A “supergiant” gas field has been discovered off the Egyptian coast, the Italian energy company Eni announced Sunday — the largest such discovery ever made in the Mediterranean.
The field, estimated to hold 30 trillion cubic feet of gas, could help satisfy Egypt’s energy demand for decades, the firm said.
The discovery was hailed as much-needed good news for a country in the grips of an energy shortage. Once a natural gas exporter, Egypt’s production has failed to keep up with demand, leading to widespread blackouts and, eventually, the importation of natural gas this April.
A discovery of this magnitude is a boon, but experts caution not to expect that the gas will be a quick fix for the country’s energy problems, or its economic woes.
Gas fields that were hyped up in the past have often proved disappointing. Even this very exploration block, which was once part of the Egypt’s massive North East Mediterranean Deepwater concession, led to disappointment in 2001 when a Shell test well failed to yield gas, says David Butter, an energy analyst and associate fellow at the Chatham House think tank.
This time, though, gas has actually been found and the prospects look much better, says Butter, adding “I’d be pretty confident that the reserve estimates are credible.”
Since 2001, other major gas fields have been discovered nearby, adding credibility to Eni’s claims. “It’s not far from the Israeli discoveries, particularly Leviathan,” Butter explains. “Evidently there is a lot of gas in that area.”
But even if Eni’s reserve estimate proves accurate, that doesn’t mean the gas will reach the grid overnight. The petroleum minister has promised that the gas will be fast tracked, and Eni CEO Claudio Descalzi told Italian newspaper La Republicca on Monday that he expects licensing terms to be agreed upon within the month, pipelines and the first wells to be in place next year, and for the project to bear “fruit” by 2018.
But Butter and energy researcher Mika Minio-Paluello estimate it will likely be closer to five years before gas is ready.
“Optimistically, it will take five or six years. That’s assuming that they move quite swiftly to commercial agreements and get going with the development,” Butter says. Any technical problems or disputes over commercial terms could mean a longer interval before gas comes to market.
One issue to be resolved is how the gas will be divided between Egypt and Eni. Under Egypt’s production sharing system, foreign companies like Eni operate in a joint venture with Egyptian state companies. After production costs are covered, the gas is split. The government gets a share — essentially for free — while the gas company has the right to sell its share back to the government or, in some cases, for export.
Early reports suggest that Egypt may end up with more than half of the gas from the Shorouk field. EGAS Chariman Badie told the privately owned Daily News Egypt that the country will retain at least a 60 percent stake in the field.
How much Egypt pays for that gas is another potential sticking point, particularly in terms of public opinion.
In July, an official from the state gas company EGAS told Reuters that the government had substantially increased the price it pays to Eni for the natural gas it extracts in Egypt. Instead of a fixed rate of US$2.65 per million British thermal units, Egypt would now pay US$4-5.88 million.
Energy companies keep their costs confidential, so it’s hard to say exactly what a fair price to pay is, but such a large jump seems unnecessary, says Minio-Paluello.
“$5.88 seems a lot to me,” he says. “I would have thought they could extract the gas and make a significant amount of money even if they were paid much less than $5.88.”
Butter, on the other hand, argues that Egypt will still save money compared to importing liquefied natural gas (LNG), and that higher prices are simply the cost Egypt has to pay to motivate companies to invest in exploration and production.
“The reason why Egypt is now running a huge deficit and has to invest in import capacity of 1.25 billion cubic feet of LNG per day is because of a failure to get the model right, in terms of getting its own gas produced and online,” Butter says.
The news has already had a positive effect on the stock market, which rose by 2.8 percent on Monday. Among the best-performing stocks were companies like Ezz Steel and ceramic and porcelain company Gemma, both of which have been badly affected by gas shortages.
While the regular blackouts that plagued Egypt in past summers have eased for residential consumers, industry is still hard hit. A recent report from Capital Economics noted that manufacturing activity in June 2015 was 30 percent below the same month last year, in large part due to natural gas shortages.
Although it will likely take years before the Eni discovery brings more gas to Egypt, Butter predicts that the results of the find will be overwhelmingly positive for the economy.
“There will be a benefit from not importing LNG, and that will help. And of course industry has been complaining for a long time about gas shortages, so that’s going to be a big help. I don’t think there is any real downside,” he says.
Another potential victim is Egypt’s fledgling renewable energy industry. “It’s highly likely [the find] will take investment money and investment energy away from renewables,” Minio-Paluello says. “If you were thinking of building a large-scale solar plant in Egypt, you’d be rethinking at the moment.”
Minio-Paluello also doubts that ordinary Egyptians will feel the benefits of the large natural gas find.
“I think it’s good news for a lot of the Egyptian elite. To what extent it’s good news for Egyptians on the street, I’m much less sure,” he says. “A lot of natural resource revenue flows get captured along the way, and there’s a lot of scope for corruption. Egypt’s past with gas deals has clearly been quite checkered.”