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Israel-Hamas Conflict May Destabilize LNG Supply To Europe

  • Egypt had been importing natural gas from Israel, primarily to meet its growing domestic demand while also preparing for full-scale LNG exports.
  • Over the weekend, the Egyptian government declared the suspension of all its natural gas imports from Israel due to the ongoing hostilities between Israel and Hamas.
  • Egypt now finds itself in a precarious situation, experiencing an abrupt halt in imports amounting to roughly 800 million cubic feet per day.

Europe's energy security remains fragile, reliant on a complex web of international supply options. In recent years, the East Mediterranean region, particularly Egypt and Israel's offshore gas production, has emerged as a crucial focus for European companies aiming to diversify their natural gas sources. This region boasts significant offshore gas reserves, positioning it as a strategic supplier to European markets. However, geopolitical tensions and instability are now posing a significant threat to this vital energy source.

Over the weekend, the Egyptian government declared the suspension of all its natural gas imports from Israel due to the ongoing hostilities between Israel and Hamas. Simultaneously, Cairo confirmed the extension of pre-existing power cuts due to surging demand outstripping supply.

Egypt now finds itself in a precarious situation, experiencing an abrupt halt in imports amounting to roughly 800 million cubic feet per day (cfd). This disruption is compounded by a surge in electricity demand, driven by higher temperatures. A core reason for this halt is Israel's decision to shut down its offshore Tamar gas field. Heightened security threats further imperil the remaining offshore production. The Sinai region also faces escalating instability as Hamas and its proxies consider potential actions in the area.

Egypt had been importing natural gas from Israel, primarily to meet its growing domestic demand while also preparing for full-scale LNG exports. Chevron, the operator of the Tamar gas field, had previously committed to supplying volumes to Egypt. Optimism regarding Egypt's LNG exports had been on the rise, following statements by Italian oil and gas major ENI, which anticipated the resumption of LNG exports due to decreasing domestic demand. Unfortunately, the reality has deviated from these expectations, necessitating a complete cessation of LNG exports. Egypt, already grappling with a dire economic situation marked by severe foreign currency shortages, is now confronted with the loss of one of its primary revenue sources. Related: Middle East Producers Cautious To Hike Prices In Tight Market

Although power cuts began in July 2023, Prime Minister Mostafa Madbuly had assured the public that the power supply would return to normal by September. Regrettably, this promise has not materialized, stoking concerns that prolonged power cuts may persist. Despite optimistic reports in the Egyptian media, demand has surged while domestic gas production is declining. Israeli gas volumes had kept the lights on in recent years. The shutdown of Israel's Tamar offshore gas production has already manifested, with Israeli gas exports to Egypt dropping from 800 million cfd to 650 million cfd. Israel is currently prioritizing its gas production for internal consumption, which has also affected Chevron's Leviathan production slightly.

In early October, Chevron, the operator of Leviathan, the largest Israeli gas field, altered its supply routes. Rather than piping gas directly to Egypt via the EMG pipeline, it redirected supplies through the Arab Gas Pipeline, which transits Jordan. Energy industry sources cited in Reuters reported that "the amount of gas exported from Israel's giant Leviathan field to Egypt has been slightly reduced as supplies to the domestic market are prioritized." Egypt relies on natural gas for 75%-96% of its power production, while the remainder is supplied by fuel oil (Mazut). The shortage of foreign currency has caused a deficit of mazut, exacerbating Egypt's energy crisis. International rating agency Standard & Poor's had previously downgraded Egypt, citing its persistent energy deficit as a contributing factor.

Egypt's government faces the daunting task of supplying power amid an economic crisis while grappling with mounting public discontent over high prices and the Gaza crisis. In the coming weeks, Cairo must navigate these challenges while preparing for presidential elections. While the election outcome seems predetermined, with President Sisi expected to continue in office, internal stability remains a significant concern.

Analysts are apprehensive as energy, food, and inflation issues have historically been powerful destabilizing factors in Egyptian politics. Popular opposition could resurface, likely under the banner of the Palestinian issue and with support from the Muslim Brotherhood and other groups. A destabilized Egypt, or even a violent reaction, would not only threaten the region but also imperil Europe's energy supply and maritime trade. The return of the Middle East to the forefront of Western media, combined with the absence of Egyptian LNG in the market and Ukraine's plans to end Russian gas transits by January 2024, casts a shadow over European energy security for winter 2023-2024.

Furthermore, it is evident that the European strategy, championed by Brussels politicians and U.S. government officials, to construct the East Mediterranean Gas Pipeline between Cyprus and Greece, is no longer viable. Analysts have long argued that the deepwater offshore gas pipeline's costs were commercially unfeasible, and the current situation, marked by the Hamas-Israel conflict and tensions between Israel, Hezbollah, and Iran, reinforces the futility of this endeavor. Turkey's growing support for Hamas, coupled with its ongoing disputes with Cyprus and Greece, further compounds the challenges.

Europe must also reconsider its alternatives for natural gas and LNG imports. The Israel-Hamas crisis is expected to impact other supply options as well, particularly Libya, Algeria, and Qatar, which are also under duress. Escalating instability in the region, and likely within Egypt itself, may jeopardize LNG supply routes, particularly Qatar's LNG. U.S. LNG is poised to benefit from this evolving situation, while Moscow silently observes the developments. It is worth noting that Europe continues to import Russian LNG, while actively encouraging gas suppliers from the former Soviet Union to maintain their pipelines to Europe. Turkey is eager to play a pivotal role as a major supply route for these resources.

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By Cyril Widdershoven for Oilprice.com

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