Natural gas prices in Europe have skyrocketed during the past six months. On 1 April, they stood at $19 per gigawatt hour. By 27 September they had reached $74, a 500 per cent increase.
The pressures of demand are certain to push up prices further in the short and medium terms due to the advent of winter in the northern hemisphere, the world’s largest consumer of gas and energy. The problem of energy prices is complex, but the major ailment at present is how far supply is falling behind mounting demand. This aggravates the uncertainty surrounding the European economy as a whole due to the Covid-19 pandemic and the spread of variants of the coronavirus.
Egypt could be the solution to this problem if it becomes a regional energy hub and a main transit point for energy to Europe.
The demand for natural gas began to increase sharply in February this year as European governments relaxed Covid-19 measures and began to reopen their economies. Shops, restaurants and entertainment and recreation spaces were back in business, stimulating demand for their products and services. The manufacturing sector also shifted into high gear in order to keep up with the soaring demand, which then fuelled others including for commodities such as energy, minerals and foodstuffs.
The global economy has thus entered what economists call a “super cycle” which has generated successive waves of inflation. Europe has been particularly hard hit due to its heavy dependence on imported primary materials. The increased demand for these has created its own set of inflationary pressures, precipitating rising prices, rising profit margins and record demands for energy far in excess of supply.
The EU primarily relies on natural gas as its main source of energy. Europe imports about $40 billion worth of natural gas, which makes up 23 per cent of its total energy imports. About 43 per cent of this comes from Russia.
Russian gas mainly arrives in Europe via 12 pipelines, three of which enter the EU directly through Finland, Estonia and Latvia. Four pipelines pass through Belarus and five through Ukraine, and these have become a source of instability in the Russian-European energy relationship.
Due to Ukraine’s irregularity in paying for Russian gas, Moscow has been forced to turn off the gas taps twice for varying periods in 2004 and 2009. To reduce its dependence on the Ukraine route, Russia decided to build Nord Stream 2, with a 55 billion m3 capacity, to run parallel with Nord Stream 1 and to double the amount of gas it transports directly to Germany.
During construction, the pipeline was subjected to US sanctions from the Trump administration, which delayed and raised the cost of completion. The Biden administration then lifted the sanctions, enabling Russia to complete the construction in July. However, Russia was then confronted with unexpected European regulatory obstacles. In return, it began to pressure Europe by slowing supply just as demand was rising due to the relaxation of the Covid-19 restrictions and the reopening of the European economies.
It should be borne in mind that natural gas is not just used for energy in the European economy but is also used to manufacture fertilisers, soft drinks, industrial gases and other products. Therefore, a significant shortage of gas triggers widespread panic among investors, producers and the population at large because of its impact on everything from petrochemical manufacturers to the prices of agricultural produce.
Many believe that Europe is now in panic mode as a result, and some have likened the situation to the Arab oil boycott during the 1973 October War, especially after the European authorities announced that their gas reserves had plunged to below 30 per cent in April and May, almost the lowest level in five years.
Although the reserves began to rise again in June, the decline has wreaked havoc in some European countries. The UK, for example, has seen spikes in the hoarding of certain food and household commodities. The situation has become so serious that the British government has been forced to consider nationalising the energy companies in order to forestall their bankruptcy and further economic catastrophe.
This is where Egypt comes into the picture. Chronic gas-supply crises have induced the EU to search for alternatives to Russian gas in the past, though the projects that have been inspired by this have not met with success.
One example was the Nabucco pipeline that was intended to transport gas from Iran to Europe via Iraq, Azerbaijan and Turkey. This $13 billion project was proposed in 2010 in the aftermath of the Russian decision to cut off the Ukraine pipeline for 20 days in 2009. It is unlikely that this project will now see a revival, especially since Turkey has proven itself to be as unreliable a partner as Russia.
Egypt, by contrast, has demonstrated its potential as a dependable supplier of gas and electricity to Europe, and such considerations should galvanise the EU authorities into launching a European project to increase available gas reserves in the Eastern Mediterranean.
According to the US Geological Survey, there are around 270 trillion m3 of gas in this region, most of which has not yet been discovered. It would make sense for Europe to promote research and exploration in the maritime economic zones of the five countries where the bulk of this gas is expected to exist, namely Egypt, Lebanon, Israel, Cyprus and Greece, thereby increasing the amounts available for export through European pipelines from Cyprus or Greece or in liquified form from Egypt and Israel.
In this regard, Egypt has the advantage of possessing the only two currently existing gas-liquefaction plants in the Eastern Mediterranean. It would cost $7-10 billion to construct another plant, so the more sensible option would be to raise the capacities of Egypt’s Edco and Damietta liquefaction plants. At present, these have a capacity of 8.2 million and five million tons a year, respectively.
Another practical solution would be to augment Egypt’s energy transmission to Europe. Egypt currently possesses surplus power production of around 26 gigawatts, of which 20 gigawatts could be immediately available for export once the Egyptian and European grids are linked. Work is already in progress on a three-gigawatt linkup to Cyprus and then to Greece that is expected to be completed in 2023. A second line of the same capacity would bring the transmission capacity up to six gigawatts.
A third possibility would be to pump more investment into Egypt’s promising renewable energy sector, which, according to current plans, should produce about 90 gigawatts per year by 2035, or around 42 per cent of the country’s total energy.
There is no reason why these plans cannot be developed with an eye to producing more if the Europeans are truly interested in durable solutions to their energy problems. In fact, they should also encourage accelerating work on the linkup between the Gulf and Egyptian grids, so as to make even more power available if needed.
