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New momentum for East Med gas?

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Europe was already facing an energy crisis before Russia invaded Ukraine, but Moscow’s move has forced a rethink of energy policies at the EU and country levels.

The European Union, which imported 155 bcm of natural gas from Russia in 2021, now aims to cut its dependence on Russian gas by two-thirds this year and cease all fossil fuels imports “well before 2030”.

These are ambitious targets if we consider that Russia accounts for around 45% of EU gas imports, 25% of oil imports and 45% of coal imports.

The EU intends to do so by diversifying gas supplies, boosting the use of biomethane and renewable hydrogen, seeking greater energy efficiency, speeding up the roll-out of renewables, and accelerating the decarbonisation of industry.

Whether these are attainable targets is beyond the scope of this note.

As Europe scrambles to find alternative sources of natural gas, attention has turned to the resources of the Eastern Mediterranean, among other potential sources of supplies.

In the short term, the EU will focus, among others, on diversifying gas supplies by increasing LNG and pipeline imports from non-Russian suppliers.

The Commission has listed Egypt and Israel among the countries it has engaged in that regard.

In 2021, Egypt recorded a 10-year high in LNG exports, thanks to the resumption of operations at the Damietta terminal and Israeli supplies.

But the ability to boost exports significantly in the short term is limited by two constraints: The overall capacity of Egypt’s LNG terminals, which stands at 12.2 million mt/year, and, more importantly, the availability of surplus gas in Egypt for exports (amid uncertainties over future production levels) and the volume of gas that can be supplied from Israel for liquefaction.

Still, Egypt’s LNG plants, which remain the only way to export East Med gas beyond the region, were running at full capacity in December, according to Tarek el Molla, the Egyptian Petroleum Minister.

As we get closer to summer, shipments are expected to fall due to rising domestic consumption.

But Egypt will be importing additional volumes of Israeli gas following the inauguration of a new export route via the Arab Gas Pipeline last month, which will sustain exports from its LNG plants.

Egypt expects to export 4 million tons, or approximately 5.5 bcm, in the first half of 2022.

This figure, however, was announced before the Russian invasion.

There may be a need to invest in expanding the region’s export capacity in the medium term.

LNG infrastructure

The most affordable option would be to invest in infrastructure to transport additional supplies to Egypt and to expand the capacity of Egypt’s LNG plants, though it raises the issue of over-dependence on a single transit route via Egypt.

An export route to and via Turkey is fraught with political challenges and requires a robust diplomatic effort but should not be ruled out.

Leviathan’s operator Chevron and partner NewMed Energy are also considering an FLNG option for the next phase of the gas field’s development, which would allow exporting additional volumes of East Med gas beyond the region.

Other plans may be brought up in the future, depending on the results of drilling activities off Cyprus.

But current high prices are reviving interest in the region for projects whose economic and financial viability was always in doubt.

These prices are misleading. Such large capital-intensive infrastructure projects are not based on volatile spot market prices that can range from record lows to record highs depending on circumstances.

They require security of demand over the project’s lifetime. They are largely based on long-term contracts with more stable prices offering suppliers and investors some protection against extreme price fluctuations.

More attention should focus on studying the evolving market dynamics to identify the most adequate export project, rather than revelling in current high spot market prices.

The Ukraine crisis exacerbates already tight gas and LNG markets, putting additional pressures on prices.

Europe’s shift to LNG to replace Russian gas will translate into intense competition for available supplies, while little growth in export capacity is expected before the middle of the decade.

This will likely keep prices high over the next few years unless an economic slowdown affects demand.

For East Med gas producers to benefit from this window, they will have to rely on expanding access to existing infrastructure.

More ambitious projects that take long years to go from inception to completion would have to compete with new LNG projects coming online in the second half of the decade in a market whose characteristics are particularly challenging to anticipate amid the current fog.

Ukraine

Key uncertainties include the impact of decarbonisation policies on gas demand growth, the impact of high prices on demand growth, and the war’s impact on planned Russian export projects.

Another uncertainty is the reaction to the Ukraine conflict over time.

While the war is raging, it is hard to see how the situation between Europe and Russia will evolve and, therefore, its impact on energy markets.

Will European policymakers and citizens remain mobilised in pursuing their newly announced objectives when the conflict dies down or if it evolves into a prolonged, low-intensity confrontation?

For now, one thing is certain: even if Europe pursues policies to reduce dependence on fossil fuels, eliminating or reducing dependence on Russian gas will require investments, within Europe and beyond, in infrastructure to bring more non-Russian gas to the markets and in exploration and production to bring new supplies to markets in the future.

These are the kind of investments Europe generally dislikes.

The countries of the Eastern Mediterranean are less critical of investments in the energy sector and embrace natural gas as a transition fuel.

Europe could help by making sure new projects in the region are “transition-proof”, as argued by energy expert Nikos Tsafos in this piece.

The Eastern Mediterranean is well-positioned geographically to contribute to Europe’s energy needs, and it should aspire to attract a portion of these investments.

The countries of the region could stand to gain if they offer investors the needed incentives, starting with the basics – stability and sound legal and regulatory frameworks – but also the ability to coordinate efforts at a regional level to bring project costs down and boost competitiveness, with the overall aim of improving prospects for monetisation.

By Middle East Strategic Perspectives in collaboration with Obeid & Medawar Law Firm