The Eastern Mediterranean region has become a hotspot of international energy discussions in the last decade, following a series of large-scale gas discoveries off the coasts of Egypt, Cyprus, and Israel. To utilise such potential, with confirmed reserves of about 2,000bn cubic metres (bcm) of gas, plenty of export and regional cooperation scenarios are being studied. The new discoveries have stirred hope to play a role in boosting regional cooperation, in addition to the improving economic and political stability across the Eastern Mediterranean region.
The initial optimistic assumptions started to fade over time, especially following the natural gas investment decision delays in Israel and the downward revision of scale of the explored gas reservoirs in Cyprus. These events led to the rise of scepticism regarding the concept of the Eastern Mediterranean regional gas hub itself.
However, this changed in 2015, following the discovery of the mega Zohr gas field in offshore Egypt (the largest gas field ever discovered in the Mediterranean with reserves estimated at 30tn cubic feet. With its gargantuan size, Zohr’s discovery has reshaped the regional gas outlook, revived earlier expectations, and advanced new regional cooperation prospects.
The most prominent fact about Zohr is the fact that its development will primarily serve Egypt’s domestic market needs. The country’s status changed from a liquefied natural gas (LNG) exporter in 2003 to an LNG importer in 2015, following drops in production and increasing demand. Consequently, Egypt’s LNG exporting infrastructure, including the two LNG plants in Idku and Damietta, were left idle and completely unutilised. Hence the importance of Zohr discovery, as it represents a major relief for Egypt’s strained gas market.
Moreover, Zohr could be just the beginning of a series of new gas discoveries in offshore Egypt. Various international oil and gas companies have flocked to the area and increased their operations there, and if Zohr and other deep-water fields such as Atoll, Nooros, Taurus, and Libra fields begin production at full capacity by 2020, Egypt would restore its position as LNG exporter once again.
The impact of Zohr could surpass Egypt’s boundaries, as a result of its geographic location and availability of nearby infrastructure.
Zohr is situated only 90 kilometres away from Aphrodite gas field in Cyprus, which in turn is only 7 kilometres from the Leviathan field off of Israel. Such proximity could allow for the development of joint fields and could lead the way to the creation of an integrated regional gas infrastructure network.
With the already existing substantial LNG export infrastructure in Idku and Damietta, which are currently being underutilised, such infrastructure would enable Egypt to export any produced natural gas from Zohr and other fields not used in the domestic market. However, when taking into consideration the increasing domestic natural gas demand in Egypt, it is clear that, in theory, there will be room left for Israeli and Cypriot gas if they are transferred to Egyptian terminals. With the possibility of further expansion of the two LNG terminals, they would be a viable export outlet for Israeli and Cypriot developers.
For current and prospective gas producers in the Eastern Mediterranean: Israel, Cyprus, and Lebanon (which has a long-awaited licensing bid scheduled to begin in 2018), the need for cooperation with different parties in the region is unquestionable. Establishing an export infrastructure, in addition to the development of the gas fields are considered high risk operations, and represent the chicken or the egg dilemma, since if political or commercial risks prevent the establishment of export infrastructure, the money invested in field production will be spent in vain, while if the infrastructure was put in place, and the fields underperformed, such costly infrastructure will be underutilised. Thus, linking an underused and scalable export infrastructure with plenty of promising fields would minimise the risk, and could be the key to unlocking untapped regional potential.
Consequently, Egypt can be considered the Eastern Mediterranean’s future gas gatekeeper. Unlike Cyprus and Israel, Egypt is not dependent on other countries, as it could solely proceed by exporting the remaining gas volumes after fulfilling its domestic market’s needs, or it can act as the cornerstone of a new Eastern Mediterranean gas hub in cooperation with Israel and Cyprus. Creating such a framework would represent the unrivalled option for all the parties involved—except for other regional countries which aspire to play the same game such as Turkey. That, in turn, would strengthen the Egyptian regional position, in addition to generating revenues, while on the other hand, it would allow Israel and Cyprus to fully exploit their gas reserves.
Europe would be another possible beneficiary, especially in the wake of its projected growing import needs by 2020, on the back of declining domestic production, in addition to expected expirations of the continent’s long-term import contracts with Norway and Russia. The first genuine assessment of the proposed cooperation between Egypt, Cyprus, and Israel would be joint regional export strategy via Egypt’s LNG. If such cooperation escalated in the 2020s, with new gas discoveries in the region, the establishment of additional infrastructure, such as an Israel-Cyprus-Greece pipeline, it may be economically viable.
