The Geopolitics of EastMed Gas
The following article first appeared on http://caspiandc.org/energy/the-geopolitics-of-eastern-mediterranean-gas-an-overview/ (24 June 2016)
The Geopolitics Of Eastern Mediterranean Gas: An Overview Gas: An Overview
Large gas discoveries and the prospect of substantial hydrocarbons resources beneath the Eastern Mediterranean seabed have sparked major international interest.
Three large-scale discoveries in the region (Israel’s Tamar and Leviathan offshore fields, and Aphrodite field off the coast of southern Cyprus) have opened up a new deepwater exploration province province, paving the way for this so-called gas bonanza. The giant Zohr discovery in a deep offshore zone of the Mediterranean came next, in 2015. But despite these discoveries, the region remains one of the world’s most under-explored – indeed, unexplored – areas, despite its prospects for additional gas and potentially oil reserves. A recent assessment confirms this.
Two assessments by the United States Geological Survey in 2010 – one on the Nile Delta and Mediterranean Sea sectors of Egypt, the other on the Levant Basin Province – indicated nearly 9800 billion cubic meters (bcm) of technically recoverable undiscovered gas potential in the region. To put this into context, Algeria’s current proven gas reserves is about half of it.
When converted into potential revenues, reaching 12-13 digit figures, this situation has naturally given rise to dizziness. Thus, the symptoms of natural gas poisoning have started, experienced to varying degrees across the countries in the region. In Lebanon, it has even led to hallucinatory effects. Extensive seismic research conducted over 80% of the country’s exclusive economic zone shows promising prospects, between 700 to 2800 bcm, depending on whom you ask. Although no wells have been drilled yet, billboards on Beirut streets eagerly promised a modern army, high-speed rail network, free healthcare and education – all because “Lebanon now has oil”. The importance of aphorisms such as “don’t count your chickens before they hatch” immediately springs to mind.
Lebanon launched its first licensing round for offshore gas exploration in May 2012, but the tender was put on hold due to the absence of a functioning government and political vacuum in the country. The parliament could not ratify two constitutional decrees related to the number of blocks for exploration and the model Exploration and Production Agreement. As a result, the initial excitement has dimmed.
Syria is also considered as frontier exploration area, given that so far, no wells have been drilled. The country announced an offshore exploration licensing round for three blocks in March 2011 with a closing date of December 2011. No bids were submitted due to the ongoing crisis in the country. In December 2013, the Syrian government signed a 25-year agreement with SoyuzNefteGaz, assigning the Russian company an exploration license for Block 2. With the conflict still raging, no progress has been registered.
In Cyprus the dizziness began with the discovery of Aphrodite field by Noble Energy on 28 December 2011. In 2012, the Republic of Cyprus (RC) opened a second round of exploration and production bidding round for 12 offshore blocks. The authorities awarded five blocks to French, Italian and Korean companies in early 2013. But then came the bad news: Eni/Kogas consortium drilled two dry wells and Total announced that it had not found any targets in Blocks 10 and 11 to justify drilling. Total relinquished Block 10, but agreed to extend its presence in the country to conduct geological and geo-chemical surveys in and around Block 11. The Zohr discovery in Egypt, just 6 km from Block 11, motivated RC to open the third round of licensing with a deadline of 22 July 2016. Three Blocks (6, 8 and 10) are currently being offered.
Since no drilling is planned in Cyprus until 2017, all eyes turned to the Aphrodite field. BG (now Shell) bought 35% stake in the field in January. Political headaches aside, the exploitation of the Aphrodite field may be a significant step towards the monetization of the natural resources for domestic use as well as exports. The problem is that lack of gas infrastructure makes this very challenging. Downward revisions to Aphrodite’s resource base and the disappointing developments mentioned above caused the LNG dreams to fade away.
Israel never lost hope of finding hydrocarbon reserves, even after more than six decades of fruitless searching costing hundreds of millions of dollars. This persistence finally yielded results with the discovery of two large gas fields (Tamar in 2009; Leviathan in 2010). These and other discoveries, albeit small in size, combined with announcements for further large prospects, have made everyone dizzy and maintained the hype. Tamar field came on-stream in March 2013, and produced 2.2 bcm of natural gas and 104,000 barrels of condensate in the first quarter of 2016. Development of the Leviathan field, however, was jeopardized by numerous obstacles and uncertainties created by changing government policies and a series of regulatory hurdles.
Two recent developments are expected to remove these obstacles and uncertainties. First, the new gas framework deal acceptable to companies and government in Israel was finally agreed in May. Second, the settlement of the arbitration dispute between Egypt and Israel. A $1.7 billion fine for terminating gas sales was imposed by the International Court of Arbitration. Egypt and Israel agreed to halve the amount to be paid by Egypt to Israel Electric Cooperation and the payment schedule .
Negotiations for the sale of Israeli gas to Egypt’s domestic market or to international markets through the LNG plants in Egypt is expected to intensify. This time; however, price will remain a challenge because the gas framework does not allow gas to be sold to Egypt at a lower price than to the customers in Israel. Note that in the first quarter of 2016, the average gas sales price to the customers in Israeli was $5.2/MMBtu, which is higher than the current LNG import price, which is likely to remain rather stable and low over the next five years.
The Leviathan and Tamar partners signed several agreements to export gas to Egypt, Jordan, and Palestine. The consortium holding Block 12 and the RC have also been exploring development options for the Aphrodite field that would enable gas to be exported to Egypt. Egypt has been the prime target for two main reasons. First of all, the country desperately needs gas. Second, Egypt’s two LNG plants in Idku and Damietta have lain idle due to lack of gas. Exports from the region could also significantly change the energy map in the wider Mediterranean region. For instance, importing gas from EastMed could offer supply diversity, help lessen the dependence of Russian gas, and thus contribute to the EU’s energy union goals.
