Natural Gas Prospects in Egypt, the East Mediterranean and North Africa* IGU Executive Committee Workshop Cairo, 19 April 2018

1. The evolving nature of natural gas in Euro-Mediterranean relations

1.1 Features and prospects of the energy landscape in the Mediterranean

- Mediterranean countries account for 7% of the world’s primary energy demand. The latter is expected to grow substantially over the next 25 years spurred by sustained population (+105 million compared to 2013) and economic growth (+2.3% per year on average) in the region1.

- According to OME, final energy consumption would double by 2040 in the South Mediterranean countries and electricity consumption would triple, notably on account of the increase of air conditioning and new electrical appliances. Carbon dioxide emissions would increase by 45% for the whole region and more than double in the South Mediterranean.

- The Energy transition Scenario, developed by MEDENER and OME, assumes the implementation of those measures that are currently the most technically, economically, and politically mature for large- scale rollout of the energy efficiency and renewable energies. Compared to the business-as-usual scenario, the transition scenario would lead to a sizeable reduction in primary energy demand (-30%) and final energy consumption (-23%), a substantial increase of the share of renewables in the energy mix, mainly solar and wind (27% in 2040), and a decrease in CHG emissions of 38%.

- Expected trajectories for energy demand are very contrasted in the Mediterranean:

o Northern Mediterranean countries have embarked upon a transition path with substantial levels of renewables and effective demand-side management. The energy demand has indeed decreased by 4% since 2010, to be put in relation with low population growth (+0.5) and decreasing GDP (-2%). In 2040 energy demand from Northern Mediterranean would be 22% lower than current levels. o The Southern Mediterranean has experienced sustained economic and population growth (+6% and +5% respectively), translating in an energy demand growth of +6% since 2010. In the Energy Transition Scenario, energy demand would continue to increase at 55% compared to current levels.

*This presentation has been pepared by Roger Albinyana, director of Mediterranean Regional Policies at the European Institute of the Mediterranean (IEMed) and Fátima Fernández, research fellow at the IEMed 1 OME, MEDENER (2016): “Mediterranean Energy Transition: 2040 Scenario”.

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o By the end of the outlook period (2040), the Southern Mediterranean energy demand would thus have exceeded that of the Northern Mediterranean (Southern European countries). o Under the Energy Transition Scenario, 30% of primary energy demand can hence be saved by 2040 for the whole region.

1.2 The Euro-Mediterranean market in the energy sector

- The development of the Euro-Mediterranean natural gas market had a regional dimension at its origin, but it doesn’t perfectly overlap with the Internal Energy Market (IEM) and it has mainly a multipolar shape with the main Member States (MS) playing a central role in it2.

- Against the background of a highly heterogeneous market, the natural gas industry in the Mediterranean has experienced tumultuous development since the aftermath of the oil crises in 19733.

o 1st phase: regional markets were developed by connecting the main import hubs (in Italy and Spain) with transport pipelines to the large gas exporters in the region (Algeria and Libya). The preferred business model was to tie the price of natural gas to the price of crude oil, and to use long term contracts that sometimes explicitly included the take or pay clause. This, on the one hand, has developed long term ties with gas suppliers and achieved large infrastructural investments, but on the other, has historically limited the development of a flourishing natural gas market in Europe, and in southern Europe in particular.

 The buyer took the volume risk, and the seller took the price risk  This was possible because the respective domestic markets were dominated by large vertically integrated utilities on both sides of the pipelines.  Most of these long term contracts (LTCs), after more than 40 years, are still in place in the Mediterranean exchanges (Heater, 2015)  Moreover, the long term contracts left no necessity, room or incentive for diversification.

o 2nd phase (transition): European integration induced a superimposed top down transformation of the existing energy systems, toward a tightly specified target model as defined by the EU institutions (Tholens, 2014)4.

- The theoretic common approach to the security of energy supplies proposed by the EU continues to collide with the actual nationalist approach adopted by Member States in this field, which is reflected by the Treaties themselves: according to Article 194 of the consolidated version of the Treaty on the Functioning of the European Union, each MS has the right to autonomously determine its energy mix and its energy security of supply architecture.

2. Euro-Mediterranean governance: Internal market and external policy

- Parallel to the progress on the Internal Energy Market (IEM), the external dimension also gained steam, but while the accent was initially on rule harmonisation, as a step toward market integration, it has now been shifted toward Security of Supply (SoS)5.

