The author of this article is Dr. Cyril Widdershoven

The impact of the ongoing conflict between Israel, Hamas, and Hezbollah is growing. Not only is the end to the conflict not near, but a possible full-scale regional war with Iran is in the offing. Insecurity and military confrontations are never a good mix for energy projects in general, but when looking at the East Med region, it could put an absolute stop to future developments very soon. As global oil and gas markets have witnessed increased volatility, based mainly on fundamentals and algorithm trading, a renewed regional conflict is not taken lightly. Any statements by Israeli or Iranian leaders are translated into sharp movements in the future markets. Still, overall war premiums of the broadening conflict are minimal; some don’t even see them anymore.

The risks of a full-stop to Arabian Gulf and Iranian oil and gas exports seem to be taken very lightly, as energy prices are subdued. Regular terrorist acts perpetrated by Yemen’s Houthi militias, supported by Iran and the so-called Axis of Resistance, in which Russia and China are playing an ever-increasing role, threatening not only Israel’s mainland but also the freedom of navigation in the Red Sea, Horn of Africa and even the Suez Canal region, also are minimal; some don’t even see them not anymore making headlines at all. A Middle East war, a possible temporary closure of the Straits of Hormuz, or an Iranian retaliation on Saudi or Abu Dhabi oil and gas infrastructure is seen as an option, not even a real threat anymore. Statements made by the US Biden Administration on the Israeli military strategy have more impact on oil (and gas) prices than the bombardments of the Israeli Air Force of missiles of Hezbollah.

Still, under the surface, the effects are measurable for energy markets in the region and Europe in particular. The military onslaught and growing instability in the East Med region (or the Levant) threaten the economic and military stability of the littoral states and the energy future of the East Med and its prospective clients.

Europe’s current energy security situation is still fragile, as shown by the fact that after 2.5 years of Russia’s invasion of Ukraine and the continuing military battles, sanctions have not removed Moscow’s hydrocarbon volumes from the energy-addicted continent. Some figures indicate a resurgence of Russian oil and natural gas, or LNG flows despite sanctions regimes and political adversity. In addition to Norway (pipeline gas/LNG), North Sea, US LNG, and Qatar LNG, East Med is a focus region for Europe’s current and future energy supplies. Egypt, Israel, Cyprus, and Lebanon’s offshore gas reserves are potential sources for Europe’s continued gas needs.

The future of East Med’s gas potential is clear, but reality is again constraining these projects. Egypt, as the main natural gas producer and possible central gas hub, is stepping up its push to regain some of its former glory. Egypt’s Petroleum Minister Karim Badawi stated on October 14 that the country plans to increase its overall natural gas production in several of its concession areas, including the offshore Elephant field Zohr. Most new production is targeted to be supported by drilling programs in 2025. The ministry indicated that new drilling will ramp up the Zohr field production starting in Q1 2025. The Zohr field’s production is hovering around 2 billion cubic feet daily (bcfd) in FY2023-2024. The field is, however, still far below its former grandeur, as was shown by a peak production of 3.2 bcfd in 2019, declining to around 1.9 bcfd in early 2024.

The official reason behind the current production drop is the lower investment appetite of international oil and gas companies in Egypt. This is partly linked to the fact that Cairo didn’t pay the bills, slated to be several billions in arrears.

At the same time, Egypt is still eager to increase its gas imports from Israel and Cyprus and is trying to revamp its two LNG export facilities. The Egyptian Natural Gas Holding Company (EGAS) signed a partnership agreement with the Greek Copelouzos Group to enhance natural gas trade, transport, supply, and regasification across Eastern Europe and Greece to regain part of its LNG export capacity. The deal is part of Cairo’s drive to become the regional energy hub.

On October 13, Egyptian officials stated that the country is targeting an increase of 30% of its natural gas production to 6 bcfd by the end of 2025, compared to the current 4.6 bcfd. The production targets are linked to removing the country’s ongoing struggle to import more natural gas. The country’s daily natural gas consumption stands officially at 6.2 bcfd. The 11 new agreements signed with IOCs in the last months will boost the targets set, Yassin Mohamed, Executive Managing Director of EGAS, stated. According to Mohamed, the agreements hold a minimum investment requirement of $925 million.

For Europe, a successful Egyptian energy hub position supported by Israeli natural gas exports is of great interest. Already 2 years ago, the EU Commission signed an agreement to transport gas from Israel via Egypt to be transported as LNG to Europe. It also was represented by parties as a European move to partly end the dependence of the EU on Russian fossil fuels. Israel has increased its efforts to explore and produce more offshore gas from its known reserves.