On the other hand, the discovery of Zohr as well as fast track developments in Egypt may complicate all these export plans. By the time Leviathan or Aphrodite start producing, Egypt may no longer require gas imports for domestic use. What is more, Egypt may start exporting gas again in the early 2020s when production catches up with demand. Natural gas production could very well double in Egypt over the next five years.
Timing is critical for EastMed gas developments. Given the expected developments in LNG markets in the next five years, the difficulty of exporting gas from the region to international markets will increase with every passing year. In addition, EastMed gas may not compete with Russian pipeline gas because the cost, excluding profits, of producing and transporting Cypriot and Israeli gas to LNG plants in Egypt, liquefying it, shipping it to the EU, and re-gasifying it may not be competitive.
Similarly, a pipeline link from Leviathan and possibly Aphrodite to Greece and onward to Italy would be very costly. This means that within the next five years, EastMed gas is unlikely to be cost competitive. It might later become more competitive, but access to LNG plants in Egypt could be an issue because Egypt would be needing them to export its own gas.
This is not necessarily a bad news. Indeed, it would potentially create a new window of opportunity for exporting gas to Turkey.
Several Turkish companies have shown interest in buying gas from the Leviathan field, and building a pipeline from the Leviathan field (possibly with a link to the Tamar field) to the southeastern Mediterranean coast of Turkey, either directly or indirectly (via Cyprus). At first glance, this option appears to be a cost-effective and attractive option; any mix of Israeli and Cypriot gas could target the Turkish market or feed into the Trans Anatolia Natural Gas Pipeline (TANAP), which will bring Azeri gas to the Turkey-Greece border.
However, the Turkey option may not be viable, either politically or commercially, for a number of reasons. Even if we assume that Turkey may need additional gas in the next decade, the construction of an Israel-Turkey gas pipeline faces two major political hurdles: the resolution of the Cyprus problem and the normalization of the frosty Turkey-Israel relations.
It is highly likely that Turkey-Israel political relations will normalize sometime in the future, but a precise timeline is hard to project. Similarly, while there are big hopes for a settlement of the decades-long dispute in Cyprus in the very near future, potential timing remains unclear. In any case, the Cyprus dispute will remain an obstacle until Turkey and (unified) Cyprus can reach agreement on the Exclusive Economic Zone, particularly in offshore areas located to the west and southeast of the island.
Despite all the rhetoric about being a regional and global leader, Turkey is becoming increasingly isolated in the region. Turkey’s souring relations with regional countries, especially Israel, have contributed to new alliances in the name of energy cooperation. Greece and RC have started to implement a pro-Israel shift in their foreign policies, despite having traditionally followed pro-Arab tendencies and maintained a fairly successful balance between the EU, the US and Russia.
In the past few years, two tripartite alliances have emerged. One is between Greece, RC and Egypt, and the other is between Greece, RC and Israel. At the same time, relations between Egypt and Turkey have deteriorated, while relations between Egypt and Israel have improved. High-level political and technical meetings have reinforced tripartite summits bringing top officials from Greece and RC together with their Israeli and Egyptian counterparts.
Deepening relations among Greece, Greek Cypriots, Israel and Egypt may create a bloc that could jeopardize Turkey’s interests in the region and change the regional balance of power at Turkey’s expense. Turkey’s worsening relations with Russia since November 2015 and the recent rapprochement between Israel and Russia could add a new dimension to the regional power balance, and might even bring Russia into this quartet. Will Russia enter into the RC and/or Israeli gas sector? What would happen if it did? These questions are open-ended; all we know is that a zero sum-game in the region will lead nowhere.
Recent natural gas discoveries and the prospect of substantial hydrocarbon resources beneath the Mediterranean seabed offer major opportunities in terms of energy security, economic prosperity and regional cooperation. The exploitation and export of these resources present numerous technical, administrative, security, legal and political challenges. Unless these resources are developed for the benefit of all the countries in the region, they may fuel disputes and add to the various frictions and anxieties in this already volatile region. In some cases they might even escalate into a full-scale confrontation.
Natural gas is not a toxic substance when inhaled. However, in a political environment it can become toxic. Whether natural gas will lead to greater harmony or increased conflict is hard to predict. But if these resources not managed carefully and wisely, the current myopic policies of the countries in question, and the levels of mutual distrust, will present further obstacles to development.
An Arab proverb says, “Four things come not back: The spoken word, the sped arrow, the past life, the neglected opportunity.” What is needed now is a balanced but pragmatic approach, enacted through a constructive and frank dialogue.. A robust mechanism that would lead to joint exploitation of hydrocarbons resources may offer an interim solution, creating interdependencies that pave the way for regional cooperation. This could, potentially, redraw the whole political and economic map of the region in a way that benefits all parties. However, unless the actors in the region talk to each other, these opportunities will be lost, and substantive compromises are unlikely to be reached.
There is an old African proverb that says, “If you want to go fast, go alone. If you want to go far, go together.” It is up to the politicians which path they will choose. For the benefit of their people, they must go far and quickly.
 Unless stated otherwise the word “Cyprus” in this article refers to the name of the Island. The Republic of Cyprus, which is not recognized by Turkey, is usually mentioned by Turkish officials as the Greek-Cypriot Administration (GCA). The Turkish Republic of Northern Cyprus, which is only recognized by Turkey, is mentioned as TRNC or KKTC.