2 Rubino, A. (2016): “Euro-Mediterranean Gas Cooperation: Roles and Perceptions of Domestic Stakeholdersw and the European Commission”, EUI Working Papers, RSCAS 2016/53, Robert Schuman Centre for Advanced Studies. 3 Ibid. 4 Ib. 5 DG EXPO (2017): “Energy: a shaping factor for regional stability in the Eastern Mediterranean?”, European Parliament.

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- The series of energy security crises experienced by the EU since 2006 triggered the inception and development of awareness on the issue of security of energy supply. In particular, the Russian- Ukrainian-European gas crises of 2006 and 2009, as well as the 2014 unprecedented standoff between the EU and the Russian Federation on this matter.

- In the Framework of the EU Energy Union Initiative, three high-level platforms were established by the European Commission in 2015 in order to facilitate partnerships based on mutual trust and transparency between the Union for the Mediterranean (UfM) member states as well as with the relevant energy stakeholders in the region

- The revised European Neighbourhood Policy (2015) highlighted the stabilisation of the Neighbourhood as the most urgent change, to be pursued in two strategic ways

o Supporting the development of regional economies o Scaling-up security cooperation with countries in the region

- With regard to the Southern neighbourhood, the EU has declared its intention to ‘offer cooperation, on a tailored basis, to promote production, distribution, trade and efficient consumption of energy. [...] The EU will support sub-regional cooperation as appropriate in the Eastern Mediterranean, the Maghreb and the Southern Caucasus6.

- This entails an “unambiguous turn in favour of bi-dimensional negotiations, with constant bilateral negotiations, directed in particular to strategic countries (Algeria, Egypt, Turkey), and with regional dialogue in the background (Rubino, 2016).

- A polycentric core-to-periphery design is steadily emerging, where domestic actors play a leading role in promoting rule adoption and institutional change. In this framework, vertically integrated utilities and national champions can exercise a significant veto power and are able to halt or slow down the process for the creation of an integrated regional market (both within and outside the EU).

2.1 Gas and electricity in the Euro-Mediterranean region

- In the last years, a growing concern to create an energy ring that comprises gas, electricity and renewable energies within a cohesive and coherent framework has spurred the establishment of different interconnected institutions and platforms aimed at analyse, discuss and harmonise technical standards and the regulatory framework of each domestic market

. 2007: MEDREG (Association of Mediterranean Energy Regulators) . 2012: MED-TSO (Association of the Mediterranean Transition System Operators) . 2014: The conference “Building a Euro-Mediterranean energy bridge: the strategic importance of Euro-med gas and electricity networks in the context of energy security (Rome, 19 November 2014) proposed three thematic platforms to re-invigorate Mediterranean dialogue in this issue: Gas, Regional Electricity Market and Renewable Energy and Energy Efficiency . 2015: UfM platforms o UfM Regional Electricity Market Forum (UfM REM Platform) o UfM Renewable Energy and Energy Efficiency Platform (UfM REEE Platform) o UfM Gas Platform (UfM Gas Platform)

6 “Review of the European Neighbourhood Policy”, JOIN (2015) 50 final.

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3. Political Economy of the natural gas: Western vs. Eastern Mediterranean

- Given the changing characteristics of this sector and, governance transitions and geopolitical shifts in the Euro-Mediterranean region, there is a clear division on the natural gas markets between Western and Eastern Mediterranean countries: o Western Mediterranean countries: mature markets and stable relations

 They are dominated by former national champions (from Southern Europe, together with local monopolies in the Maghreb) and managed through Long-Term Contracts (LTCs), which are at the same time an incentive for investors on the basis of stability, and a barrier for innovation, productivity, etc. due to the stable nature of the contract  Italy and Spain dominate a market that has started, in the last years, to undergo a certain stagnation because of the lower growth of gas demands, to shifts in the Spanish electricity industry and to the rising competition from American LNG  Algeria is placed at the heart of the model. Regional rivalries (i.e. between Morocco and Algeria) or domestic instability (Algerian civil war) did not prevent the sector to develop itself throughout the area.  Despite bilateral cooperation and gains in some areas, vertical micro-economic integration has not allowed, in general, for a symmetric relationship between importer countries in Europe and Maghreb exporters  The relatively declining importance of natural gas in the Spanish market could be solved through re-exportation to other European countries eventually, through South Transit East Pyrenees (STEP). o Eastern Mediterranean countries: potential markets and conflictual diplomacy