However, since the October 7, 2023, Hamas massacre of Israelis and the resulting Gaza and Southern Lebanon wars, all is again in flux. Analysts are now wondering if the current instability, or almost full-scale regional war if Iran is going to be part of it, will block the further development of East Med offshore gas. Hezbollah and Iranian missile attacks have already shut down Israeli offshore gas projects before. When looking at the ongoing confrontation, Israeli offshore gas is a significant target again. Iran’s last ballistic missile attack included offshore gas targets, but were not successful. Analysts are now wondering which specific impact Israeli shutdowns will have on Egypt’s natural gas supplies and LNG dreams. Increased domestic market pressure on Egypt’s already struggling gas production and supplies could lead to a long-term stop to Cairo’s LNG exports and undermine the country’s overall economic and security situation. Until now, Israeli offshore gas production has continued, as its Leviathan and Tamar fields have only been temporarily shut down. On October 1, during the Iranian ballistic missile attack (180 missiles), US oil major Chevron, the primary operator on these fields, shut down operations. In 2023, between early October and November 13, the production on both had already been shut, which affected Israeli gas export volumes to Egypt.

A possible escalation between Israel and Iran, combined with the ongoing Hamas-Hezbollah military operations, could lead to a long-term shutdown of offshore gas production. Egypt’s LNG situation, forcing Cairo to become a net importer, is not good news for European gas markets. Cairo’s former LNG exporter position has been substituted for an importer position, directly competing for LNG volumes with Europe. Brussels is already stressed that Ukraine will not extend the existing Russia-Ukrainian gas transit agreement by December 31, 2024, creating a shortage of available gas and/or LNG for EU members. If Egypt is forced to re-enter LNG markets to fill up its storage, combined with re-emerging Asian demand, the heat for Europe is on. According to US investment bank Goldman Sachs, a production stop of Israeli offshore gas will remove around 9 BCM annually from markets, aka 1.7% of global LNG supply.

Egypt’s situation is much more dire than Europe’s, as the country is battling an economic and financial crisis at the same time. Renewed energy shortages will only increase the pressure on the government of President Sisi, with potential unrest on the streets or at least growing opposition. Natural gas shortages are not unknown in Egypt, but a renewed gas or energy crisis is the last thing the Sisi government is looking for. Cairo understands that Israeli gas supplies are a main lifeline at present. In 2022, Israel exported around 4.9 BCM to Egypt, increasing to 6.3 BCM in 2023. During the last year, Israeli exports to Egypt increased by 12.5%. Cairo, at present, is countering shortages by putting in place a 750 million cfd floating, storage, and regasification unit (FSRU) to import LNG in Ain Sukhna (Red Sea). At the same time, it can import LNG from Jordan’s port of Aqaba. Still, Egyptian sources have already indicated that in case of a shutdown of Israeli gas exports, the country will need another 750 million cfd FSRU to counter domestic demand.

At the same time, Turkey is also stepping up its efforts to become an energy hub on the other side of the East Med. For years, Ankara has been vying to be a spider in the web, bringing Russian, Central Asian, and Middle Eastern oil and gas to Turkey and its perceived hinterland of Europe. The main focus at present is to set up an international gas hub. In the last few days, Turkish energy minister Bayraktar indicated that the project will be significantly boosted in the coming months, allowing Turkey to leverage its geographical position and pipeline infrastructure to become a natural gas trading hub. Even though the discussions have been ongoing for over a decade, tangible steps have been taken since the Russian-Turkish agreement in October 2022 to set up a gas trading hub. Russia’s gas giant Gazprom presented even a draft roadmap to Turkish energy company Botas. However, the full details of the hub are not yet precise. It is also under pressure as European customers will take a more cautious approach towards dealing with Russian parties, especially Gazprom, in light of the Ukraine war. A gas trading hub can be set up by looking at Turkey’s current gas infrastructure capabilities. The country has a well-established pipeline system with Azerbaijan, with a transport capacity of 12.5 BCM annually. Turkey also can take in its own Sakarya gas field capacity. At the same time, the country has set up an LNG import capacity of between 20-25 BCM per year.