Yet, the future of the Eastern Mediterranean will be determined by the development of regional geopolitics, not only the fact that it will be economically sound. Plenty of factors must be taken into consideration, most prominently the political rifts between regional parties such as the Cyprus issue, the Palestinian issue, Israel-Turkey relations, Israel-Egypt relations, and the Israel-Lebanon territorial disputes. Without geopolitical stability, international oil companies will remain reluctant to invest in expensive and long-term energy infrastructure required.
Egypt: cornerstone for the future of the Eastern Mediterranean
To fully understand the Egyptian position, one must consider the gas import settings which resulted from the aftermath of the Arab Spring, which led to the obsoletion of Egypt’s existing export infrastructure developed over the previous decade. The infrastructure did not only include the two LNG plants, but also two pipelines: the Arish-Ashkelon pipeline and the Arab Gas Pipeline (AGP).
The Damietta LNG complex is located 60 kilometres west of Port Said and has one train with a total capacity of 7.56 bcm per year of LNG. The Idku LNG complex is located 50 kilometres east of Alexandria and has two trains with a total capacity of 11.48 bcm per year. The total LNG export capacity of Egypt thus amounts to 19 bcm per year
The Arish-Ashkelon pipeline became operational in February 2008, exporting Egyptian gas to Israel. In 2010, the pipeline supplied approximately half of the gas consumed in Israel. The pipeline, which extends for 100 kilometres, has a total transfer capacity of 9 bcm per year. At the time, Egypt and Israel reached an agreement for the delivery of up to 7.5 bcm per year. The deal was not socially accepted in Egypt, and in 2010, some Egyptian activists appealed for a legal provision against governmental authorities to stop gas flow to Israel on the grounds of the obscure nature of the contract and the alleged low pricing compared to global benchmarks.
However, the appeal was rejected, yet following the 2011 revolution, many Egyptians demanded the termination of gas exports to Israel. Consequently, gas exports to Israel were unilaterally halted by Egypt in 2012, on the basis of alleged Israeli breaches of its obligations, and the cessation of payments a few months earlier. Since then, the pipeline has sat idle.
Meanwhile, the Arab Gas Pipeline is a 1,200 kilometre pipeline connecting Egypt with Jordan, Syria, and Lebanon, all the way to Turkey, with a capacity of 10 bcm per year. Gas flows through the pipeline commenced in 2003 to Jordan and then reached Syria in 2008 and Lebanon in 2009. In the past, an ambitious project to expand the Arab Gas Pipeline to Iraq was also proposed.
However, the Arab Gas Pipeline interrupted its operations in March 2012, after several attacks following the Egyptian 25 January revolution, mainly carried out by militants in the Sinai Peninsula; since then, the pipeline has not been reopened.
Furthermore, an agreement to construct another 63 kilometre pipeline linking Syria’s Aleppo with Turkey’s Kilis was signed in 2008, as the first segment of a Syria-Turkey connection with the Arab Gas Pipeline.
To sum it up, the halt of Egyptian gas exports to Israel through the Arish-Ashkelon pipeline, as well as the halt of the Arab Gas Pipeline after the various attacks on their infrastructure, were the coup de grâce to the regional gas cooperation aspirations at the time. The political turmoil in Egypt following the 2011 revolution and the civil war in Syria greatly compromised the regional geopolitical equilibrium, making any form of comprehensive regional cooperation on gas extremely difficult.
Furthermore, a second factor contributed to the obsolescence of the earlier regional cooperation scheme, which was the gas discoveries that were made in offshore Israel and Cyprus between 2009 and 2011.
According to the US Geological Survey agency (USGS), which ran a programme to estimate the undiscovered gas resources of the Nile Delta Basin and of the Levant Basin in 2010 using a geology-based assessment methodology, the estimated undiscovered technically recoverable gas resources of the Nile Delta Basin registered at 6.3tn cubic metres (TCM), and of the Levant Basin at 3.5 TCM.
Yet, the notable turning point in terms of gas discoveries came in 2009, with the discovery of Tamar field in offshore Israel by Noble Energy. This was followed by two more discoveries by Noble Energy: the Leviathan field in offshore Israel and the Aphrodite field in offshore Cyprus. After that, in 2015, Eni announced the discovery of the giant Zohr gas field in offshore Egypt.
