Bomb Again Severs Egyptian Gas Pipeline to Israel, Jordan

Hit Again

A blast this morning (12 July) ripped through the gas pipeline feeding both the East Mediterranean Gas (EMG) pipeline to Israel and the Arab Gas pipeline to Jordan and onwards to Syria and Lebanon, likely setting back repairs to the last blast's damage significantly. The pipeline has now been blown up four times—but attacked five times—since the January and February popular uprising against the former Egyptian regime under long-time president Hosni Mubarak, with the last explosion having severed gas transports as late as 4 July (see Egypt: 4 July 2011: Down and Out: Egyptian Gas Export Pipeline to Israel, Jordan, Blown Up for Third Time This Year and Egypt: 6 July 2011: Egyptian Gas Pipeline Back Online to Israel After Sabotage). The last blast only shut the pipeline to Egypt's north-eastern neighbours for a few days, although supplies remained far below normal levels up until the explosion this morning, with repairs by state-owned gas champion EGAS's midstream arm, Gasco, originally expected to be completed over the coming weekend (15-16 July). According to Egypt's official MENA news agency, attackers hit security guards at al-Sabil, outside al-Arish, before blowing up the pumping station, which supplies gas to the Sheikh Zwayed pumping station, which in turn supplies the EMG pipeline to Israel. At least one security guard and possibly some of his family members were injured in the attack and the subsequent blast, which cased a fire visible from a distance of 20 km away, according to MENA.

Broken Trust

The EMG pipeline normally supplies about 40% of Israel's gas needs, while Jordan has been receiving up to 80% of its gas needs through the Arab Gas pipeline. Israel, under the politically controversial deal with the Egyptian government and the EMG consortium, was meant to be receiving around 3 bcm of gas this year, although it was understood that volumes since the last bombing had not recovered to levels higher than between 30% and 40% of that. Jordan normally receives 240 mmcf/d of gas from Egypt (or 6.8 mmcm/d) but is understood to have suffered longer shut-ins of gas delivery in the aftermath of the previous bombings, with perhaps no supplies having come through at all in the past weeks. Both Israel and Jordan were seen as initially having secured the gas deliveries at prices far below the market value because of political—and allegedly private economical reasons for key people in the former Egyptian regime in the case of the Israeli contract—reasons, with the Egyptian population, in particular, for years having found the sub-market-priced supply of gas to arch-enemy Israel highly provocative. Both Israel and Jordan were under pressure to agree to higher prices before this year's political commotion in Egypt, with the Israelis having agreed to higher prices in 2009—allowing for a price peak of USD4.50/mmBtu—which they had been hoping would ease pressure for further price revisions at least until the next contracted price adjustment window, widely thought to be sometime in 2014. Jordan has in the past months been reportedly close to an agreement to lift its gas prices from the highly favourable levels of USD1.5-3/mmBtu, with a final agreement previously having been reported likely during this month (see World Markets Energy: Jordan: 13 June 2011: New Gas Pricing Agreement to Be Completed by July for Jordan-Egypt Supplies).

Egyptian Gas Pipeline Infrastructure

Source: IHS EDIN

Egypt's inability to guard its infrastructure from what is believed to be disgruntled tribes in the Sinai region has now completely undermined its neighbours' belief in it as a long-term strategic energy partner (see World Markets Energy: Egypt: 24 June 2011: Gas Pipeline Protection Sought in Sinai; Egyptian Gas Price Reviews for Domestic, Export Buyers Continue). This is not necessarily a long-term problem for future Egyptian governments, however, given the over-commitment for gas export entered into by the previous Egyptian regime, leaving the country with domestic gas and power shortages during peak demand times, when disputes over the country's upstream fiscal terms with IOCs caused a slow-down in deepwater gas development some years ago. As Israeli and Jordanian gas volumes are replaced with other sources as this decade progresses, Egypt's ability to meet growing domestic demand without having to cut power subsidies for the population—another highly controversial policy that Egyptian governments will try to avoid—will increase.

See You in Court

The situation for Egypt might, however, become yet more complex, as the shareholders of EMG, including the Merhav Group and Thailand's PTT, aim to sue the Egyptian government for compensation. "The investors plan to seek more than USD8 billion in damages", Merhav Group's senior vice-president, Nimrod Novik, was quoted as telling Platts yesterday (11 July), before the latest disruption, indicating that the case would be brought to the International Court of Arbitration, which is run by the France-based International Chamber of Commerce (ICC). He further added that lawyers representing EMG's shareholders had already advised the United States' government—thought to have issued political guarantees and partly brokered the original Israel-Egypt and EMG deal—and the Egyptian government that the legal process had been set in motion. EMG is owned by Egyptian businessman Hussain Salem, who currently is under arrest in Spain and facing extradition to Egypt on corruption charges thought to be not entirely unrelated to the original EMG deal, involving EGAS, Thailand's PTT, EGI (controlled by US businessman Sam Zell), Ampal-American Israel Corp. Israel's Merhav Group and Israeli institutional investors.

Outlook and Implications

While Syria—and to some extent Lebanon—is able to compensate for Arab Gas pipeline shortages with its own gas resources, both Jordan and Israel have been struggling to manage their energy balance, something that will only become harder the further into the peak power demand summer season (June-October) they head. Israel has boosted its production from the depleting Mary B offshore gas field and has put pressure on IOCs to speed up development of existing small oil and gas discoveries offshore the country, although the latter is more of a mid-term solution (see World Markets Energy: Israel: 20 June 2011: Upstream Development Plans Firmed Up As Israel Confronts Impacts of Egyptian Political Change). A more long-term solution is to get development under way at the recent large-scale deepwater gas discoveries, which will make Israel self-reliant on gas and even turn it into a potential exporter in perhaps a decade's time. In the meanwhile, however, to cover needs in the coming one to two years before the Tamar gas field comes onstream, floating LNG regasifiaction capacity is increasingly been seen as the main possible solution. Jordan too is now mulling a similar project off its Aqaba port, having even fewer alternatives to turn to than Israel. So far, however, raised crude imports from Iraq have allowed it to boost some emergency power generation programmes, as well as raising its imports of fuel oil—at a very significant cost to the government, which subsidises power to its population.

Over the long term, both Israel and Jordan will move away from dependence on Egypt, with Jordan in particular looking both at its shale oil options as well as nuclear power, although the financing of both, and in particular the latter, could become a problem, especially given the government's deteriorating financial position as a result of gas shortages so far this year. While this might provide a gradual way out of Egypt's own gas supply and demand balance conundrum without the need for politically costly structural reforms at a time when the political will and ability might be hard to drum up, it will nevertheless represent falling government revenues and hit Egypt's regional standing somewhat. More importantly, however, an investor dispute in international courts might prove damaging at a time when the international business community is trying to assess the emerging Egyptian political leadership's sense of responsibility for adhering to contracts and its business friendliness. If the likely relatively weak governments emerging from the country's newfound political freedom give in to seductive populist policies vis-à-vis the arbitration process over the coming years, confidence in Egypt as a business destination might take a hit on a much wider level. On the other hand, any government will be required to fight its corner in the upcoming dispute and try to limit any eventual payouts. This might prove to be a hard-to-manage process, particularly because of its resonance in domestic politics.

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