This report does not constitute a rating action.
- The Israel-Hamas war is hampering Israel's gas exports, in particular to Egypt and Jordan, and could eventually hurt credit quality in the region if it escalates further.
- We see limited flexibility for gas producers in the Gulf to divert shipments of liquefied natural gas (LNG) to the Middle East in the short term, since a large share of production is already under contract.
- We assume the war will remain centered in Gaza and have a low impact on Israel's neighbors, but if it spreads to important delivery channels, Egypt--which is already rationing gas--might struggle in the medium term, in our view.
The war between Israel and Hamas has already taken a heavy toll on the population and damaged infrastructure. Gas production at the Tamar plant was halted due to its proximity to Gaza after the decades-long conflict escalated on Oct. 7. We understand production resumed Nov. 9, but the shutdown illustrates the potential repercussions of the war for Israel's gas projects and importers of Israeli gas. Since 2020, Israel has provided almost all of Jordan's natural gas supply and 5%-10% of Egypt's, according to S&P Commodity Insights data. Yet S&P Global Ratings believes Egypt's gas supply is more exposed than Jordan's because Jordan has an unused LNG plant and an offtake agreement with Israel.
Our current base case is that the war will largely be contained to Israel and Gaza and last no more than three to six months (see "Israel Outlook Revised To Negative On Geopolitical Risks; 'AA-' Ratings Affirmed," published Oct. 24, 2023). However, further escalation, also spreading beyond Israel's borders, could involve damage to pipelines or obstruction of shipping in the Strait of Hormuz.
We believe if that were to happen, Israel's gas exports could stop completely. And we don't think many producers in the Gulf Cooperation Council (GCC) would be able to fill that gap, since most of their gas production is already under contract. This could leave Egypt facing a long-term shortage at a time when supply is already tight.
An Impact On Oil Is Likely Less Immediate
We see the oil market as sensitive to physical risk in the Strait of Hormuz due to an escalation of the current conflict beyond Gaza and Israel. This is also due to the potential for increased U.S. sanctions on oil exports from Iran, the region's fourth largest oil producer. If Saudi Arabia would be prepared to make up for the related shortfall in oil supply, that should lessen the impact.
In our view, risks to the region's gas industry are greater and more immediate. Across the region, we expect gas producers in Israel to see the most pressure on credit quality due to increased security risks and production shutdowns.
Israel's Gas Production Is Down Almost 50%
Israel produced about 22 billion cubic meters (bcm) of natural gas in 2022, about 1% of the global total. It exported a combined 9 bcm to Egypt and Jordan, according to S&P Global Commodity Insights data. Most of Israel's gas production comes from offshore fields in the Mediterranean sea. Notably, last year, the Leviathan field produced about 11 bcm, Tamar about 10 bcm, and the Karish Main field about 0.3 bcm.
Operations at the Tamar gas field were stopped for about a month due to security issues, since it is close to Gaza, the epicenter of the war. The reduction in gas production and exports will be a further drain on economic activity in Israel (see "Israel Outlook Revised To Negative On Geopolitical Risks; 'AA-' Ratings Affirmed," published Oct. 25, 2023). Also, in early November we revised our rating outlooks on the debt of three gas projects (Leviathan Bond, Energean Israel Finance, and Energean PLC) in Israel to negative due to increased geopolitical risks.
Production at the offshore Leviathan field has continued but with reduced exports to Egypt, according to media sources, and its output is being prioritized for domestic use. The export route to Egypt--the East Mediterranean Gas pipeline--ceased operations when operations at the Tamar field were suspended, with gas now being re-routed to Egypt through Jordan via the Arab Gas Pipeline.
The Gas Supply Cut Is Further Straining Egypt's Economy
Israel's gas exports were disrupted after Oct. 7. But in recent years, Egypt has been largely self-sufficient in producing gas to fulfil domestic demand. About 60%-65% of Egypt's domestic gas production is consumed as fuel for power generation, and 20%-25% goes toward industrial use.
