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    East Med gas: a regional perspective [GGP]

Summary

New natural gas discoveries are attracting attention to the region but are also a source of conflict

by: Charles Ellinas

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Complimentary, Global Gas Perspectives

East Med gas: a regional perspective [GGP]

East Med gas: a regional perspective

 An international workshop organised by a European think-tank in Nicosia on 3-4 April provided a regional perspective on East Med gas. The participants represented most countries in the region, as well as Greek and Turkish Cypriots, Greece and Turkey. The subjects discussed included the latest developments in natural gas, the geopolitical risks of gas exploration and production, environmental impact, security risks, climate change, transparency and corruption. These discussions form the basis of this article.

The East Med is a region of clashing interests, but also networks of cooperation, providing a gateway from the Middle East – including Egypt and Israel – to Europe. The US, having scaled-down its direct presence, is cultivating alliances with Israel, Greece and Cyprus to safeguard its interests in the region.

Is energy the glue that will unify the region or is it a source of competition? New natural gas discoveries are attracting attention to the region, but are also a source of conflict. Turkey’s more nationalistic interests have put it at odds not only with Cyprus, but also with Israel and Egypt and are straining its relationship with Greece. They are also threatening security in the East Med.

Meanwhile, northern Cyprus is becoming increasingly ‘turkicised’. In addition to water, soon there will also be electricity interconnection. As time passes, this problem is becoming increasingly intractable.

Alignment between Egypt, Greece, Cyprus and Israel, and possibly Jordan, is developing around energy, but it is also driven by political and security considerations.

Gas developments

The major news in February was the discovery by ExxonMobil of Glafkos gas-field in block 10. Estimated reserves of the three discovered gas-fields, with a 90% probability, are: Glafkos 4 trillion cubic feet (tcf), Calypso 3tcf and Aphrodite 3.1tcf. With additional drilling being planned by Eni, Total and ExxonMobil in 2020, these gas reserves are likely to increase.

Success with ExxonMobil’s further drilling in promising block 10 next year has the potential to lead to an LNG plant at Vasilikos and exports, thus transforming Cyprus’ fortunes –– provided total discoveries approach 12-15tcf and global gas prices justify commercial viability.

Noble’s renegotiation of the Production Sharing Contract for Aphrodite with Cyprus’ government is close to agreement, paving the way for Aphrodite gas sales to Shell’s Idku LNG plant in Egypt. If these succeed, which looks likely, first exports will be in 5 years. The inter-governmental agreement between Cyprus and Egypt for the required pipeline is already in place. But given low gas prices challenges remain. If the sale goes ahead profits will be marginal.

There is a need for realism. Gas discovered so far in the East Med amounts to just about 2% of global gas reserves.

Even with the potential to discover more, East Med gas will not change the international map of energy supplies. East Med gas is expensive to develop. It can become an important player only if it can compete on price. As a result, priority should be given to regional exploitation.

Global energy markets

The world has an abundance of fossil fuels and with the relentless penetration of renewable energy the competition to secure markets is intense.

The EU has strengthened its climate targets to 2030 – promoting renewable sources at the expense of fossil fuels. Demand for fossil fuels is expected to peak around 2030.

These changes will have a dramatic impact on the use of fossil fuels after 2030 – already leading to a glut of energy resources, with the result that prices remain low.

Oil prices have found a new range with Brent crude at $60-$65/barrel. Gas prices are converging to an average of $6.50-$7.50/mmbtu in southeast Asia and $5.50-$6.50/mmbtu in Europe.

Should these remain in the longer term, which is very likely, they will pose greater challenges to East Med gas exports. It needs to be competitive and where sales are possible, profit margins will be low.

Investment in major gas projects will also require reduction of regional geopolitical risks.

Israel, Jordan, Egypt gas exports

A view was expressed that Israeli gas exports to Egypt are driven by security considerations. This is not just a commercial deal – it was likened to a barter deal, with security being a key element. The recent news of a decision by the Israel Electric Corporation (IEC) to approve a compromise with the Egyptian gas company which entails an 85% reduction of the arbitration award in favour of IEC, in order to facilitate the gas exports to Egypt, tends to support this view. But the eventual outcome of such deals is further strengthening of the Israel-Egypt relationship.

In Jordan, even though the contract to supply Israeli gas to NEPCO is fully in place, it lacked transparency, with a strong suspicion that the agreed terms and prices are disadvantageous to Jordan. There is now huge public and political outcry and resistance building against this deal. Lack of transparency often leads to regional deals being viewed with suspicion.

However, the problems most of the East Med countries are facing with Turkey’s aggressive stance in the East Med is another major factor bringing them together.

Both Israel and Egypt need Greece and Cyprus as gateways to Europe – in order to promote their interests there. A view was expressed that the relationship developing between Israel, Greece and Cyprus is not an alliance, but an arrangement of convenience. Israel does not need Greece or Cyprus – it could drop them when it suits its interests.

Turkey is serious about intervening in Cyprus to protect its continental shelf claims and what it sees as its interests. These new political arrangements, including the recent support by the US, will not deter Turkey. It was ready for naval action when it confronted Eni’s drilling vessel last year and it is ready to take any action it considers necessary now.

Solution of the Cyprus problem could change the situation dramatically, but optimism is thin on the ground, with resumption of the negotiations between Greek and Turkish Cypriots at present looking a distant prospect.

Transparency and corruption

Lack of transparency and corruption in the energy sector pose serious challenges in the East Med. Civil Society efforts in Lebanon – where it is very active – were instrumental in the passing of laws by the Lebanese Parliament to deal with these. It agreed to a transparent contracting process, disclosure of tenders and bidding results, and disclosure of the contracts with the oil companies.

Using these laws, it is now possible to access information on new deals and revenues from the hydrocarbon sector.

The drive now is to revise the sub-contracting process. This was identified as the area where most susceptible to corruption. The effort is to address these issues by ensuring proper oversight, fair economic opportunity, transparency and open procurement, including any facilitation fees. All subcontracts, goods and services, should be disclosed, including beneficial ownership – with all subcontractor ownership details published. Civil Society in Lebanon is active in ensuring that this happens, with increasing success.

Similar efforts are expended in ensuring transparent environmental and safety impact assessments, with full disclosure and full public consultation.

But it was agreed that such laws are as good as the readiness of the authorities to apply them. In most countries of the region the laws exist, but they are not being applied or are being selectively applied. As a result, corruption still thrives.

Cyprus can certainly benefit from such processes. Transparency is lacking and public consultation is more or less non-existent. A good example is the preparation of Cyprus 2030 Energy Plan – no public consultation has taken place despite its importance to the future of energy and on the economy of Cyprus.

Dr Charles Ellinas, @CharlesEllinas

Senior Fellow, Global Energy Center, Atlantic Council

Chief Features Writer Natural Gas World

Originally published in Cyprus Mail April 7, 2019

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