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Egypt natural gas outlook | Newsflash: Egypt loses USD2bn international arbitration case to Naturgy, Eni – Neutral impact

ICSID orders Egypt to pay USD2.0bn to Naturgy, Eni over 2012 gas supply disruptions. On 3 September, the International Center for Settlement of Investment Disputes (ICSID) ruled that the Egyptian government should pay USD2bn (after taxes and before interest) to Naturgy and Eni, in compensation for the 2012 gas supply disruptions. The case pertains to Egypt halting the natural gas supply to both companies in 2012, amid rising shortage at the time, in violation of contractual agreements. The case represents one of three international arbitration cases that were filed by both companies over 2012-14, for halting the natural gas supply to their 4.8mn tpa LNG liquefaction unit in Egypt. The unit was used to export gas to Spain before 2012). The details of the ruling remain unclear, including whether Egypt will proceed with the settlement or resort to negotiations, and, in the case of settlement, the final settlement due (after factoring interest payments), the form of payment, and the settlement timeline.

Implications: gas exports likely to resume, no change to supply/demand picture. Naturgy is willing to reach a commercial agreement with the Egyptian government, enabling the restoration of gas supply to the plant, in lieu of a cash payment. In Dec-16, it was reported that Egypt reached an agreement with Eni to resume the supply of gas to the liquefaction unit using output from the Zohr field, in return for dropping the arbitration cases. Although such an agreement did not materialise, it is now more pressing, given the court ruling. We assume Egypt will barely be self-sufficient in natural gas output over 2019-20, becoming a net importer starting 2021. Accordingly, we expect the resumption of gas exports, if any, to be plugged by higher importation activity, with a neutralised impact on the current account. However, this is likely to carry a wider and earlier gas supply deficit, which will be offset by more imports, leaving total supply and demand unchanged, in our view. Until 2011, gas was supplied to Naturgy and Eni at a cap of USD1.25/mmBtu, while imports from Israel cost cUSD7-8/mmBtu, on our estimate.

Urgent need to complete the natural gas liberalisation framework. We expect the government to pass the burden of the settlement payment, if materialised, onto the end consumers in Egypt. This could happen via one of two scenarios: i) the most likely scenario would be pushing private sector players to import gas (instead of government importation), at the liberalised price (import price parity) of cUSD9/mmBtu, meeting the deficit from resuming export activity, meaning end-user gas prices are likely to see further upward pressure in the short run, or ii) channelling the cheaper gas that will be provided to Naturgy and Eni back to the local market, by offering favourable terms to both companies. Both scenarios require the urgent completion of the natural gas liberalisation framework (gas liberalisation law approved in Aug-17), including setting the terms for using the national gas grid, and the active involvement of the private sector players in the supply of gas to end consumers. In the long-term, we maintain our view that natural gas prices will continue to be linked to the import price parity of USD9/mmBtu, barring new discoveries.