Egypt Looks To Resume LNG Exports As Prices Rise » EntornoInteligente

Egypt Looks To Resume LNG Exports As Prices Rise

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By Viktor Katona for Oilprice.com

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Home Energy Energy-General Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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Share Facebook Twitter Google + Linkedin Reddit Premium Content Egypt Looks To Resume LNG Exports As Prices Rise By Viktor Katona – Jan 24, 2021, 12:00 PM CST Join Our Community Egypt’s 2015 discovery of the supergiant Zohr gas field was supposed to propel the North African country into the Eastern Mediterranean limelight. Within less than 3 years Egypt shed its historical legacy of being a net importer, rekindled its hopes of finally using its existing (and vastly underutilized) LNG infrastructure to the extent it had always wanted and even boosted its licensing activities to ensure a smooth continuation of offshore drilling looking into the 2020s. Even the internal regulatory environment turned for the better – with the new gas law of 2018 private companies could already import and distribute gas on the domestic market, i.e. Israeli gas could be brought in when global prices favor more exports. But then COVID happened and it all went down the drain.   From March 2020 up until November 2020 only one cargo of Egyptian LNG has left the country on the back of anemic demand and plummeting prices all across the globe – a grueling course of events for a country wielding 12.2mtpa of liquefaction capacity. Gradually, however, the recovery of Asian demand has started to turn things around. The first positive development came late in October 2020 when the Idku LNG plant was restarted in the last days of October 2020. Idku, Egypt’s main LNG gateway linking it to buyers globally, was closed down for almost 6 months, triggered by weak LNG prices globally (in contrast to Rudong or Hammerfest there was no technological undertone for the shutdown). The 7.2mtpa capacity Idku is operated by Shell, with Petronas owning 35-38% of the two trains and the Egyptian state NOCs EGAS and EGPC taking up the remaining stakes. 

The primary trigger for such an impressive winter season lies in Asian LNG prices moving into really lucrative territory. Egyptian producers generally avoid selling LNG below the level of 5 per MMbtu as it is roughly equivalent to the cost of buying the gas from offshore fields in the Mediterranean such as Zohr – this time, however, prices in China and Japan climbing above 20 per MMbtu in mid-January has created a solid buffer to ensure the profitability of LNG sales. Of the 18 LNG cargoes that have left Idku in the NovemberJanuary period, only two went to European customers, all the others are satiating Asian LNG demand. As difficult as it is to foretell how the summer season is going to look like (a temporary shutdown due to Asian prices dropping remains as an option on the table), one thing is for sure – the February loading program is just as full as that of January. 

Graph 1. Monthly LNG Exports from Egypt in 2017-2021 (million tons of LNG).

Source: Thomson Reuters.

The past months’ hiatus has allowed ENI and the Egyptian authorities to iron out all past discrepancies and grievances. Under a deal concluded in December 2020, ENI will reopen the 5mtpa  capacity Damietta LNG terminal in Q1 2021 (went offstream since November 2012 due to an alleged scarcity of gas as it needed to be diverted for domestic means), all the while the shareholding structure of the asset will see the Spanish Naturgy depart for a one-off fee of $600 million. The Egyptian state companies EGAS and EGPC will from now on own 40% and 10%, respectively, while ENI will take 50% of the project. Egypt now claims that domestic gas needs can be fully met from the current output volume and Damietta can receive surplus production from Zohr.  

Related: Can Shale Resist The Lure Of Another Output Surge?

Naturgy (formerly known as Gas Natural Fenosa) leaving the joint venture with ENI will most probably also put an end to a long-standing legal dispute over the causes and consequences of idling Damietta. As Damietta’s lack of feed gas was primarily caused by the Egyptian authorities diverting gas that ought to be LNG-dedicated to domestic needs, the Union Fenosa Gas joint venture has taken EGAS to the World Bank-affiliated International Center for Settlement of International Disputes (ICSDI).  ICSDI has decided in September 2018 that the state gas company should pay 2.01 billion after taxes and before interest to the Italo-Spanish JV, stating that Egypt failed to grant the JV a “fair and equitable treatment”. From now on, ENI will be the one responsible to feed Damietta with natural gas and it will have most of the liquefaction rights (2.8mtpa LNG per year). 

ENI might be perceived as the ideal candidate to spearhead the resuscitation of Damietta LNG considering its operating stake at Zohr, however, even the Italian NOC will experience substantial roadblocks. The crux of the matter revolves around pricing as a protracted low-price environment would inevitably hit exported volumes – Egypt lacks natural outlets in its Mediterranean vicinity that could pull in its cargoes. Even Turkey, as close as a marketing destination might be and a Levantine economy that has significantly boosted its LNG imports during 2020, took in a mere one cargo of Egyptian LNG in 2020 (one cargo each for 2018 and 2019). 

Considering that both of Egypt’s LNG liquefaction terminals will soon be operating, the main thrust of efforts should now be put towards boosting production volumes again. Having demonstrated robust growth throughout 2016-2019, Egypt reached an annualized output level of 6.7 BCf per day last year as ENI managed to bring Zohr to a plateau. In 2020, however, overall gas production fell to a yearly average of 6.1 BCf per day, i.e. roughly 9% lower than in 2019, and might have been much worse were it not for a solid Q4 2020. The vast reserves of Zohr notwithstanding, the return of Egypt’s LNG will inevitably depend on how LNG prices evolve in Asia – their precipitous decline in the second half of January 2021 has put Egyptian producers on alert, though LNG exports towards China and India still make economic sense. At least ownership issues are now no longer in the way of reacting swiftly to the market’s mood swings.

By Viktor Katona for Oilprice.com

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