Israel Will Export Natural Gas to Europe Via Egypt

While Egypt and Israel have for years been security partners, sharing intelligence on Jihadis in the Sinai, including regrouped remnants of the Islamic State and Al-Qaeda, as well as on the Muslim Brotherhood, the Gazan branch of which is Hamas, a new and promising development is bringing them closer still: Israeli natural gas. Until little more than a decade ago, it was hard to imagine Israel as a significant producer of fossil fuels, much less as an exporter. In 2009 large quantities of natural gas were discovered offshore in the Tamar and Leviathan fields. But in 2012 it was still importing natural gas from Egypt. it was only in 2017 that Israel began to export natural gas, to Jordan, and then, in 2020, reversing their previous roles, to Egypt. Since then Israel had been making plans to export natural gas via the East/Med pipeline that would bring the natural gas to Greece, and from there on to Europe. That plan ended when Biden withdrew American financial support for the East/Med pipeline out of environmental concerns.

Now Europe’s need to diversity its suppliers of natural gas so as to reduce Russian imports — a main consequence of the Ukraine war– has the continent looking to Israel to fill part of its natural gas needs.  Before the war started, Russia supplied 40% of the EU’s natural gas. But Russia had been an unreliable supplier. In a number of disputes with European customers; it used pipeline shutdowns as a way to get its way on prices.  Russia is no longer in the catbird seat; Europe is now determined to limit its reliance on Russia, and is seeking other suppliers of oil and gas. In response to a loss of European customers, Russia has expanded its exports of both oil and gas to China, one of a very few countries willing to still do business with the now-pariah state of Russia. In response to the invasion of Ukraine by Russia, the European Commission and International Energy Agency presented joint plans to reduce reliance on Russian energy, to reduce Russian gas imports by two thirds within a year, and completely by 2030.  This means that Europeans have to quickly find other suppliers, and Israel, already a major exporter to both Jordan and Egypt, is ready to help fill that need. Instead of the East/Med pipeline, Israeli natural gas will be sent from the Tamar and Leviathan fields to Egyptian processing plants, where the fuel will be converted to liquefied natural gas, before being shipped to the EU. The Ukraine war should prove to be an economic bonanza for Israel and Egypt, too, bringing them closer together.

There is another consequence of the Ukraine war. Sanctions are still in place that prevent Iran from selling its oil and gas. One country, however, has been willing to ignore those sanctions and to buy Iran’s oil – China. The People’s Republic now buys more oil from Iran than it did before the sanctions were imposed. And Iran has been glad to have that one steady, and very big, customer. But the Ukraine war, which will provide such a boost to Israel’s natural gas industry, and to the country’s balance of payments, will be very bad for Iran’s economy. Here’s why.

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European customers for Russian gas are eager to wean themselves from their Moscow supplier. The Russians, of course, are well aware that the Europeans will cease to buy their oil and gas just as soon as they can find alternate supplies, or alternate sources of energy, such as renewables. Russia has now found, just as Iran has done, that there is one big customer ready to buy whatever oil and gas Russia can supply – China. Now Iran, which had a large share of the Chinese market, finds it now must compete with Russia to keep its share. The Russian oil is of a higher grade than Iranian oil, and is also being offered at prices far below what Iran charges, as Russia is desperate to sell.  Eager to take advantage of cheap Russian oil, the Chinese are now in talks with Moscow to replenish its strategic reserve. Iran, which had been selling most of its oil on the grey market to China, has been caught flat-footed, suddenly finding itself being undersold by the Russians. A price war has broken out between the two exporters who for political reasons – sanctions (Iran) and boycotts (Russia) — have been forced to offer their oil at great discounts. China is taking full advantage of this situation.  And Russia has been increasing its market share in China at Iran’s expense. Iran’s crude exports to China have fallen sharply since the start of the Ukraine war, as Beijing favored heavily discounted Russian barrels, leaving almost 40 million barrels of Iranian oil stored on tankers at sea in Asia and seeking buyers. Furthermore, the COVID lockdown in major cities in China has led to a steep decline in demand, as the people in those cities are not traveling, neither to work nor to anywhere else.That drop in demand is another blow to Iran’s sales.

Iran once produced 3.8 million barrels of oil, of which 1.8 million barrels went for domestic consumption. Iran’s exports fell to a low of 400,000 barrels a day in 2020, and then rose to slightly under 1 million bpd at the beginning of 2022, just before the war in the Ukraine began and Russia started to offer its oil at cut-rate prices. Iran can now try to undersell Russia, but the Russians can withstand a price war over oil and gas much more readily than Iran. Russia exports, for example, more than $20 billion dollars worth of gold each year. Oil and gas account for 82% of Iran’s exports, but only 55% of Russia’s exports.

In short, if the deal to route Israel’s natural gas to Egypt’s LNG facilities, and from there to ship the liquefied natural gas to Europe, materializes — as now seems likely — the Ukraine War will have been a bonanza for Israel’s natural gas exports. And the same war will deal a great blow to Tehran’s income, for Russia has been willing to sell its oil at ever lower prices, in order to take away market share in China from Iran. And Russia can outlast Iran in any price war over oil.  One more bit of bad news for the tyrants in Tehran. There have been so many.

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