The three-nation regional gas hub race
Following these discoveries, three nations shared the dream and aspiration of becoming the cornerstone of the proposed Eastern Mediterranean regional gas hub. All three countries possess different strong points that may allow them to play such role.
Turkey owns a considerable and expanding network of natural gas pipelines that it uses primarily for importing natural gas to fulfil its domestic market needs. Its oldest international pipeline is the Russian-Turkey Natural Gas Pipeline (West Line), connecting Turkey to Russia through Bulgaria, Romania, and Ukraine. In addition to the West Line, the Blue Stream Gas Pipeline cuts through the Black Sea to carry natural gas from Russia to Turkey. The pipeline began operations in 2003 and has the capacity of supplying Turkey with 16 bcm of natural gas per year, according to the Turkish Ministry of Energy and Natural Resources.
However, following the instability plaguing Ukraine over the past few years, gas imports through the West Line have been threatened, which led Russia and Turkey to develop alternative routes. Consequently, the two countries signed an agreement in 2016 to establish the TurkStream pipeline. The proposed project will include two pipelines connecting Russia to Turkey through the Black Sea with an annual combined capacity of 31.5 bcm of natural gas, according to the Turkish Ministry of Energy and Natural Resources. The proposed plan aims to re-export around half of this amount to EU markets, while the other half will substitute the current gas imports via the West Line. Gas supplies through the pipeline are expected to start in 2019.
In addition to Turkey’s natural gas connections to Russia, the Tabriz-Ankara pipeline connects Turkey with Iran’s huge natural gas market. The pipeline extends over 2,577 kilometres, and has a capacity of 10 bcm per year and became operational in 2001, according to the Turkish energy ministry. However, the pipeline has been attacked with explosions several times by PKK guerillas.
Moreover, to further tap the rich natural gas supplies in the Caucasus, Turkey and Azerbaijan agreed to build the Baku-Tbilisi-Erzurum (BTE) Pipeline, running from the Shah Deniz field in Azerbaijan through Georgia and into Turkey, to transport 6.6 bcm of natural gas from Azerbaijan to Turkey. According to the Turkish energy ministry, the capacity of this pipeline is being increased to feed into the Trans Anatolian Natural Gas Pipeline (TANAP). TANAP is supposed to connect Europe with the natural gas fields of Azerbaijan. Once completed, the pipeline is planned to transfer 32 bcm of natural gas per year, and to stretch from the Turkish border with Georgia to the Greek border. The Turkish energy ministry, according to its website, anticipates gas to reach Europe via the new pipeline in 2020. To facilitate the flow of natural gas through Asia Minor to Europe, an interconnection pipeline between Greece and Turkey was inaugurated in 2007—though plans to extend the pipeline on to Italy have languished uncompleted.
However, despite its extensive pipeline network, Turkey lacks pipelines to the south to capitalise on Mediterranean gas resources. If such a pipeline was built, Turkey, straddling multiple energy markets, could draw upon the natural gas resources of Russia, the Eastern Mediterranean, and Russia for re-export to Europe.
Turkey, due to its central geographic location and extensive network of pipelines, is in a perfect position to benefit from the ongoing natural gas boom in the Eastern Mediterranean. Yet, despite the different factors favouring the country, Turkey’s problematic relationships with Israel and Cyprus have the potential of countervailing its strengths.
The biggest obstacle in the way of Turkey’s ambitions is Cyprus. Cyprus’ central location in the Eastern Mediterranean makes its territorial waters the natural pathway for natural gas pipelines from the region. Yet its relationship with Turkey has been hostile since Turkey occupied northern, or Turkish, Cyprus in 1974. Turkey still has 30,000 soldiers stationed on the island and continues to contest the maritime rights of the Cypriot government. After the breakdown of talks between the rival parties this summer, the Turkish government warned international oil companies against operating in Cypriot waters, according to a July 2017 Reuters article by David Dolan and Ece Toksabay.
Such disputes not only threaten the possibility of gas exports from Cyprus to Turkey but, due to Cyprus’ central location, it also blocks potential pipeline routes from Israel, and Egypt as well, according to a Financial Times article in September 2017 by Andrew Ward.
