Giant gas field discovery in Egypt likely to impact global gas markets

September 2015 | Anders Norlen, Kerri Maddock

Egypt has been suffering natural gas supply shortages over the last years due to a lack of investment in the country’s upstream sector, political unrest, and a struggling regulatory environment. This has forced Egypt to re-route gas destined for the country’s two LNG export facilities – Egypt LNG in Idku and Damietta LNG – to domestic consumption. As demand for electricity has been growing faster than the available supply of gas for power generation, recurring blackouts have been frequent over the summer in the last few years due to a lack of power supply.

Natural gas demand in Egypt grew by 8.4% p.a. from 2000 to 2012 on the back of strong growth in electricity demand for households and as feedstock in industrial processes. Demand growth for electricity continues to be strong and has averaged 5.5% p.a. since 2000, mainly driven by an expansion of gas-fired power generation capacity, but has declined by 8.7% since 2012 as gas supply shortages have been prevalent.

Population growth and economic development have been – and will continue to be – the main drivers behind energy demand growth. Egypt is in a very strong population growth phase, currently growing by 1.7% p.a., and the IMF expects GDP to expand by 4.5% p.a. by 2020, indicating that underlying demand expansion remains robust.

Exhibit 1: Half of the active oil horizontal rigs are currently drilling in the Permian basin

The Egyptian government has taken steps during 2015 to solve the energy shortages through a number of supply-side measures:

Firstly, an agreement with the consortium operating Israel’s Tamar field was signed in March allowing for imports of gas through the EMG pipeline. Previously, gas flows were reversed – from Egypt to Israel – but following domestic supply shortages the export contract was cancelled.

Secondly, an agreement with BP was signed in March under which the British major is to invest USD 12 bn in Egypt’s West Nile delta, ultimately allowing for up to 15 bcm of supplies to be added to the domestic market. The agreement was signed following decades of discussions on development of the resources.

Thirdly, a string of LNG import contracts were signed as expected following the start-up of the country’s first FSRU terminal. The latest agreement was signed with Gazprom on August 27th, allowing the Russian company to supply LNG to Egypt over the coming 2 years. Similar agreements have been signed with a number of other suppliers over the last few months.

Zohr discovery significant supply boost for Egypt

The announcement by ENI of the discovery of a super-giant 850 bcm natural gas field in the deep-water Sohar basin offshore Egypt will have strategic implications for Egypt, the Eastern Mediterranean region, and for the global LNG market1 . The discovery follows recent exploration successes in other countries in the Eastern Mediterranean, with Israel already producing from the 300 bcm Tamar field which was discovered in 2009. Other undeveloped discoveries in the region include the 500 bcm Leviathan field, discovered offshore Israel in 2010, and the 200 bcm Aphrodite field offshore Cyprus, discovered in 2011.

We expect fast-tracking of development and expect first volumes to reach the market by 2020, adding 20-30 bcm of annual production when the field is fully operational. The biggest challenge to fast-tracked development is reaching an agreement between the Egyptian government and ENI on the proportion of gas sold at regulated domestic prices as well as delays caused by the operator prioritizing between other green-field projects in its portfolio.

A delay could have important effects on the short-term LNG market, as Egypt supplies the balance of its supply through short-term contracting of volumes. Rapid development will mean releasing the FSRU currently leased and re-selling or cancellation of the recently signed contracts.

The field is located 190 kilometers north of Egypt’s Mediterranean coast, covering an area of 100 square kilometers. ENI has announced that there is further upside potential for the field, with a dedicated well targeting a deeper Cretaceous formation. Field development will require floating production facilities as well as the construction of 190 kilometers of subsea pipeline to connect the field with onshore facilities, indicating that overall development costs will be in the USD 6-7/mmbtu range2 .

Overall implications

The Zohr discovery will strengthen the energy balance of Egypt in the long term. The additional supplies will provide relief for Egypt of its current shortages of gas and electricity. This should boost Egypt’s economic growth possibilities in the longer term.