 The promising discoveries of offshore gas fields has been continuously challenged by maritime border disputes, hegemonic quarrels and investors’ hesitation due to regulatory, economic and security uncertainty  For most of the countries involved, individual projects to exploit natural gas would result inefficient due to low levels of reserves and difficulties to find stable and long-term transit countries  They play in a more liberalised market, but also within a context of increased need from the EU to diversify and secure continuous flows of resources  Contrary to the Western Med picture, Eastern fields are fragmented, offshore and seem to fit well with schemes of regional cooperation and scale economies  Eastern Mediterranean potential gas supplies seem to fit into the Energy Union strategy, most importantly into its energy security section, as it represents a potential diversification option for the gas security of supply architecture.

4. Eastern Med gas: the big picture7

- Gas has played an important role in Egypt -the largest energy market in the region- for almost four decades.

7 This section builds mainly on the work of Tareq Baconi (2017), “A flammable Peace: Why gas deals won’t end conflicto in the Middle East” and “Pipelines and Pipedreams: how the EU can support a Regional Gas Hub in the Eastern Mediterranean”, ECFR.

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o After 2000, Egypt became a major gas exporter (2011-2011 its exploitation scaled-up x3), developing not only a large LNG infrastructure, but also two international pipelines that represented, for years, examples of regional economic and political cooperation driven by energy  The Egypt-Israel pipeline  The Arab Gas Pipeline (Egypt, Jordan, Syria, Lebanon, Turkey) o However, its gas production was severely hit by the so-called Arab Spring, as the political turmoil blocked the inflow of essential upstream investments and made it become a net gas exporter o The gas import context made obsolete the export infrastructure developed by Egypt over the previous decade. This infrastructure is composed of  Two LNG plants (located in Damietta and Idku)  Two pipelines: El Arish-Ashkelon Pipeline (2008-2012) and Arab Gas Pipeline (2003- 2012)

- 2005: ‘Euro-Arab Mashreq Gas Market Project’, an EU initiative aimed at contributing to the integration of the gas markets of Egypt, Jordan, Lebanon and Syria to create a regional gas market in the Mashreq, as a first step towards integration with the EU gas market.

- The halt of Egyptian plan supplies to Israel and the halt of the Arab Gas Pipelines ended the expectations of regional gas cooperation. The political turmoil in Egypt, the civil war in Syria and the conflictual relations between Egypt and Israel undermined the established geopolitical equilibrium in the region under the ‘Euro-Arab Mashreq Gas Market Project’.

- The gas discoveries made in offshore Israel and Cyprus between 2009 and 2011 further contributed to the obsolescence of the cooperation scheme embedded in the regional gas cooperation vision.

- Exclusive Economic Zones (EEZ) delimitation treaties hit regional ‘open wounds’ and paved the way for the emergence of new disputes in the region .

- 2015: Eni’s discovery of the major Zohr gas field in the Shorouk block put Egypt in the timelight. Zohr represents the largest gas discovery ever made in the Mediterranean Sea and, due to its size, it might redefine the overall Eastern Mediterranean gas outlook. Furthermore, being the first discovery in a geological formation previously not exploited, it could be the first of a new string of gas discoveries offshore Egypt (NOTA 2016)

o Zohr is located only 90km away from Aphrodite (Cyprus), which is in turn only 7km off from Leviathan (Israel). This proximity could allow a coordinated development of the fields and thus the creation of the economies of scale needed to put in place a competitive regional gas infrastructure. o Egyptian gas facilities would allow it to export any volumes from Zohr and other fields not used in the domestic market. Given the growing domestic demand in Egypt, it is fair to assume that some export capacity would be left for Israeli and Cypriot gas -if it can be brought to the Egyptian terminals, which could also be expanded.

- Development of the second phase of Leviathan depends on the finalisation of a gas sales agreement to Egypt, a more concerted focus to develop Israel’s domestic gas market or the Palestinian markets, or a surer indication that the EastMed pipeline is likely to proceed.

5. The complex dynamics of sub-regional cooperation

- Israel-Jordan: Instability in Egypt paved the way for Israel and Jordan to reach an agreement that helped make the exploitation of the Leviathan field viable. After negotiating a series of long-term

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agreements to supply gas from Israel by pipeline to two major domestic industrial players, Jordan concluded an agreement in September 2016 for gas to flow from Leviathan to NEPCO, the National Electricity Power Company.

o The Jordanian commitment to buy Israeli gas from Leviathan, along with commitment from several Israeli power plants, effectively put Noble Energy in a position to announce a final investment decision for the first phase of production from Leviathan in February 2017, whereby gas is expected to flow to NEPCO by 2019. However, further political tensions raised during summer.