One major constraining factor, which also appears in the Egyptian energy hub strategy, is Turkey’s growing domestic demand for natural gas. Until now, domestic production and import capacity have exceeded consumption. There are, however, some clouds on the horizon. Increasing demand, especially if the Turkish economy is growing again, could constrain potential export hub options. At present, another worry has popped up in Ankara, as the country is facing the expiration of several major gas import contracts. The potential negative impact of these renegotiations forces Turkey to rethink its future energy strategy. As indicated by Bayraktar, the coming months will be critical for its natural gas supplies in 2025/26. A significant concern for Ankara is the expiration of a 16 BCM per year Gazprom via the Blue Stream pipeline in 2025. Turkey must also renegotiate a 9.6BCM per year Iranian natural gas supply by July 206. The current geopolitical and geo-economic reality shows Turkey faces a much more volatile environment. Some moves have been made to counter this volatility, as shown by the long-term LNG contracts with IOCs. The latter is to boost Turkey’s supply security. By setting up long-term LNG contracts, Turkey has an import capacity of 80-85BCM of natural gas, compared with a national consumption of 50BCM. This situation sets a potential of 20-25BCM per year of natural gas for regional/EU trading. Moscow supplies Turkey’s natural gas via Blue Stream and TurkStream pipelines via the Black Sea. Both are meant not only for Turkey’s domestic demand but also to supply southern Europe, mainly Bosnia-Herzegovina, Greece, Hungary, Romania, and Serbia.

The two energy hubs, Egypt and Turkey, face internal and regional constraints and could be hit by European political developments, as member countries have become increasingly wary about Russian gas deliveries. Even though Europe still keeps importing vast volumes of Russian gas, the fact that Russian gas revenues are directly financing the war against Ukraine is seen as critical and unwanted.

To find a solution to the latter, European ministers are assessing the upcoming winter gas situation of the union, especially in light of the expiration of a key Ukraine-Russia gas transit agreement on December 31, 2024, but also how to decrease imports of Russian hydrocarbons.

Looking at the widely assessed Russian dark fleet and the continuing import of Russian oil and gas by EU member states is a concern for Brussels and staunch supporters of Ukraine.

However, Europe’s energy geopolitical situation is not based in a vacuum, as international political developments have their say too. A possible change of guards in Washington (Trump) could dramatically change the Ukraine war situation. At the same time, a Republican/Trump victory also will could lead to a more aggressive LNG export strategy. Not only Europeans are hit by higher energy prices, American voters too. Still, energy prices in Europe have not yet been a major political power issue, but this could change if economies go into recession. A full re-emergence of Russia as a major energy/fossil fuel supplier to Europe is however not on the horizon, even not if Ukraine-Russia sign a peace agreement very soon. When looking at global gas markets, there is no shortage in supply. Europeans are only hit by a lack of urgency of political leaders to find different supply sources, while dreaming about a renewable energy future.

These increasingly anti-Russian standpoints will have a detrimental effect on East Med energy hubs, especially Turkey. By rebranding Russian gas as Azerbaijani gas, in the case of natural gas swaps between SOCAR and Gazprom, reality is blurred and unwanted by most. Another group of EU member states, including France and the Baltics, are calling for stricter reporting rules for importing Russian LNG (liquefied natural gas) across the bloc. As it focuses on identifying the origin of LNG, it could be another blow for Russian LNG being traded via Turkey to the EU.

Both East Med gas hubs are under pressure. Egypt’s future depends on the viability of its energy export strategies, which are also part of the country’s economic diversification strategy and the Levant region. Cairo’s energy hub approach is directly linked to Israel and Cyprus, delivering additional volumes to the North African giant. Geopolitically, it is also a major regional investment climate and security cornerstone. The energy connection is a major instrument that links the major power players in the East Med to each other and southeast Europe, aka Greece, Cyprus, and the Balkans.

The Turkish position is different, as it is currently going solo, based on its perceived historical and geographical position between Russia-Central Asia – the Middle East, and Europe. By, however, increasing its interlinkage with anti-European forces (Russia-Iran) or potentially pro-Russian former Soviet republics, Ankara is seen as a growing risk in the future. Geographically, Turkey is in an enviable position, clearly a bridge between consumers (EU) and producers. At the same time, Ankara’s blurred or even diffuse geopolitical standpoints and growing links to potential adversaries of the West (Iran-Russia-China) put pressure on the attractiveness of the energy hub position. Turkish President Erdogan’s position on Israel is also not helping, showing his growing Islamist position backing Hamas, Hezbollah, and even Iran. Investors, energy companies, and potential clients still assess their positions before committing to a deeper involvement in a Turkish delight.

The total for Europe’s energy security is not very optimistic or promising. At a time of fledgling economic growth, weak energy transition results, and increased geopolitical conflicts, the need for security of energy supply is still clear.

The results of the multi-billion renewable energy projects do not yet support any removal of natural gas or LNG in the total energy mix. At the same time, Europe’s reliance on Russian natural gas/LNG still exists and can’t be substituted very soon. East Med has been identified as a possible part substitute, but the results are meager. 2024-25 will not be an easy ride for most, especially if the Ukraine- Russia gas transit agreement ends and regional wars continue in the Middle East.