China Looks To Derail The West’s Strategy To Replace Russian Gas Supplies

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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• China is ramping up its energy investments in Egypt.
• Egypt’s strategic energy position makes it a key battleground, as U.S. and European firms, including Chevron, BP, and ExxonMobil, have heavily invested in its gas sector.
• The West is responding to China’s growing influence with major new gas projects, including Chevron’s Cyprus-Egypt pipeline and ExxonMobil’s discoveries.

China’s North Petroleum International Company (NPIC) last week signalled its intention to dramatically increase its presence in Egypt’s energy sector. An initial US$100 million is earmarked to acquire new concessions and establish partnerships in the gas and oil sectors of Egypt’s Western Desert and offshore areas, according to comments the firm’s regional director Sun Bao. This funding is only the opening salvo in a planned investment push from China into the strategically crucial country, a senior source in the European Union’s (E.U.) energy security complex exclusively told OilPrice.com last week. “Beijing has set aside billions of dollars to build its presence in Egypt starting from now, which will initially focus on the energy sector before broadening out into the range of other projects commonly seen in priority one BRI [‘Belt and Road Initiative’] targets,” he said.

Perhaps the main reason for China’s interest in significantly expanding its presence in Egypt is that the country became a key focus of the West’s attempts to secure gas supplies to help compensate for those lost from Russia following its invasion of Ukraine on 24 February 2022, and so it remains. U.S. and European investments poured into the country that holds a uniquely strategic position as part of North Africa, the Middle East and the Eastern Mediterranean, beginning most notably with Chevron. The oil and gas behemoth quickly expanded on its initial presence there before announcing in December 2022 that it had hit at least 99 billion cubic metres of gas with its Nargis-1 exploration well in Egypt’s eastern Nile Delta, about 60 kilometres north of the Sinai Peninsula. Following that, Italy’s Eni announced a potentially huge offshore gas field in its concession area in the Red Sea focused as well on the Nargis-1 site. According to the president of Chevron International Exploration and Production, Clay Neff: “The East Mediterranean has abundant energy resources, and their development is driving strategic collaboration in the region.” These entry points effected into Egypt’s gas sector by the U.S. and Europe have since been broadened and deepened by the U.K.’s Shell and BP. The latter said recently that it will invest US$3.5 billion in the exploration and development of Egypt’s gas fields in the coming three years. This amount could be doubled if the exploration activity yields new discoveries. Meanwhile, Shell began the development of the tenth phase of Egypt’s Nile Delta offshore West Delta Deep Marine (WDDM) concession in the Mediterranean Sea. This came after the British firm and its partner had developed the previous nine development phases of the WDDM concession that comprises 17 gas fields.

The West, like China, is also well aware of Egypt’s unique strategic importance on several levels. For a start, it is the only country in the Eastern Mediterranean gas hotspot region with an operational liquefied natural gas (LNG) export capacity and is consequently ideally placed to become the top regional export hub for the gas. Crucially as well, its geographic positioning means it controls the major global shipping chokepoint of the Suez Canal, through which around 10% of the world’s oil and LNG is moved. It also controls the vital Suez-Mediterranean Pipeline, which runs from the Ain Sokhna terminal in the Gulf of Suez, near the Red Sea, to Sidi Kerir port, west of Alexandria in the Mediterranean Sea. This is a vital alternative to the Suez Canal for transporting oil from the Persian Gulf to the Mediterranean. The Suez Canal’s importance to the global energy sector is further boosted by the fact that Egypt is currently one of the very few major transit points that is not controlled by China. Specifically, Beijing already has effective control over the Strait of Hormuz through the all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and analysed in my latest book on the new global oil market order. The same deal also gives China a hold over the Bab al-Mandab Strait, through which commodities are shipped upwards through the Red Sea towards the Suez Canal before moving into the Mediterranean and then westwards. This has been achieved as it lies between Yemen (the Houthis having long been supported by Iran) and Djibouti (over which China has also established a stranglehold through debts connected to its multi-generational power-grab BRI project).

As important as any of these factors from the West’s geopolitical perspective is that Egypt has long been seen in the Arab world as at least as much of a leader of it as Saudi Arabia. It was a leading proponent of the ‘Pan-Arab’ ideology which held that the enduring strength of the Arab world can only be found in the political, cultural, and socioeconomic unity of the Arab peoples in their various locations that emerged after the two World Wars. The idea found one of its two key champions in Egypt’s president from 1954 to 1970, Gamal Nasser. Among the most palpable signs of this movement at the time was the formation of the United Arab Republic union formed between Egypt and Syria from 1958 to 1961, the formation of OPEC in 1960, the series of conflicts with neighbouring Israel over the period, and then the 1973/74 oil embargo, as also analysed in full in my latest book. By bringing this leader of the Arab world on side, the West hoped to offset the geopolitical impact of long-term ally Saudi Arabia’s drift into the China-Russia sphere of influence.

For its part, Egypt could well be seen by Beijing as the ‘one that got away’, so focused was it on securing its immediate post-Ukraine invasion energy supplies from other countries in the Middle East, most notably Qatar. NPIC began its operations in Egypt in 2014 with the intention being for it to rapidly expand its presence in the Eastern Desert and the Suez Canal areas, as part of a broader strategic energy push in the country led in part by NPIC’s parent company, ZhenHua Oil. This huge conglomerate is in turn the energy exploration and production arm of Chinese defence giant Norinco. Under international law, foreign energy firms are legally entitled to station as many of its own personnel on gas and oil sites – including as many ‘security staff’ – as they want, in order to safeguard their investments on the ground, as also detailed in full in my latest book. China has stretched the legal point by including in its high-level government-to-government long-term relationship deals the right to build out transport routes (including airports, seaports and railway networks) that are also protected by Chinese security personnel when and wherever they are required. Beijing’s Egypt expansion programme – under the umbrella of the BRI – were a lower priority back in 2014 than its plans for the heart of the Middle East and the region’s biggest oil deposits in Iran, Iraq, and Saudi Arabia. Consequently, NPIC’s plans in the Eastern Desert and the Suez Canal areas were not fully realised. However, last year saw the signing of a comprehensive strategic partnership to run until the end of 2028. This agreement foresees multi-billion-dollar investment by Chinese firms into Egypt in energy, infrastructure, and technology. It also includes provisions for increased cooperation in new sectors, including technology, artificial intelligence, and defence.

This roadmap to an enhanced relationship between Egypt and China has not gone unnoticed by the West. Recent weeks have seen a flurry of investment activity into Egypt. U.S. energy giant ExxonMobil recently announced a new natural gas discovery in the Nefertari-1 well in the North Marakia Block, located five miles off Egypt’s northern coast. Two further exploratory gas wells at the Cairo and Misri concessions in Egyptian waters in the Mediterranean Sea area will be drilled in the first quarter of 2026 at an initial cost of US$240 million. Even more potentially significant was the very recent announcement by Chevron that a development and production plan has been approved to establish a floating production unit within Cyprus’ Exclusive Economic Zone with a pipeline to export gas to Egypt. This will build on the existing Cyprus-Egypt gas connections that allow Cyprus to export gas to Egypt for processing and re-export to Europe. This further cements Egypt as a key energy hub in the West’s Eastern Mediterranean gas supply complex, which in turn is vital to Europe’s future energy security.

By Simon Watkins for Oilprice.com

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