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    East Med Gas: A Discussion with Dr. Sohbet Karbuz

Summary

Dr. Sohbet Karbuz, director of the Hydrocarbons Division of OME gives Natural Gas Europe his views on the East Med's gas potential and the challenges attached.

by: Karen Ayat

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Natural Gas and LNG Latest & Breaking News, News By Country, , Israel, Featured Articles, East Med Focus

East Med Gas: A Discussion with Dr. Sohbet Karbuz

Natural Gas Europe had the pleasure to discuss Eastern Mediterranean gas matters with Dr. Sohbet Karbuz. Dr. Sohbet Karbuz currently works at Mediterranean Observatory for Energy (OME), an energy industry association based in Paris, as director of its hydrocarbons division. Before joining the OME in 2004, he was with the International Energy Agency in Paris. Previously, he worked as research associate and manager at several institutions in Austria, Germany, Italy and Turkey. Mr Karbuz received his Bachelor of Science and Masters of Science degrees from Istanbul Technical University, his PhD degree from the Technical University of Vienna and Postgraduate Diploma from the Institute for Advanced Studies in Vienna. In a career spanning more two decades he has authored or co-authored 8 books and over 60 scientific journal articles and book chapters. His main areas of interests are oil and natural gas markets, energy policy, and forecasting.

Do you believe in the Eastern Mediterranean region’s potential to constitute an alternative source of energy to Europe?

Europe is seeking to diversify its sources and routes of supply and ease its dependence on Russian gas. To say that the Eastern Mediterranean will replace Russian gas is false. Europe will always depend on Russia to satisfy its natural gas needs. What Europe can do is work on the diversification of its supply sources and routes. The Eastern Mediterranean can provide both. The quantities that could eventually be received from the Eastern Mediterranean are however minimal. Israel and Cyprus can potentially supply Europe with more or less the equivalent of what Europe can get from Azerbaijan in the next decade through the southern corridor/ Tap and Tanap, but cheaper. We are talking of about 10 bcm. We often hear that the East Med would be able to supply as much as 35 and 40 bcm but I believe that this is an exaggeration.

Given the modest quantities that the East Med can provide Europe, the introduction of East Med gas into Europe’s natural gas portfolio might not play a tremendous role in terms of loosening Russia’s grip over the European market. However, there is another element to that: East Med gas could put pressure on Russia in the future in terms of the contract terms. European countries and companies could leverage this new reality to the benefit of spot prices.

How will East Med gas reach Europe?

I believe that the most economical, fastest and optimal solution for Israel at least in the short to mid-term is to use Egypt’s unused LNG export terminals. Israel could potentially use Cyprus’ planned LNG plants but the latter will largely depend on Cyprus encountering additional amounts of natural gas in its proclaimed EEZ, or channeling of some gas from the Leviathan field. Total and ENI will be drilling six wells in Cyprus’ EEZ in the next two years. This is in addition to Noble’s drilling plans there. Should they or a new ambitious player make additional discoveries, the LNG terminal project in Vassilikos could be commercially viable. For this to happen, Cyprus needs to find another 4 Tcf, ie as much as it has already discovered in the Aphrodite field of its Block 12.

Another feasible option for gas exports from the region to Europe is a pipeline from the Leviathan to Turkey, preferably crossing the Island of Cyprus from south to north. But this requires enormous political challenges which are not easy to be overcome. A pipeline option to Greece would not only be politically challenging but financially and technically challenging too. A floating LNG option could provide flexibility but it is too costly and not expandable.

Which markets will the Eastern Mediterranean be targeting?

Despite the Eastern Mediterranean countries’ ambition to reach Asia via LNG (Cyprus) and FLNG (Israel), I believe it will take another decade for the completion of such projects (2023-2024). By then, the gap between the energy prices in Asia and Europe will decrease. With the entry of new LNG players in the Asian markets, competition will be harsh and the prices will not be as lucrative as they are today.

Europe remains the best bet for the East Med. Turkey, with expiring contracts, attractive prices and growing natural gas needs could absorb a substantial quantity of East Med gas. Turkey is also geographically close to the East Med and could be easily reached via pipeline. Such a deal would require substantial cooperation between the countries in the region, who do not talk to each other today.

Do you see an eventual uniformisation of natural gas prices across the globe?

Natural gas prices across the globe are unlikely to reach a uniform price. There are three main regions: the Atlantic, Pacific and Europe. Perhaps Panama and Arctic route for LNG will provide arbitrage between the regions but heterogeneity in pricing will remain. Because the gas markets in these regions

have different characteristics and each has its own price dynamics. After US LNG and multiple other new sources of LNG enters the market, the major LNG volumes will put pressure on prices, and the gap in LNG prices between the regions may decrease. This may force Europe’s largest supplier, Gazprom, to adjust downward its contracts under more flexible pricing, but we cannot talk about a uniform price, even after adjusting for transportation cost differential also because markets in those three regions are fragmented and are at the different stage of developments. What we may have in Europe in the future is a perhaps more flexible forms of contracts, with less take-or-pay commitments and bigger part of contact volumes with spot market components.

