Israel-Hamas Conflict Threatens EU Energy Security

The ongoing conflict between Israel and Hamas, killing hundreds of civilians a day and threatening critical infrastructures of all sorts in the vicinity of the Gaza Strip, has reached a new turn, with the full encirclement of Gaza City by Israel’s army. Yet, the implications of this asymmetric war are largely misunderstood. Day by day, the energy picture of the Middle East becomes murkier, possibly upending global energy security in ways markets are unable to predict, starting with the wobbly Egyptian energy system. Too focused on decrypting daily volatility on the TTF or Henry Hub after 21 months since the beginning of the Russian invasion of Ukraine, analysts are neglecting the short and long-term political and geopolitical consequences of market imbalances amid a still-unfolding global energy crisis. U.S. Secretary of State Antony Blinken failed to convince Israeli Prime Minister Benjamin Netanyahu to pause Israel’s army assault on Gaza and allow much-needed humanitarian assistance is a stark reminder that Netanyahu and his War Cabinet are trying to apply maximum pressure on Hamas, despite disastrous consequences for civilians. This means Israel is ready for a long fight.

The aftermath of the October 7 horrors has led to an unusual public split between the U.S. and Israel. From China to the European Union, all great powers have a say in this crisis, even though the dialogue has been clearly sidelined by Netanyahu’s pursuit of maximalist goals, including the possibility that Palestinians could be forced to leave the Gaza Strip and relocate to the Sinai desert. According to some high-ranking Israeli officials, this represents a “unique and rare opportunity” to settle a new security framework on Israel’s Southern border, leaving Egypt with the puzzle of dealing with millions of refugees.

This is an event that the El-Sisi regime is trying to avert in any possible way. Just a few weeks ahead of the next Presidential elections, Egypt’s economy is in shambles. The country is already grappling with problems stretching from a deepening debt crisis and in desperate need of sources of financing, next to this, it’s dealing with a string of currency devaluations and record inflation. No credible opponent is ready to challenge El-Sisi’s hold on power. And yet the Israel-Hamas war is reviving internal dissent among large swaths of Egyptian society that have gone silent after almost 10 years of iron-fist rule. Right now, the consequences of the Israel-Hamas war are putting the energy security of Egypt, the most populated country in the Arab world, in grave danger.

Israel’s offshore Tamar gas field, providing close to 40% of the country’s production, has been shut to prevent possible retaliations by Hamas. Gas production from Leviathan and Karish fields has been diverted to prevalently serve Israel’s domestic needs, while just a fraction of this is now exported to Egypt. Just last August, the two governments agreed to boost gas cooperation and source new gas from Tamar to “strengthen the diplomatic relationship between Israel and Egypt,” ensuring higher revenues for Israel and ensuring the Arab country with a stable gas flow from the neighbor in the years ahead.

It is worth highlighting that at that time, although nobody expected to be fighting the largest war in decades in a matter of months, senior government officials criticised the deal because it “could endanger Israel’s energy security.” By all means, the Israel-Egypt energy entente is also the least common denominator for the success of the trilateral MoU signed between the EU and the two to increase regional cooperation and boost exports to European countries, aiming to diversify away from Russia.

Cairo has grown increasingly dependent on Israel’s gas to feed its energy system, especially during peak load periods. Even though the country has vast reserves, blackouts and shortages have increased since the start of the last Summer. Now, the Egyptian Cabinet indicates the reduced gas imports from Israel as the cause of relentless power cuts, indirectly transforming the Egyptian grid’s instability into a geopolitical case.

Forced to rely on domestic sources, Egypt has de facto halted high-value LNG exports from the two Mediterranean Idku and Damietta terminals, leaving empty tankers and diverting them to other ports. In 2023, around three-quarters of Egyptian cargoes have been directed towards EU and Turkish terminals, relieving these markets from some pressure felt because of Russian supply curtailments. Eni’s CEO Claudio Descalzi, whose company is a major player in Egypt’s offshore, operating the giant Zohr but also the Damietta LNG facility, is optimistic about the resumption of the country’s exports in the coming weeks.

However, the outlook for the Egyptian energy industry is far from stable. Because of the gas shortage, power cuts have increased, while petrochemicals and fertilizers companies have reduced stocks at their disposal. The significance of a long-term reduction of fertiliser output, the second largest industry for the country’s exports, could bring further economic distress and devaluation to the Egyptian pound, likewise sending shockwaves across the food markets and threatening the livelihoods of millions.

Egypt’s energy security is in such a dire situation that it has even resorted to importing a cargo of mixed fuels, including LNG. The tanker has navigated to the SUMED port, where the FSRU named BW LNG and chartered by state-owned EGAS has been located since 2015. Soon, the vessel will be headed to Italy, leaving Egypt without the option to import LNG. BW LNG is reminiscent of the dark ages of the Egyptian energy sector, meaning the years following the country’s Revolution and its devastating effect on its energy industry, unable to cope with domestic consumption. Indeed, high energy and food prices have been the root causes of the country’s chronic instability in the first half of the last decade, leading to El-Sisi’s seizure of power.

Today, the news of a major LNG exporter in the Mediterranean Basin turning into an importer would be sufficient to spark fears in a market that is already coping with many supply constraints. Against the background of mounting tensions in the Middle East, TTF front-month prices have reached a nine-month high earlier this month. Nevertheless, market watchers remain confident that Arab leaders, including Hezbollah, will maintain a pragmatic approach to the conflict and avoid an escalation.

However, a domestic energy crisis overlapping with the Egyptian presidential elections, a democratic façade without real opposition, could ignite a series of unpredictable political consequences. Currently, the entire MENA region is a cauldron, starting with the imperiled Tunisian democracy and the ongoing rift in Libya, both just South of the EU borders and possibly spreading to other countries such as Lebanon and Iraq.

The crumbling of the EU-Russia energy interdependence has created an opaque energy landscape. In this scenario, energy trade reflects, more than anything else the political sentiment in the MENA region, and European policymakers should not entertain any illusions and acknowledge that continental energy security does not solely rely on the stability of market fundamentals, but also on geopolitical realities.