Partners in the Tamar gas field offshore Israel have signed a preliminary non-binding agreement with Union Fenosa Gas SA (UFG) to supply gas to its liquefaction facility in Egypt to produce liquefied natural gas (LNG) for export.
The letter of intent (LOI) contemplates a contract term of 15 years and a total gross sales quantity of up to 2.5 trillion cubic feet (Tcf) of natural gas, or approximately 440 million cubic feet per day over the period, according to Tuesday's press release from Texas-based Noble Energy Inc., which operates Tamar with a 36 percent working interest.
Egypt, which owns 20 percent of UFG's LNG plant in Damietta, has been unable to honour its contractual obligations to provide the facility with natural gas for liquefaction and export, as fuel shortages have forced it to divert its resources for domestic consumption.
"This is especially damaging as LNG plants are by nature highly capital-intensive, compared to, say, a pipeline," explains Mohamed Abu Basha, chief economist at Cairo-based investment house EFG-Hermes.
Last April, UFG – a joint venture between Spain's Gas Natural and Italy's Eni – filed a complaint against the Egyptian Natural Gas Holding Company (EGAS) with the International Chamber of Commerce's (ICC) International Court of Arbitration, alleging that EGAS had failed to keep up its contracted payments – regardless of production – needed to cover operating expenses, investments and debt servicing, Reuters reported at the time.
One of the two largest gas fields in Israel, Tamar was discovered in the eastern Mediterranean in 2009 and holds an estimated 10 Tcf of gas.
All parties are hoping for a binding agreement to be finalised within six months, subject to regulatory approvals from Israel and Egypt.
"They will need approval mainly for the building of a submarine pipeline which will be used to carry the gas from the field to the plant," explained Abu Basha.
Despite much speculation in the local media, Egypt's government has not expressed any interest in purchasing the imported gas, which would be sold to UFG at prices "similar to the contract price in other natural gas sales and purchase agreements for regional export sales from Israel, and based mainly on a linkage to Brent oil prices," Tamar's partners said.
The country, which uses natural gas primarily for electricity generation, has suffered increasingly frequent blackouts since its January 2011 revolution that toppled long-time autocrat Hosni Mubarak.
Egyptian public opinion has been particularly sensitive to the government's business dealings with Israel since the 1979 Camp David Accords, opposing any signs of "normalisation" in relations between the two previously warring nations.
In April 2012, Egypt scrapped a highly unpopular 20-year deal – signed in 2005 – to supply natural gas to Israel, citing financial disputes. Two months later, Mubarak-era petroleum minister Sameh Fahmy was sentenced to 15 years in prison on charges of squandering public funds in the gas deal.
The pipeline used to supply the gas has also been bombed 20 times by Islamist militants in the Sinai Peninsula since the 2011 revolution.
By 2013, Egypt's exports of natural gas and its derivatives had fallen by 67.3 percent as compared to the previous year, registering some $63 million.
The Egyptian petroleum ministry predicts that domestic gas consumption will exceed production in the next fiscal year, with production stalling at 5.4 billion cubic feet (bcf) per day and consumption increasing to 5.57 bcf/day.
The government recently announced that it was preparing to import natural gas beginning in August, as it is finalising a deal to buy a floating unit to re-gas a LNG unit based in Ain Sokhna.
It also plans to launch a tender in 2015 to import natural gas for three to five years until the country can restore its previous levels of production.