Do you believe that Lebanon will enter the natural gas game despite its failure thus far to launch its first licensing round?

I do not believe that we will see a molecule of Lebanese natural gas before 2020. At first, Lebanon started well, with an ambitious schedule, precise dates and a clear agenda. However, the country had to postpone the first licensing round several times and its launch is now expected in 2015. Hopes turned into hype. Politics play too much of a role in Lebanon: politicians took advantage of the natural gas potential of the country to promise the civil society the end of public debt and economical problems, free education, a modern army, health care, etc. It will take at least seven years to see the fruit of any discovery, if made. It is important to differentiate political populism from reality. Original estimates as announced by the political class were 25 Tcf. Now we hear new estimates of 95 Tcf of natural gas in Lebanese waters, a number that I believe to be largely exaggerated.

The danger is for companies to become tired of the repeated postponings. It is important that the rules of the game governing the hydrocarbons industry in Lebanon are set in advance, and are disclosed clearly to all stakeholders, including the society. Two decrees remain to be issued by the Government, one determining the delineation of the offshore blocks open for bidding and the second laying out a model exploration and production sharing agreement. Despite that we have been witnessing a rush for bidding round in a place where there is still no established national oil and gas company and six member Petroleum Authority has all the powers. Can anyone guarantee that the existing oil legislation will not be reconsidered by the new parliament? Security of the institutional, legal and fiscal framework is very important for investment decisions.

When we talk about East Med, we think of the triangle Israel, Cyprus and Lebanon. Should Lebanon succeed in launching its first licensing round and encountering natural gas in its EEZ, it could play a big role in the Eastern Mediterranean region, but this should not be expected before the early next decade. 

Can the Eastern Mediterranean ever become an energy superpower?

No. For a region to be considered an energy superpower, it needs to have oil. Natural gas is not enough.

Can natural gas play a role in resolving the various geopolitical problems in the region?

In theory, the discovery of natural gas can help solve the various problems in the East Med. However, the politicians in the region lack pragmatism. They use natural gas to the benefit of populism. Instead of forming a common denominator and an axis for stability, natural gas has become a main component of the geopolitical obstacles. 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 would like to chose. For the benefit of their people they have to go far and quickly.

What are the prerequisites for a Cyprus-Israel-Turkey energy cooperation?

What is needed for such an optimal scenario to happen and to help turn controversies into possible cooperation is for all the players and stakeholders to get into a balanced but pragmatic cooperative approach through a constructive and candid dialogue on two main issues. First, the Cyprus Problem. July 2014 marks the 40th anniversary of Turkey’s military intervention in Cyprus in response to a coup that aimed to unite the island with Greece in 1974. The reunification of Cyprus would be beneficial to everyone, Turkey included, from both an economical and political standpoints.

Turkey’s disagreement with the Republic of Cyprus concerns the overlapping claims in offshore areas located in the west and south east of the island. Turkey claims that maritime demarcation agreements signed by the Greek Cypriots with countries in the region are null and void for several reasons. First, Turkey does not recognize the Republic of Cyprus and hence its proclaimed EEZ. Second, Turkey argues that the Greek Cypriot government does not represent the Turkish Cypriot population. Third, Turkey argues that Greek Cypriot unilateral drilling is hurting the reunification negotiations. This is why Turkey and TRNC oppose the drilling program in southern Cyprus. They propose suspension of all activities or establishing a joint committee related to hydrocarbon reserves off the island until the reunification process of both communities of the island is concluded. On the other hand, TRNC is only recognized by Turkey.

A genuine mechanism that would lead to joint exploitation of hydrocarbons resources in the island of Cyprus may offer an interim solution for creating interdependencies for paving the way for cooperation in the region. A mutually agreed formal two-state settlement between Turkish Cypriot and Greek Cypriot sides on the Island seems like the only way for resolving this problem. However reaching substantive compromises will be unlikely unless relevant parties talk to each other.

Second, normalization of the frosty Turkey-Israel political relations. Turkish politicians remind frequently that while Turkey's demand for an Israeli apology had been fulfilled, the remaining two conditions (compensation for the families of the passengers killed on the Mavi Marmara ship and the lifting of the blockade on Gaza) have not been concluded. Some progress has been made in regards to the former. The environment for the latter, however, had changed following the auster of former Egyptian President, Mohammed Morsi, in July 2013. The relationship between Israel and Turkey was starting to improve after a period of deteriorated diplomatic relations. What is interesting to note is that the trade between the two countries peaked in 2013, despite the then tensed relationship between the two countries. But Israel’s assault on Gaza Strip just one month before the upcoming presidential elections in Turkey has given the Turkish politicians a big leverage to freeze the relations with Israel again. Erdogan has recently stated that he will never normalize or even improve relations with Israel while he is in office, this means a long time. If Turkey-Israel diplomatic ties could improve (and this is a big if today), Israel could work in support of reconciliation talks between Turkey and Greek Cyprus. At the end, politics will dictate the future of the cooperation in the future, including on energy.

Karen Ayat is an analyst and Associate Partner at Natural Gas Europe focused on energy geopolitics.  Email Karen on karen@minoils.com.  Follow her on Twitter: @karenayat