Egypt: ENI’s Zohr, a boost for political stability

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ENI’s announcement of the discovery of a large gas field that could hold around 30 tcf of natural gas off the coast of Egypt puts the Egyptian gas sector on the road to recovery, provided reforms are pursued.

Egyptian gas production peaked in 2010 and has started to decline since, turning Egypt from a gas exporter to a net importer. The discovery, which still needs to be appraised, is a boon for Egypt and its president Abdel Fattah al-Sisi. Gas shortages and frequent power cuts have nurtured political instability over the past few years by amplifying popular discontent and worsening social unrest, which Sisi’s predecessors were unable to contain. Any hope for controlling economic discontent would have to pass by reforming the energy sector. By early 2014, the Egyptian gas sector was making the headlines for a series of crisis and lawsuits. With production unable to keep up with demand, exports dropped cutting revenues and delaying payments for international companies. Containing social discontent inevitably passes by improving economic conditions, and this, in turns, relies largely on the performance of Egypt’s energy sector. After his accession to power in 2014, Sisi made it a priority to boost production and reduce reliance on imports over time, by attracting investments. He initiated a series of reforms, including cutting down subsidies by about a third (with a view to phasing them out completely within five years), reducing Egypt’s debt to foreign companies and introducing pricing reforms. For years, Egypt imposed a ceiling of $2.65 per mmBtu, considered as far too low to motivate new exploration and the development of certain projects. These measures have contributed to restoring confidence in Egypt’s gas sector.

Regardless if it is correct or not, the discovery of Zohr is already perceived, in Egypt and beyond, as the result of the measures taken to reform the gas sector over the past year. As such, it is a boost for President Sisi. But the reasoning goes both ways: Political stability in Egypt relies on the performance of its energy sector, and putting the energy sector back on track relies on political stability. ENI’s discovery couldn’t have come at a better time for Sisi: On 30/08, Egypt announced it will hold parliamentary elections in October and November 2015. The intense media coverage will make sure Egyptians will head to polls with two “spectacular” achievements directly attributed to Sisi in mind: the inauguration of the new Suez canal, and the discovery of Zohr.

ENI plans to fast-track the development of Zohr, benefiting from already available infrastructure. The local market will absorb most of the production. Officials at the Egyptian Petroleum Ministry are even saying all of the production will go for internal consumption, though exports are a possibility a few years down the road. The field can meet local demand for about 10 years. In the past few years, local demand has soared fuelled by a fast growing population. Currently standing at around 89 million, a low birth rate scenario puts Egypt’s population at 100 million in 2036. More pessimistic scenarios project a population reaching 100 million as early as 2025. This suggests Egypt must hope for more discoveries if it is planning to achieve long-term self-sufficiency and resume exports. And, further exploration depends on pursuing reforms. Though tempting, Zohr’s discovery should not be an excuse for stalling reforms.

Growing Italian involvement in the region paying off

But it doesn’t come without a risk. Egypt and Libya are two countries with a strategic significance for Italy. On 30/08, Italian company ENI announced the discovery of the largest gas field ever discovered in the Mediterranean. This represents one of the rewards of Italy’s growing involvement in the region. But it must not conceal the growing risk that also comes with a greater involvement. On 31/08, a car bomb exploded in front of ENI’s headquarters in Tripoli, Libya. On 11/07, a large explosion went off near the Italian consulate in Cairo, Egypt, destroying the façade of the building and killing one person. An Egyptian group, affiliated to ISIS, claimed responsibility for the attack, which appeared to be a warning for the Italians, since the bomb went off early in the morning, before rush hour. Future attacks targeting Italian companies, citizens or interests are likely. The attack on an Egyptian Navy vessel off the coast of Damietta in November 2014, is a reminder that coordinated attacks at sea, including attacks targeting offshore installations, must now be treated as a growing possibility. Strengthening coordination with local authorities is a must. On the day of the announcement of ENI’s discovery, Italian Prime Minister Matteo Renzi called President Sisi to discuss the potential impacts of the discovery. Beyond the obvious economic benefits, these also include stability.

A test for Egyptian-Cypriot relations?

Beside the political risk linked to the country’s stability, other factors risk complicating the development of Zohr. News that the gas field possibly extends into Block 11 in Cyprus’ EEZ, as alluded by some but not confirmed, could reignite a debate that the Egyptian opposition has been holding against Sisi following his rapprochement policy with Cyprus: the perceived unfair delimitation of the Egyptian-Cypriot maritime border, with many Egyptians believing Cyprus has encroached on large swathes of Egypt’s EEZ. If the field does extend into the Cypriot EEZ, this will be a first test to evaluate how solid the “strategic” relationship between Egypt and Cyprus is. Fortunately, the unitization agreement signed in 2013 offers a framework for the development of joint hydrocarbon reserves extending on both sides of the border.

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