Although Egypt imports gas from Israel (about 6 bcm of in 2022), it converts some of it into LNG, which it then exports to Europe. About 92%-93% of Egypt's gas exports comprised LNG in 2021 and 2022. Insufficient supply will also curtail Egypt's exports of LNG to Europe. That said, Europe imports most of the LNG it needs from the U.S. and Qatar, with Egypt contributing less than 5%. The EU has also exceeded its 95% target inventory level and, barring an unusually cold winter, has sufficient gas supply without LNG from Egypt. Moreover, if, as we assume, the conflict does not extend beyond six months, the reduction of Israel's gas supply to Egypt should be temporary.
However, even before the recent escalation in Israel, increased demand for energy led to blackouts in Egypt. This came amid lower gas production in Egypt and a greater need for gas to fuel cooling units during this year's unseasonably hot summer. The situation will be exacerbated by the disruption to Israel's gas exports. Recent reports indicate that the Egyptian authorities are rationing deliveries of gas to industrial companies, and limiting the use of gas by electricity companies, thereby extending daily blackouts by about 30 minutes from one hour previously.
Jordan Can Manage Its Gas Needs In The Short Term
Jordan's state-owned power company NEPCO is treated as a domestic user under an off-take agreement with the Leviathan field. This means Israel's supply of gas to Jordan has a higher priority than its gas exports to other countries. The agreement has therefore allowed gas exports to Jordan to remain steady.
That said, there are risks to this arrangement should political pressure mount in either country, or if security risks to the pipeline increase. Some large industrial users in Jordan also import gas directly from Israel, and this smaller portion of non-NEPCO imports is likely to be more vulnerable to a supply disruption.
Jordan has relied on Israeli gas for practically all its needs since 2020. However, it currently has an unused LNG plant in Aqaba, which could be used as a backup should the pipeline supply be disrupted. We do not currently expect Israel to stop or significantly reduce its gas exports to Jordan.
Gulf Gas Can't Immediately Cover The Shortfall
If Israel stops exporting gas to Jordan and Egypt in the short term, which is not our baseline scenario, we assume national oil companies in the GCC might not divert all their available volumes to offset the loss of the combined 9 bcm of gas. More important, even if additional volumes are available, it is unlikely they will all be redirected to the Middle East at the same time, since gas producers can likely achieve more competitive prices in Europe or Asia.
That said, the 9 bcm figure is for 2022, and the actual volume of gas can vary with demand as well as the nature of supply contracts. What's more, Egypt's current approach seems to be to ration gas rather than diversify sources to make up for lower imports from Israel.
Of all the GCC gas producers, Qatar likely has the most spare capacity to fill a potential gap left by Israel's reduced supply. However, most of its production is already allocated under long-term contracts. Saudi Arabia consumes the gas it produces, and other GCC states have lower gas production capacity than Qatar. We calculate that the majority (about 90%) of QatarEnergy's LNG exports are contracted. Additionally, according to S&P Global Commodity Insights data, we calculate that contracts on 7 bcm–10 bcm of gas produced in Qatar will expire by the end of this year or in 2024.
QatarEnergy is planning to increase its LNG capacity to 173 bcm from 106 bcm currently by 2027, when the expansion of its North Field is scheduled to be completed. Other LNG exporters (such as Australia and the U.S.) could probably help bridge any potential supply gaps Egypt and Jordan may face. However, Qatar's relative proximity to both countries and low production costs suggest that QatarEnergy could be more likely to supply Egypt and Jordan than from other providers, in our view.
In particular, QatarEnergy has a leading position in the global LNG market, more than 20% by capacity (including foreign partners' joint venture stakes of). The company also derives about 60%-65% of its proportionately consolidated EBITDA and assets from LNG. For now, we see a modest monetary benefit to QatarEnergy if it diverts LNG exports from Asia to the Middle East, given the relatively small volumes it would need to supply.
