Egypt has taken a major step towards reasserting itself as a regional energy hub, halting the import of liquefied natural gas (LNG) following a recent surge in domestic gas production.

In late September Tarek El Molla, the minister of petroleum and mineral resources, announced that Egypt had received its final shipment of LNG after meeting gas self-sufficiency.

The decision to halt imports was largely driven by increased production at the Zohr offshore gas field, located 200 km north of Port Said in the Mediterranean Sea, which has grown six-fold since operations began in January, the minister said.

Zohr’s output jumped to 2bn standard cu feet per day (scfd) in September, up from 350m scfd in January. Discovered by Italian energy multinational Eni in 2015, the field holds reserves of more than 30trn standard cu feet (scf), with local media reporting that officials were aiming to increase output to 3bn scfd by the second half of next year.

“Zohr is a game changer for Egypt,” Claudio Descalzi, CEO of Eni, told OBG in an interview published in February 2018. “It is the largest gas discovery ever made in the Mediterranean Sea… enough to meet Egypt’s natural gas demand for decades to come.”

As a result of the increase at Zohr, Egypt’s total gas production rose to 6.6bn scfd in September 2018, according to the Ministry of Petroleum and Mineral Resources. This was above last year’s average of 5.1bn scfd, which itself was a 15.9% increase on 2016’s total of 4.4bn scfd.

Ending LNG imports could lead to $3bn in annual savings

The decision to halt LNG imports is expected to have a significant impact on government finances, with El Molla estimating it could save the state as much as $250m per month, or around $3bn a year.

Meanwhile, the spike in natural gas production marks a reversal of the process that led to Egypt becoming a net gas importer in recent years.

The instability caused by the 2011 revolution saw natural gas production fall from 59bn standard cu metres in 2010 to 40.3bn standard cu metres in 2016, before rebounding to 49bn standard cu metres last year, according to the BP Statistical Review of World Energy 2018. This, coupled with increasing domestic demand, saw Egypt become a net importer of gas in 2014.

Nevertheless the financial savings of halting LNG imports could be somewhat offset by increased oil prices: as a net importer of refined gasoline and diesel, the government had calculated its FY 2018/19 budget on prices of $67; however, Brent crude prices have been consistently above this figure since April, peaking at more than $85 per barrel in early October and currently around $77 per barrel.

Increased production, new law seek to position Egypt as regional energy hub

Achieving natural gas self-sufficiency and ramping up production aligns with plans to resume exports and position the country as a regional hub for energy trade.

With proven natural gas reserves of 62.8trn scf at the end of 2017, the third largest in Africa, according to BP, the sector has significant expansion potential.

To help unlock this potential, in August last year the government passed a new law opening up the gas market to the private sector. The legislation led to the creation of the Gas Regulatory Authority, an independent public body charged with regulating the rules that allow private companies to directly ship, transport, market, store and trade gas using the country's network and pipeline infrastructure.

The development builds on the 61 agreements signed for oil and gas exploration since mid-2014, which the government estimates to be worth $14bn.

Downstream investment adds to re-export potential

Furthermore, new investments in downstream infrastructure could see Egypt further develop as a key player in the processing and re-export of gas.

In late July Eni announced the activation of its fourth LNG processing facility at the Zohr field’s gas treatment plant, increasing national production capacity of LNG to 1.6bn scfd.

This was followed in September by the signing of an inter-governmental agreement with Cyprus facilitating the construction a $1bn subsea gas pipeline connecting Cyprus’ Aphrodite gas field to two liquefaction units in Idku, on Egypt’s northern coast. The LNG imported from the pipeline, which is expected to be operational from 2020, would provide further re-export opportunities.

In addition, local media reported in August that private company Dolphinus Holdings would begin receiving natural gas imports from Israel’s Leviathan gas field in the first quarter of next year. Under the deal, the company will purchase $15bn of gas over the next 10 years to be converted into LNG in Egypt and then re-exported elsewhere.

This information was originally published by Oxford Business Group (OBG), the global publishing, research and consultancy firm. Copyright Oxford Business Group 2017. Published under permission by OBG. For economic news about Egypt and other countries covered by OBG, please visit: http://www.oxfordbusinessgroup.com/economic-news-updates