Finance Analyst
Troubled Waters
Four months on from the Israel-Palestine conflict, neighbouring Egypt has faced calls to increase their presence in providing humanitarian relief for civilians trapped within the bombardment. The urgency of this sentiment has grown amongst speculation of the Israeli Defence Force preparing a ground-insurgency campaign into the Rafah Governate. This move they claim will free the remainder of Israeli hostages held by Hamas but has been warned against internationally to avoid catastrophic civilian casualties.
This tenuous situation places Egyptian-Israeli relations, and President Abdel Fattah el-Sisi, in a difficult position balancing economic necessity with nations' support for the Palestinian cause. With the relationship having survived several crises within the Middle East such as the Palestinian intifadas, and conflicts within the West Bank and East Jerusalem; Cairo has always played a leading role as a mediator between Israel and Hamas. Since the ascension of the Egyptian President in 2013, the relationship has been centred around economic and energy relations. A central tenant of this agreement has been cooperation on security operations between the IDF and Egyptian military against Hamas tunnels within the nation, with Egypt claiming in January of last year to have destroyed 1500 tunnels. Therefore, any analysis regarding ongoing developments within this region must utilise this vector to truly understand the motivations behind geopolitical stratagems.
How Energy Changed the Game
Post the formation of the Israeli state in 1948 and up to the Arab Spring of 2011, the Israeli state has been a net importer of natural gas. This can be marked to small reserves discovered domestically and a lack of investor interest due to not wanting to provoke large oil-producing Arab states. Due to this, the Israelis have been historically forced to rely on coal production to meet their energy needs.
However, post-Arab Spring in 2011, the brief regime of the Muslim Brotherhood of June 2012 to July 2013 saw gas shortages with overall energy consumption growing 5.6% between 2000 and 2012 and the demand for gas hiked by 8.7%. This marked an opportunity for Israel to use the large reserves discovered in the Tamar and Leviathan fields to export natural gas cost to Egyptian private firms. On the 19th of February 2018, Delek Drilling and Noble Oil signed a contract with Egyptian firm Dolphinus to supply 64bcm of gas for 10 years at US$15bn from the Tamar and Leviathan gas fields. The Egyptians would utilise half of these imports to service their growing domestic population and the rest into LNG for re-exports. To complement the deal, Egypt’s East Gas Company spent US$148 million, US-based Noble Energy and Israel-backed Delek Drilling spent US$60 million each, and Leviathan and Tamar gas field partners spent US$125 million each to repurchase the 39% of the disused EMG Company pipeline linking north Sinai with Ashkelon at the total cost of US$518 million.
This deal, however, came as a surprise to many as Egypt has been developing the Zohr gas field since 2015. Discovered by Eni in August of 2015, it is estimated to contain 850 bcm worth of natural gas. The nation's interest in importing natural gas from Israel was backed by serious strategic thinking to utilise its expensive LNG infrastructure to shape the regional energy trade. In 2022/23 the gas field produced 2.4 bcm per day.
For Israel, the nation currently has two export options, especially for supplying gas to European states. It can either utilise the existing LNG infrastructure in Egypt or build an expensive pipeline connecting Israel to Europe. In September of last year, Netanyahu met with Greek and Cypriot representatives to discuss shipping Israeli gas to LNG export terminals in Cyprus and from there to the continent. Feasibility studies conducted in the past valued such an initiative at US$7 billion. However, Turkey’s strained relations with Greece over Cyprus and Israel’s’ heated relationship with Lebanon over maritime borders and the conflict in Gaza are likely to weaken this initiative. On the other hand, Egypt has also signed agreements with Cyprus such as the 2016 agreement to build subsea gas pipelines and the 2018 agreement to construct a pipeline supplying gas from the Aphrodite gas field to the Idku LNG facility in Egypt. Therefore, Cyprus is emerging as a new battleground for Egypt and Israel to gain access to the European market, a particularly lucrative initiative since the Russian invasion of Ukraine and the decommissioning of the Nord Stream pipeline in 2022.
Houthi Attacks & Disruptions to the Suez
Keeping this in mind, we can therefore see why such disruption caused by Houthis in the Red Sea and targeting vessels using the Suez Canal would add increased strain to Egypt and Israel’s economies. The Suez Canal contributes 2% to Egypt’s GDP and the increased attacks by Houthis prior to military intervention by the US and her allies saw traffic fall by 64% in the early weeks of 2024. As a result, in January of this year, Egypt earned US$428 million from the canal down 47% from US$804 million in the same period last year. According to maritime consultancies, sea traffic around Africa’s Cape of Good Hope jumped 168% in January from 77 ships to 206, lengthening their voyage by 30% and reducing their effective shipping capacity by 9%. The results can be seen below.
Source: flexport
As of January 2024, ~562 carrier vessels accounting for ~7.6 million TEUs of capacity (almost 25% of global capacity) are actively diverting, will divert, or have already diverted the Suez Canal. This reduction in taxation coupled with the speculation of intensification of the conflict is putting pressure on the Egyptian treasury already amid a worsening debt crisis. As the 15th largest population in the world, the growing population consumed 60.7 bcm of natural gas in 2022 constituting about 37.3% of Africa’s total gas consumption for the year and their population is projected to grow to 124 million by 2030. This pressure from a ballooning population has swelled the nation’s debt levels to US$160 billion and servicing this debt is detracting critical resources from domestic development with the Government earmarking 56.1% of revenues, amounting to $78.8 billion, for debt servicing in 2023-24 fiscal year.
Looking Forward
Given these challenges to the Egyptian economy, there are still reasons for optimism in seeing a rebound to their current economic challenges. For example, in September 2023, Egypt announced plans to license a pipeline of green hydrogen projects with a total investment value estimated at US$83 billion. In addition, the government is seeking to accelerate the expansion of the Suez Canal which generated revenues of US$9.4 bn in the 2022-2023 fiscal year. Finally, as a condition of their loan arrangement with the IMF, the Egyptian state has lined up 32 state companies for privatisation, the transition of the currency to a floating rate to combat the black-market deals and restructuring the budget composition will aim to allow for an expansion in social spending. The IMF projects that with the implementation of these three key pillars the public debt-to-GDP of the economy will fall to around 78% by fiscal year 2026-27.
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