In the United Arab Emirates, the majority of LNG sold by Abu Dhabi National Oil Co. (ADNOC) is based on spot prices. The volumes are much smaller than those from QatarEnergy and not enough to meet Egypt's potential needs, however. Moreover, for ADNOC, contracts expiring in 2023 account for only about 1 bcm of gas. According to S&P Global Commodity Insights data, Oman has contracts for about 8 bcm of gas--mainly to Asia--that expire in 2024.
Meanwhile Oil And Gas Prices Are Rising
The war is pushing up oil and gas prices, owing to an increased risk premium amid higher geopolitical uncertainty. TTF (Title Transfer Facility) gas prices climbed to $59.8 per megawatt hour (MWh), after Oct. 7, 2023, from $46.5 per MWh on average in September (see "Credit Conditions: War In The Middle East Compounds Global Geopolitical Risks," published Oct. 18, 2023). However, having reached about $91 per barrel (/bbl) after that date, the Brent oil price has come down to $85/bbl-$87/bbl.
We expect both oil and gas prices to remain volatile, with potential for a sharp rise if the conflict escalates further. In our base case, we view the impact on the supply and demand of oil and gas to be manageable on a global scale. As such, our oil and gas price assumptions remain broadly unchanged (see "S&P Global Ratings Has Raised Its Henry Hub Natural Gas Price Assumptions For 2024 And 2025", published November 7, 2023).
Risks To Global Energy Security Depend On What Happens Next
Although energy prices remain volatile amid conflict in the region, we do not foresee a meaningful gap in the supply of oil and gas globally. Risks for global energy relate more to the possibility of an impediment to supply through the Strait of Hormuz if there is further escalation, in our view. This is because about 30% of the world's seaborne oil and one-fifth of global LNG supplies (mostly from Qatar) flow through this channel.
We also think mounting geopolitical tensions could lead countries to increase their focus on energy security. For example, after the supply of gas to Europe was disrupted in 2022 following the start of the Russia-Ukraine war, some countries diversified their energy supply away from Russia. Subsequent price volatility also prompted countries to secure more LNG agreements with the GCC. In the current situation, some countries could turn to producers outside the GCC to meet their oil and gas needs. But we assume those volumes will be minimal compared to GCC national oil companies' overall production volumes.
- S&P Global Ratings Has Raised Its Henry Hub Natural Gas Price Assumptions For 2024 And 2025, Nov. 7, 2023
- MENA Tourism Likely To Take A Hit From Israel-Hamas War, Nov. 6, 2023
- Outlook On Leviathan Bond's Debt Revised To Negative On Geopolitical Risk; Affirmed At 'BB-', Nov. 6, 2023
- CreditWeek: What Are The Credit Ramifications Of The War In The Middle East?, Nov. 2, 2023
- Outlook On Energean Israel Finance's Debt Revised To Negative On Geopolitical Risk; Affirmed At 'BB-', Nov. 1, 2023
- Gas Producer Energean Rating Outlook Revised To Negative On Geopolitical Risks In Israel; Affirmed At ‘B+’, Nov. 1, 2023
- Israel Outlook Revised To Negative On Geopolitical Risks; 'AA-' Ratings Affirmed, Oct. 25, 2023
- Egypt Downgraded To 'B-' On Mounting Funding Pressures; Outlook Stable, Oct. 21, 2023
- Credit Conditions: War In The Middle East Compounds Global Geopolitical Risks, Oct. 18, 2023
- S&P Global Commodity Insights: East Med primer: Energy implications from the latest Israel-Hamas conflict, Oct. 10, 2023
- Jordan 'B+/B' Ratings Affirmed; Outlook Remains Stable, Sept. 9, 2023
- Qatar Energy, Aug. 28, 2023
|Primary Credit Analyst:||Rawan Oueidat, CFA, Dubai + 971(0)43727196;|
|Secondary Contact:||Trevor Cullinan, Dubai + (971)43727113;|
|Additional Contacts:||Simon Redmond, London + 44 20 7176 3683;|
|Corporate and IFR EMEA;|
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