Cyprus is well-positioned to use Egyptian infrastructure, including undersea pipelines and liquefaction plants, to export gas to European markets, Cypriot Energy Minister George Papanastasiou said at a recent event in Nicosia.

He said that there are discussions about feeding this gas directly into the national grid to cover the needs of the Egyptian domestic market.

The plan to build a 90 km underwater pipeline connecting the Cypriot Aphrodite offshore gas field to the offshore production facilities of Egypt’s Zohr gas field was first revealed in September.

Cyprus is to pump one billion cubic feet of gas per day through this pipeline. There are mixed reports about the starting date, with some putting it in 2026 and others predicting it will start a year later depending on when the pipeline building kicks off.

Energy experts believe an agreement to pump the Cypriot gas into the Egyptian national grid would benefit both parties. While Egypt is suffering from a shortage of gas, Cyprus has abundant reserves that it does not need domestically due to low demand.

There are political and economic obstacles that make the idea of exporting it to Europe via Turkey or Greece impossible.

The energy crunch Egypt is facing was manifested in the country’s changing from a net exporter of gas in 2022 to a net importer in 2024. This came on the back of a sudden decline in the production of the Zohr gas field, Egypt’s largest, which when discovered in 2016 was expected to turn the country into a leading regional and international gas exporter.

The field fed exports of liquefied natural gas (LNG) in the period from 2018 to 2022. However, output dropped to a low of 1.2 billion cubic feet per day (bcf/d) in the first quarter of 2024 compared to a peak of 2.76 billion cubic feet in the third quarter of 2021.

In 2023, LNG exports were halted and rolling blackouts were introduced as Egypt grappled with a 1.2 to 1.3 bcf/d natural gas deficit. The reasons for the decline as given by different official sources related to reservoir pressure decreasing, affecting the amount of gas that can be extracted, or due to water infiltration in the field.

However, the drop in Zohr production is only part of the energy shortage story, according to a report by the National Bank of Kuwait (NBK).

The commitment to a fixed exchange rate before the March devaluation of the Egyptian pound, according to NBK economist Noaman Abdel-Rahman, is one of the reasons for the energy crunch.

He explained that an overvalued exchange rate in times of limited foreign-currency resources limits investments in the energy sector and causes an accumulation of dues to international oil companies.

“Some reports put the dues to [Italian company] Eni at around $1.7 billion, out of which the government repaid only 25 per cent. The company has refused to continue drilling and upstream activities until it gets its dues,” said Abdel-Rahman in a report released at the end of September.

The Egyptian General Petroleum Corporation’s (EGPC) dues to foreign gas and oil companies stood at $4.5 billion in March, according to a report issued by the International Monetary Fund (IMF).

However, in early November Asharq Business quoted an unnamed official source as saying that Egypt had already paid around 75 per cent of its arrears to the oil and gas companies. Eni has recently announced its plan to resume drilling at the Zohr gas field in December this year, with the arrival of a rig to drill two new wells.

The Italian company has pumped $13.9 billion in investments into Zohr since it started developing it in 2016.

Abdel-Rahman cited the nature of the agreements that the government signed with oil and gas explorers as another problem that had led to lower production.

“The majority of these agreements signed are production-sharing agreements [PSA] and not royalty agreements. The latter is mostly based on splitting revenue, which is more economically beneficial for both parties [government and companies] as it compensates for higher production costs and the natural aging of the well,” he wrote.

To cover the production-consumption gap in Egypt during the hot summer months, the government opted during 2024 to import LNG for the first time since 2018. Imported LNG needs to be re-gasified in order to be used, and the country rented a floating storage and re-gasification unit (FSRU) from the US to do so.

This facilitated the import of 22 shipments as of September and will make it possible for another 20 shipments to arrive in the fourth quarter of 2024.

The processing of piped gas like that received from Israel and in the future from Cyprus is less than that for shipped LNG, which needs to be re-gasified in order to be pumped into the national grid.

This makes importing gas from Cyprus more beneficial cost-wise.

Cypriot gas imports would also increase energy security as Egypt would not be heavily dependent on Israeli gas amid the current geopolitical tensions.  

While Cyprus discovered its first and largest gas field, Aphrodite, 12 years ago, and despite four smaller discoveries being made since then, it has not yet produced any gas.

According to Simon Henderson, director of the Bernstein Programme on Gulf and Energy Policy at the Washington Institute in the US, the exploitation of Cypriot gas has been a challenge as local demand is insufficient due to the small size of the population.

Scenarios to export were also not feasible. A first option was exporting the gas to Israel via a pipeline, but Israel does not need to import gas, and it does not have the capacity to pipe it elsewhere.

The two other scenarios were to transfer the gas via pipelines to Greece and from there to other European countries, or to use the Cypriot gas to generate electricity that would then be transmitted via a cable stretching from Israel to Europe.

However, the fact that the gas is several miles below the seabed makes extraction, transport, and/or transmission complex and possibly cost-prohibitive in both scenarios.

The pipeline option, via the East Mediterranean Pipeline (EastMed), which would take Israeli and Cypriot gas to Greece where it would join the existing Poseidon pipeline to Italy, has so far failed to raise the necessary funding to cover the cost estimate of six billion euros.

Turkey opposes the pipeline, a fact that makes the US reluctant to support the idea to avoid further political tensions in the region.

The historical political stalemate between Cyprus and Turkey over Northern Cyprus has put the brakes on any suggested cooperation projects.

* A version of this article appears in print in the 21 November, 2024 edition of Al-Ahram Weekly under the title: Perfect match on gas cooperation