PREVIEW
Egypt has warned that Israel will face serious consequences if it attacks Rafah, but its options are constrained by economic considerations
The Gaza conflict has placed Egypt's President Abdel Fattah el Sisi in an uncomfortable position. He has been unable to exert much influence on the course of the conflict, beyond affirming his rejection of any mass resettlement of Gaza Palestinians in Egypt and working with Qatar on efforts to broker a hostages-for-prisoners deal between Israel and Hamas. Egypt's already shaky economy has been hit by the Yemeni Houthi attacks on Red Sea shipping, which have resulted in a US$500 million drop in Suez Canal revenue, so far. There is no near-term prospect of a resolution of the conflict, and things may be about to get considerably worse if Israel goes ahead with a major assault on Rafah.
Egypt has warned Israel that the 1979 peace treaty could come into question if the Rafah assault goes ahead. At the same time, an Egyptian contractor has been building a concrete block wall around an 18 square kilometre area running along the eastern border of the Gaza Strip, in what could be a contingency for dealing with an exodus of Palestinians fleeing from any such Israeli assault.
Meanwhile, Egypt has been working with the International Monetary Fund on an enhanced financial package to help it cope with its balance of payments crisis – the IMF has acknowledged that this would include consideration of additional costs arising from the Gaza crisis. Egypt has also been working on plans for a significant increase in the supply of natural gas from Israel, both through the existing offshore pipeline and through building a new onshore pipeline link (AC Vol 65 No 1, Harsh economics and geopolitics loom).
Egypt's gas industry has passed through several cycles since the development of its eastern Mediterranean reservoirs started almost 40 years ago. At the end of the 1990s, the government decided that there were sufficient reserves to embark on an export strategy: pipelines to Jordan and Israel and liquefied natural gas (LNG) plants. Exports peaked at almost 20 billion cubic metres in 2009, but they then went into a steep decline, as fields matured, domestic consumption rose, and international oil companies stopped investing because of poor terms. After these terms were improved, output recovered. This was to a large extent thanks to the discovery and rapid development of the Zohr field, which in turn gave encouragement to the nascent Israeli offshore gas sector. LNG exports resumed in 2019, and they reached about 10bn cubic metres in 2022, earning Egypt some $8bn. However, this performance was helped by the supplement of imports from the Tamar and Leviathan fields in Israel, via the same pipeline that had been used in the late 2000s to export gas to Israel. Egypt's own production had started to decline again, owing to natural depletion and some technical problems at Zohr, which have yet to be resolved. Domestic consumption was held in check in 2022 thanks to the import of discounted Russian fuel oil as a substitute for gas in power stations, but that has fallen away since early 2023 because of Egypt's foreign exchange shortages.
Imports from Israel started in 2020, based on long-term commercial agreements between the owners of Tamar and Leviathan (including Chevron, the operator) and an offshore-registered Egyptian company owned by business groups tied to the intelligence services. These imports climbed steadily to about 8.5bn cubic metres in 2023, most of which came from Leviathan. The Israeli gas accounted for 14% of the total Egyptian supply. There was a brief interruption after the 7 October Hamas-led attack on Israel, but imports resumed in early November, and are now reported to be running at the annual equivalent of almost 10bn cubic metres (AC Vol 64 No 11, Cairo's gas export boom hits obstacles).
Even if Sisi were inclined to take a more resolute stance towards Israel, he would have to think carefully about the risks of jeopardising Western financial aid and triggering an energy emergency through cutting off vital supplies of Israeli gas.
The Egyptian authorities have sought to minimise scrutiny of their activities in relation to Gaza. Access to northern Sinai has been severely restricted for years, owing to the long-running Egyptian military campaign against Islamist and tribal insurgents. The first reports on the construction of the walled-off zone on the Egyptian side of the Rafah border came on 14 February from a London-based non-governmental organisation (NGO), the Sinai Foundation for Human Rights. They were subsequently confirmed by Western media with access to satellite imagery. One aspect of the project was the involvement of a contracting company, jointly owned by a prominent Sinai businessman and the military-controlled National Service Projects Organisation (NSPO). The businessman also controls a travel agency that has been active in securing exit visas for Gaza Palestinians with foreign passports, and it operates a well-armed tribal militia force.
The government has sought to discredit these reports, although Foreign Minister Sameh Shoukry did acknowledge that Egypt would 'deal humanely' with any Palestinian exodus from Rafah, while reaffirming the official line that it remained opposed to any such displacement. Meanwhile, the editor of one of Egypt's few independent news outlets was summoned for questioning in an apparent response to its publication of an article about the activities of the Sinai businessman Ibrahim el Argany. The owner and lead presenter of a Cairo TV station also presented a slew of allegations against the head of the NGO that had broken the construction story, accusing him, among other things, of being an Israeli agent.
Sisi has few good options in the Gaza crisis. Egypt is focusing on trying to head off an Israeli assault on Rafah as part of a ceasefire that would include the return of the Israeli hostages in return for the release of some 3,000 Palestinian prisoners. This would allow for humanitarian aid supplies, mostly via Egypt, to be stepped up, amid negotiations about setting up structures for the distribution of aid and the administration of Gaza, as well as on security arrangements.
The Gaza situation and the Sinai insurgency have had some positive aspects for the Sisi regime. They have allowed Egypt to highlight its role in the quest for security and stability in the region in the face of violent groups. This has been useful in deflecting criticism of Sisi's human rights record. It could also play to Sisi's advantage in his effort to secure a fresh financial bailout.
Egypt's growing reliance on Tamar
Israel's war on Gaza has provoked strong reactions among the Egyptian public, but overt criticism of their own government for its weak response has been rare, owing to well-founded fears of retribution from the security services. This might explain the relatively muted response to news that, as Israel was gearing up for an assault on Rafah, a deal had been struck to increase the supply of natural gas from Israel's Tamar field to Egypt.
This deal underlined Egypt's growing dependence on Israeli gas. Egypt's own gas production is currently not enough to meet domestic demand, let alone to run its two liquefied natural gas export terminals. Even with the supplement of Israeli gas, Egypt has been forced to ration electricity supplies since mid-2023, and there have only been a handful of LNG cargoes leaving the Idku and Damietta terminals. There is a chance that Egypt's production will rise again, but this depends on the results of ongoing exploration.
The recent agreement to boost Israeli imports is tied to the decision of the Tamar partners to go ahead with an expansion that will supply an additional 4 billion cubic metres of gas a year. All of this has been dedicated to an 11-year sales contract with Egypt, with deliveries scheduled to start in July 2025. Tamar is currently contracted to supply 2bn cubic metres a year. There are also plans for the construction of a new pipeline running from a point to the south of Beersheba to northern Sinai, with a capacity of up to 20bn cubic metres.
The Gaza Marine field, discovered in the Palestinian Authority exclusive economic zone in 2000, is a footnote in this story. The field is relatively small, with reserves estimated at about 30bn cubic metres (Zohr's reserves are put at over 700bn cubic metres), but this would be sufficient to meet Gaza's needs for electricity and to leave a useful surplus for export. A proposal to export the gas to Israel was superseded by the Egyptian pipeline. A plan to export Gaza's surplus via Egypt's LNG plants also fell by the wayside when Hamas took over Gaza. Egypt revived this proposal when its own gas production started to fall, and, remarkably, Israel gave its blessing in mid-2023. This appeared to stem from an assessment that the economic benefits from this would persuade Hamas to desist from any military adventure.
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