the same period.
Cyprus could potentially help by approving the development of the Aphrodite gasfield and export the gas to Egypt. Eni is planning something similar with its gasfields in Cyprus’ block 6, should appraisal of the Cronos prospect, currently in progress, be successful. But Cyprus is still weighing its options.
Supply of Israeli gas to Egypt also has a political dimension. Not only it helps Egypt’s power sector reduce electricity cuts that are often the cause of social unrest, but it has also contributed to strengthening diplomatic relations between the two countries. It is worth remembering that crippling power cuts contributed to the eventual downfall of Egypt’s previous President, Morsi, in 2013. For Israel the survival of President Sisi is considered to be a “vital security interest”.
East Med energy security concerns
The Israel-Hamas war has brought the question of East Med energy security and the geopolitics of energy back to the fore. Given the earlier Gaza crisis in 2021, the on-and-off clashes with Hezbollah and the hostility of Iran to Israel in the background, as well as the ongoing maritime disputes between Turkey, Greece and Cyprus, energy security concerns resurface frequently in a volatile region.
The longer the war lasts the higher the risks that it can spill into energy flows and markets, pushing prices upwards in a jittery world.
Escalation of the conflict into Lebanon, or into the West Bank, would certainly add to these concerns and make the situation that much more serious. However, based on the speech by Hezbollah’s leader, Nasrallah, on 3 November, this appears to be quite unlikely, despite the escalation in tension.
In addition, so far, Iran has been maneuvering carefully, concentrating its efforts on the political and diplomatic front, avoiding direct confrontation with Israel and the US.
Turkey’s stance against Israel has caused a halt in any discussions on joint hydrocarbon developments. These are likely to remain on ice for a long-time.
These developments create uncertainty and have the potential to derail confidence in the region and delay new gas developments, but the increased geopolitical risk can also increase their cost.
But, at least for now, the Gaza conflict has remained a contained, regional, issue and as long as it remains so it should not have wider impact.
Dr Charles Ellinas, @CharlesEllinas
Senior Fellow
Global Energy Center
Atlantic Council