- Israel-Egypt: closer relations since 2013, driven by shared security concerns, particularly around the Sinai Peninsula, and an overlapping interest in managing the unsustainable catastrophe in the Gaza strip in a way that contains Hamas, which has governed Gaza since 2007

o Since the collapse of Cypriot-Turkish negotiations in 2017 has effectively blocked Israel’s aspirations to export gas to Turkey by pipeline. Egypt has become increasingly attractive as a prospective destination for Israeli gas o Israel could also export its gas to Egypt by reversing flow through the JGTP or by constructing a new sub-sea pipeline that circumvents the Sinai Peninsula. o Cyprus could enter into the mix at a later date if it became commercially feasible for the country to develop its own gas reserves

- The cases of Israel, Lebanon and the Palestinian Territories raise the question of whether closer economic integration might provide a framework for enhanced cooperation in such circumstances and, potentially, offer a path towards the settlement of political differences.

- Also, the cases of Cyprus and Turkey offer an illuminating instance on the relationship of gas and diplomacy. Crucially, analysts suggest that, in the most recent round of negotiations, the gas reserves actually exacerbated distrust and tension between the parties and made agreement harder to reach.

- Regarding Turkey and Israel, they did not repair diplomatic ties until 2015. By that point, Israel was looking for export markets for Leviathan gas while Turkey was seeking to diversify its gas supplies. However, the commercial viability of the pipeline continues to be contested and Turkey’s need for Israeli gas has now been reduced by its own diversification initiatives.

- For its part, Turkey’s appetite for eastern Med gas has dropped in recent years as it secured supplies elsewhere, primarily from Russia through the revived Turkstream pipeline.

6. Concluding remarks

- The notion of ‘economic peace’ -that shared economic benefits could mitigate conflict- has long informed diplomacy in the Eastern region (Baconi, 2017). Supporters of the idea note the way trade can persist amid political difficulties, as shown by:

o The continued flow of Russian gas to Europe following Ukraine crisis o The continuity of Qatari gas to the United Arab Emirates and Oman despite efforts to sanction Qatar o Gas as a trust-builder between the Soviet Union and West Germany during the Cold War o Algeria to Spain through Morocco after the closure of borders

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ANNEX I – Dates and Key Documents of Euromed Governace on energy issues

The EU has been pursuing a gas supply diversification strategy since the early 2000s:

o 2000: Green Paper ‘Towards a European Strategy for the Security of energy supply’ o October 2005: Treaty Establishing the Energy Community in Athens by the European Community and then nine Contracting Parties from South East Europe (it entered into force in July 2006) . “The Energy Community is the institutional target model for the creation of an EU-South Mediterranean Energy Community, based on the transposition of EU-Law. . May 2011: This proposal was recalled in the communication on “Democracy and Shared Prosperity” . December 2013: the proposal was reintroduced in the UfM Ministerial Meeting on Energy

o 2006: Green Paper ‘A European Strategy for Sustainable, Competitive and Secure Energy’ o 2008: European Commission adopted the Communication ‘Second Strategic Energy Review – An EU Energy Security and Solidarity Action Plan’ . Infrastructure needs and diversification of energy supplies . External energy relations . Oil and gas stocks and crisis response mechanisms . Energy efficiency . Making the best use of the EU’s indigenous energy resources

o 2011: Communication ‘The EU Energy Policy: Engaging with Partners beyond our Borders’ . Promote transparency between Member States on energy agreements with non-EU countries . Help coordinate both policy toward specific partner countries and positions to be taken in international organisations . Promote comprehensive energy partnerships with key partner countries o 2012: The European Parliament and the Council followed-up this proposal of the Commission, by adopting a Decision establishing an information exchange mechanism on intergovernmental agreements between Member States and third countries in the field of energy. o May 2014: The Commission adopted the Communication ‘European Energy Security Strategy’ (after explicit request by the European Coucnil) . Increase energy efficiency . Increase energy production and diversify suppliers countries and routes . Complete the internal energy market . Speak with one voice in external energy policy . Strengthen emergency and solidarity mechanisms and protect critical infrastructure

o August 2014: Polish Prime Minister Donald Tusk was elected to be the next President of the European Council. He expressed several times during the Ukraine crisis the need for a truly European energy policy, ultimately calling for the establishment of a European Energy Union o September 2014: Jean-Claude Juncker announced his intention to appoint a Commission Vice President for Energy Union (in addition to the Commissioner for Energy and Climate), a move that represented a considerable upgrade for energy in the EU institutional structure o November 2014: The Euro-Mediterranean dialogue decided in Rome to establish 3 platforms for exchange and partnership that should operate as permanent consultation forums on strategic objectives and measures to be implemented under the auspices of the UfM . Gas sector: OME . Electricity Sector: MEDREG and MEDTSO