Plans on how to monetize Israel’s Leviathan field will have to be redrawn. The only options left now are the construction of a green-field LNG liquefaction terminal in either Cyprus or in Israel itself, or a pipeline to Turkey. Start-up of Leviathan in 2018 looks increasingly unlikely.

The global LNG market will see additional unforeseen supplies and less Egyptian demand. From 2020, Egypt will have gone from being a net importer of LNG to again exporting volumes. The market oversupply up to 2022 is unlikely to be relieved before then.

Implications for Egypt: Supply from heaven for energy-starved economy

Additional supplies from the Zohr discovery should help meet growing domestic demand. We expect Egypt to continue on its ambitious path to add a total of 4.3 GW of renewable capacity through feed-in-tariffs and to complement this with added gas-fired capacity to meet the growing demand for electricity.

Egypt has struggled with a widening current account deficit as imports of energy have been increased following the decline of domestic production and falling foreign exchange revenues.

Implications on East Mediterranean region: A new gas basin is evolving

The new supplies will effectively dent Israeli ambitions to lay subsea pipelines from the 500 bcm Leviathan field to solve the problem of where to add liquefaction capacity that can potentially help monetize the field. Due to the size of the field, the Israeli/Jordanian markets are too small to absorb the additional volumes. Discussions so far have involved the construction of liquefaction capacity in Cyprus and Israel (the former preferred for security reasons), construction of a subsea pipeline to Egypt for liquefaction in underutilized plants, and finally a subsea pipeline to Turkey for sales into the Turkish/European markets.

We believe the likelihood of piping the volumes to Turkey for sales in the European market has increased as the lowest cost solution has been exhausted. Development of the field should be able to add 10-12 bcm of supplies to growing demand in Turkey.

New (but old) LNG volumes will be added to the market

The additional volumes brought onto the market from the Zohr discovery will help put the currently idle Egypt LNG in Idku and Damietta LNG liquefaction terminals back online. The terminals have been unable to run at capacity since 2008 as a chronic shortage of gas has routed supplies to domestic usage rather than for export. Current liquefaction capacity stands at a total of 12.2 mtpa (~17 bcma). We expect exports to restart by 2020, adding “new” capacity into an already oversupplied global market.

Exhibit 2

We believe these additional volumes could be another supply boost that will push the rebalancing of the global LNG market back slightly in time and that  the global LNG market will remain oversupplied until 2022.

Exhibit 3


We believe that the Zohr discovery will have implications on a number of levels. Egypt will become energy-independent and will be able to improve its financial position through cutting energy imports and renewed energy exports because of LNG. The long-term growth outlook for the country will improve as power cuts are alleviated and the trade balance improves.

The major outstanding questions around development involve domestic Egyptian pricing of the gas and decisions from ENI on how to split its capital allocation between its vast portfolio of gas projects in a low oil price environment. Potential domestic pricing reform will be an important factor to monitor as it will provide an indication of the government’s long-term strategy on subsidies, the targeting of specific industries, and the demand growth pattern.

The discovery is the latest in a string of exploration successes in the Eastern Mediterranean. With the total volumes found offshore Israel, Cyprus, and Egypt exceeding 2000 bcm and regional markets largely saturated or inaccessible, the choice of long-term monetization options will be increasingly important. Turkey is seeing rapidly growing gas demand and the Eastern Mediterranean could possibly become yet another corridor for gas supplies to a Europe that wishes to diversify its supply base away from Russia. The Zohr discovery has dented Israeli ambitions to utilize Egypt’s LNG export terminals, again putting all options on the table.

The global LNG market will see additional supplies from the return of Damietta- and Egypt LNG. The return of these volumes to the global supply will marginally prolong the expected oversupply in the market. For the producers involved in the Egyptian LNG projects, added low-cost volumes from these projects could potentially impact investment decisions on other liquefaction projects under consideration in their respective portfolios.

1Initial assessment from ENI. Appraisal drilling will commence shorty
2Assuming total development costs in the same range as similar projects in the region 


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About the author

Anders Nolen and Kerri Maddock are senior analysts with Energy Insights, based in McKinsey's London office.