War-driven race for food and gas converges on Arab linchpin Egypt

Offshore from Ras al-Bar, where the Nile flows into the Mediterranean, cargo ships shimmer through the midday haze as they head west along the coast toward the blue loading-cranes on the horizon.

It's here, at the Egyptian port of Damietta, that the twin impacts of Russia's war on Ukraine converge. 

Damietta's grain silos are witness to the shortages of shipments caused by blockades on Ukraine's Black Sea coast. The port is also home to one of Egypt's two liquefied natural gas terminals, facilities that have moved squarely into Europe's sights as it races to replace Russian gas. 

How those dual currents of food security and energy play out in the Arab world's most populous nation are focusing global attention on Egypt, and prompting outside efforts to aid a regional linchpin. 

As one of the world's largest wheat importers, Egypt is at risk of bread shortages and associated political unrest that has prompted energy-rich Gulf states to pledge billions of dollars for Cairo. Its nascent LNG capacity adds to the foreign interest in shoring up a strategic partner. 

A European Union official said the 27-nation bloc is concerned about the serious consequences Russia's war is having for global food security, while Bloomberg Economics says Egypt is one of the countries most at risk. Moody's Investors Service warned May 27 that Egypt remains vulnerable even after winning some international support and seeking International Monetary Fund help.   

Egypt's vulnerable

Concern is growing about the stability of a nation that is "too big to fail for both Europe and the Gulf," said Riccardo Fabiani, project director for North Africa with Crisis Group. "Nobody wants to see instability in a country with more than 100 million people that is also a key gas exporter at such a delicate time for global and European energy markets." 

That reality is causing a flurry of diplomacy. US National Security Adviser Jake Sullivan met with Egyptian President Abdel-Fattah El-Sisi in Cairo in early May and discussed Washington's support "for Egypt's security, food, and fuel needs," according to a US readout.

Those talks followed a closed-doors meeting in April between Prime Minister Mostafa Madbouly and EU climate chief Frans Timmermans, when they discussed the supply of LNG to Europe as well as European help for Egypt to access wheat at reasonable prices, according to a statement from Cairo. Egypt will host the COP27 climate summit in November. 

The foreign ministers of Arab nations including Egypt and the United Arab Emirates discussed energy and food security at a rare meeting in the Israeli desert in late March, a gathering also attended by U.S. Secretary of State Antony Blinken.

Egypt has "reached out to our traditional partners in the United States and western Europe and we maintain our relations with Ukraine, with Russia, in the provision of wheat" and other foodstuffs, Foreign Minister Sameh Shoukry said in an interview with CNBC in Davos this month. "What happens in Egypt has an effect on what happens in the region as a whole."

Israel has a key role to play, since the discovery of natural gas off its coast in the 2000s dramatically altered its relations with its neighbors. While it exported only 4.25 billion cubic meters (bcm) to Egypt last year — a drop in the ocean compared to Russia's 150 bcm annual supply to Europe — that volume is set to grow.

After the Russian invasion on Feb. 24, Israel set up a working group with the EU and Egypt on a three-way agreement to boost gas exports to Europe, Lior Schillat, the director general of Israel's Energy Ministry, said in an interview. 

Under the proposed deal, which the ministry hopes will be signed this summer, Israel will initially boost its gas exports to Egypt through its two existing pipelines. Egypt will then process the gas at its plants at Damietta and Idku, near Alexandria, and ship it to Europe as LNG. The EU's international energy strategy, published May 18, also refers to a trilateral deal with Israel and Egypt to be concluded by the summer.

While the initial quantities will be small, they will still help Europe's efforts to avoid a return to using coal-fired power plants, and plans to roughly double natural gas production in four-to-five years could allow exports with a real impact, Schillat said. On May 30, Israeli officials announced a new competition for gas exploration in its waters, citing European demand.  

Jonathan Miller, special envoy for energy at Israel's Ministry of Foreign Affairs, said that gas might only be a starting point, laying the foundation for energy cooperation in areas like power inter-connectors via Cyprus and Greece, or "hydrogen-ready" pipelines.

Egyptian government officials couldn't be reached for comment. 

Ras al-Bar was once a favored vacation spot for celebrated Arab singers and actors. But if the resort's livelier days lie in the past, the adjacent port of Damietta offers a version of Egypt's future: Announcing its intentions, an ornamental gateway is crowned by a bus-sized model of an LNG ship. A European consortium signed an agreement with Egypt this month to build and operate a new container terminal at Damietta, starting with a $500 million investment in the project's first phase.

Damietta's LNG terminal reopened early last year after being idled for eight years, bringing Egypt's total capacity to some 12.5 million tons. That's enough to move it into the world's top 10 exporters of the gas, albeit many operators are also boosting capacity. LNG exports from Damietta and Idku reached 880,000 tons in April, the most in at least a decade.

To be sure, gas from Egypt and Israel won't solve all Europe's problems, and certainly not in the near term. But Egypt could still help Europe decrease its reliance on Russian pipeline gas, according to Bloomberg NEF, which forecasts exports of 8.2 million tons of LNG this year.  

Politicians from Berlin to Brussels, Rome and Romania have courted Cairo to help out with spare gas capacity. The US also asked Egypt to do its best to increase LNG exports to Europe, according to an official at a gas company with knowledge of the exchange. Italy's Eni SpA signed a framework LNG agreement last month with Egyptian state energy firm EGAS under which it will also accelerate exploration in Egypt's Western Desert, the Nile Delta and the Mediterranean.

It's part of a broader shake-up in the gas-rich eastern Mediterranean as a result of the energy crisis caused by Russia's war. But any bonus for Cairo depends on its ability to survive the immediate economic storm. 

War In Ukraine sends Egypt's wheat pice soaring

One of the Middle East's most indebted nations, Egypt buys most of its wheat from Russia and Ukraine, using those supplies as a cornerstone for a program providing cheap bread for some 70 million people. 

Bread prices have a politically-sensitive legacy in Egypt: An attempt in the late 1970s by then-President Anwar Sadat to end subsidies triggered deadly riots. While the Arab Spring protests began in Tunisia, it was only when they took off in Egypt that the unrest seriously spread.    

Saudi Arabia, Qatar and the Abu Dhabi wealth fund ADQ have together pledged more than $22 billion in investments and deposits to support the economy.

Everyone has understood what's at stake, according to a person familiar with thinking in the Gulf, who described Egypt as a cornerstone of the region. It is in nobody's interest right now for Cairo to be forced into an unbearable crisis, the person said.

Egypt isn't sitting back helpless. It's moved to boost local wheat production and has said it's in talks with Kyiv over how to get the grain it's contracted to receive out of Ukraine and into Egyptian ports. 

Still, that susceptibility to outside shocks and associated risk of social unrest remain a concern, according to Fabiani of Crisis Group. The war in Ukraine "has exposed once again the fragility of Egypt's political and economic model," he said. 

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.