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. Renewable energy and energy efficiency: MEDENER, RCREEE, RES4Med . March 2015: The new Juncker Commission formally launched the Energy Union initiative with the Communication ‘A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy’ . Energy security, solidarity and trust: by reducing energy consumption, strengthening the internal exchange of energy and diversifying energy supply . By reinforcing partnerships with current and prospective gas producing and transit countries (Algeria, Norway, Turkey) . By enhancing the role of LNG in the European gas market . A fully integrated European energy market . Energy efficiency contributing to moderation of demand . Decarbonisation of the economy . Research, innovation and competitiveness

o May 2016: Joint Statement of the US-EU Energy Council: . “The Council recognized the potential of the new gas resources in the Black Sea, the Caspian Basin, North Africa, and the Eastern Mediterranean for the energy security of the EU and the wider region. The Council stressed the need to respect the sovereignty and sovereign rights of EU Member States to explore and exploit their natural resources and stands ready to facilitate the development of these resources and corresponding infrastructure, underlining the need to respect international law”. . February 2017: The Commission releases its ‘Second Report on the State of the Energy Union’, which states: . “The Eastern Mediterranean is also a promising source of gas supply for the European Union. This increases diversification opportunities and reduces import dependency on a single supplier, a key objective of the Energy Union”

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ANNEX II – Chronology of Proposed East Med Projects

Since 2009-10, a number of export projects have been proposed in the Eastern Med sub-region:

o Israel-Jordan and Israel-Gaza pipelines o Israel-Cyprus-Greece pipeline (East-Med pipeline). The project is projected in conjunction with the Interconnector Turkey-Greece-Italy (ITGI) and the Interconnector Greece-Bulgaria (IGB) pipelines. . Confirmed as a PCI and included by the EU Commission in the second PCI list among the Southern Gas Corridor projects . Included in the last Ten-Year Network Development Plan (TYNDP), in line with the aim of the European Network Transportation System Operators of Gas (ENTSOG) to create a single European market for gas . Awarded with European grants in 2015 through the Connecting Europe Facility (CEF) . The countries involved in promoting this pipeline see this project as the surest way for eastern Med gas to reach European shores, by locking a source of gas through a long- term contract. However, this raised doubts about the possibility of entering global markets . Several energy experts question the economic viability of such an infrastructure project, particularly considering the still limited volumes of gas resources discovered in offshore Cyprus on the supply side, and the uncertain outlook for european gas demand on demand side.

o Israel-Turkey pipeline. It was halted by diplomatic conflicts, but revived in June 2016 through a reconciliation agreement. However, further bilateral agreements are needed between each of these countries and Cyprus, which announced that it would allow an Israel-Turkey gas pipeline to cross its waters only when its relations with Turkey improve o Israel-Cyprus-Greece electricity interconnector (EuroAsia Interconnector). The idea behind is to generate electricity with gas-fired power plants in Israel and Cyprus, and then export this electricity to Europe via the interconnector. o LNG plant at Vasilikos. Thought for exporting Cypriot and Israeli gas, given Leviathan’s proximity to Aphrodite . Various industry sources questioned the feasibility of the project from an economic and security point of view . 2013 downward revision of Aphrodite’s estimated resources represented a further blow to the project o (F)LNG plants in Israel. Environmental concerns and technical problems o Israel-Cyprus pipelines to existing Egypt’s LNG plants. The closest project to the economies of scale approach, but it requires a stable geopolitical and regulatory environment. . This option would allow export to global markets, rather than restricting access to European markets through the pipeline . It would also require minimal capital infrastructure . However, domestic harsh reforms would need to be done, and the volume of gas that could potentially be exported from Egypt remains unclear

- The EastMed and Egyptian option might not be mutually exclusive, the first being for long-term and the second for short-term.

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