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”. Girona, 20 E-08010 Barcelona T +34 932 449 850 F +34 932 470 165 [email protected] www.iemed.org 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. Girona, 20, E-08010 Barcelona T +34 932 449 850 F +34 932 470 165 [email protected] www.iemed.org - 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. Girona, 20, E-08010 Barcelona T +34 932 449 850 F +34 932 470 165 [email protected] www.iemed.org 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,