On the other hand, while Turkey’s relations with Israel were originally better than its relations with Cyprus, diplomatic relations between the two countries were only restored in 2016. In 2010, after the deaths of several Turkish activists in a maritime incident off the Israeli coast, Turkey broke off relations with Israel. When the two countries resumed diplomatic ties in 2016, many assumed the reconciliation was driven by Israel’s recent natural gas discoveries and Turkey’s need for natural gas, according to a CNN article by Oren Liebermann and Elise Labott in June 2016. Yet the two nations have yet to reach a natural gas agreement and relations have remained rocky.
Greece has the potential to become a regional gas hub due to its location at the EU borders of the Southern Gas Corridor and having access to LNG and gas supplies from Russia, one of the largest suppliers of natural gas to the EU. Hence, Greece has all the required elements to develop itself into a gas hub, providing competitive prices and security of supply, in addition to market integration in the region, according to European Semester: Country Reports – Greece, 2014.
Amidst the economic uncertainty that Greece has been recently facing, having real reform that includes establishing new projects is of great significance, as it keeps energy at the forefront of economic investment in Greece and turning it into a regional hub. One of these projects is the agreement signed in 2013 between Greece and an international consortium, the Trans Adriatic Pipeline (TAP). Through this agreement, a new pipeline will be built, which will cross Greece and then move gas through Albania, and underwater through the Adriatic to Italy, and then to Europe. Construction of this $3.52bn pipeline will be completed by the end of 2019, transporting 353.1bn cubic feet (bcf) from Azerbaijan to Italy, according to the Institute of Energy for South-East Europe (IENE).
This is not a significant amount of gas given European gas needs, which reached almost 17,657.3 bcf in 2014. Nevertheless, the TAP pipeline is supported by the EU as Europe’s best alternative gas supply route in its efforts to lessen its customary dependence on Russian gas. Nevertheless, TAP, even if it doubles its capacity to 706.3 bcf, as latest plans suggest, will still provide insufficient quantities to enable it to play a key part in European gas supply diversification, according to the IENE.
While Greece enjoys the privilege of being part of the EU, which supports its dreams of being a regional hub, simultaneous gas discoveries in offshore Egypt have opened a new opportunity for regional collaboration between the EU and the East Mediterranean countries, given that discovered volumes seem to exceed domestic market capacities.
Egypt holds the keys to the Eastern Mediterranean’s gas future. It has the ability to proceed alone by exporting the expected gas surplus from Zohr field via its existing exporting infrastructures, such as the two idle LNG terminals and the Arab Gas Pipeline, or it might decide to proceed together with Israel and Cyprus, by creating a new Eastern Mediterranean gas hub, according to Simone Tagliapietra and Georg Zachmann’s Forbes opinion piece.
While considering the EU as its main market, Egypt’s LNG terminals are the current most foreseeable sources of gas supply in the entire region, in addition to the fact that Egypt has the largest natural gas reserves in the region. Consequently, Egyptian LNG would prove to be cheaper than either Cypriot or Israeli gas, as there would be no need to inject any capital investment. Although it is hard to compete with the price of Russian gas, which is currently one of the main suppliers to the EU, Egyptian gas could be competitive in comparison to American LNG, and it could provide an option for greater diversification of the EU’s energy mix, allowing it to be less dependant on Russian supply.
According to an opinion article published in the Financial Times by energy expert and visiting professor and chair of the Kings Policy Institute at Kings College London, Nick Butler, it is clear that there is no other practical export route for gas from the giant Leviathan field in Israeli waters off of Haifa or from the smaller Aphrodite field off of Cyprus.
Butler explains that the proposed concept of a long sub-sea pipeline across the Mediterranean linking Israel and Cyprus to Greece is not realistic, as it does not take into consideration the economics at a time when gas prices are low, the absence of a grid through Greece to the main markets of central and northern Europe, and most important of all, the complexity of sub-sea conditions. Such factors are favouring Egypt, placing it as the cornerstone of the commercial development of natural gas (and perhaps oil) in the Eastern Mediterranean.
On the other hand, Butler believes that Turkey lost its chance to act as an export route for gas from Cyprus, after trying to associate the exports with the settlement of the long-standing Cyprus territorial division. In addition, Turkish-Israeli relations have deteriorated over the last few years, making it almost impossible now for Israel to entrust its gas trade to the control of a government whose leader has, according to Al Jazeera, described Israel as “a terrorist state”.