New regional cooperation scenarios despite conflicts!

⛅ In recent years, the Eastern Mediterranean has been a hot topic in international energy markets. Interest in the area arose when three large fields were discovered between 2009 and 2011: the Tamar and Leviathan fields in offshore Israel and the Aphrodite field in offshore Cyprus.

⛅ To exploit this potential, a number of export options where progressively discussed, from pipelines (to Turkey or Greece) to LNG plants (in Cyprus, Israel and Egypt).

⛅ Analysts have expressed hopes that the new gas discoveries might not only strengthen the energy cooperation in the region, but also pave the way for a new era of economic and political stability.

⛅ However, the high initial expectations were largely muted over time. In Israel, a long-lasting internal political debate on the management of the gas resources created a climate of uncertainty that contributed to the delay of key investment decisions.

⛅ In Cyprus, where the gas discovery was welcomed as a god-sent gift to relieve the country from its financial troubles, the initial enthusiasm cooled down due to successive downward revisions of the expected resources.

⛅ These developments raised scepticism on the general idea that the Eastern Mediterranean might become a gas-exporting region. But expectations were revived by the recent discovery of the large Zohr gas field in offshore Egypt. Considering its size, this discovery – the largest ever made in the Mediterranean Sea –might indeed completely change the regional gas outlook.

⛅ However, multiple lines of conflict (e.g. the Cyprus issue, the changing relations between Turkey, Israel and Egypt, Israel’s relations with neighbours and the Turkish-Greek disputes over the Aegean) make future potential exploitation of Eastern Mediterranean energy resources a major geopolitical issue.

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The Eastern Mediterranean region has become a hotspot of international energy discussions following a series of large-scale gas discoveries in the offshore of Israel, Cyprus and Egypt. To exploit this gas potential, a number of export options have progressively been discussed, alongside new regional cooperation scenarios. Hopes have, indeed, been expressed about the potential role of new gas discoveries in strengthening not only the regional energy cooperation, but also the overall regional economic and political stability.

However, initial expectations largely declined over time, particularly due to continuous investment decision delays in Israel, and the downward revision of gas resources in Cyprus. These developments even raised scepticism about the idea of the Eastern Mediterranean becoming a gas-exporting region.

But initial expectations were revived in 2015, after the discovery of the large Zohr gas field in offshore Egypt (the largest gas field ever discovered in the Mediterranean). Considering its size, this discovery has reshaped the regional gas outlook, and has also raised new regional cooperation prospects.

If there is a certainty about Zohr, it is that its development will primarily serve the Egyptian domestic market. Due to a rapid decline in production, the country has increasingly struggled to meet its domestic demand. As a result, Egypt even started to import liquefied natural gas (LNG) in 2015. Accordingly, Egypt’s LNG exports dropped to zero in 2014, leaving the country’s two LNG plants completely idle. Zohr thus represents a major relief for Egypt’s strained gas market.

Furthermore, Zohr could be the first of a new string of gas discoveries in offshore Egypt. International oil and gas companies have already started to increase operations in the area, and if Zohr and other offshore fields reach their full potential in the 2020s, Egypt might again become an LNG exporter.

The impact of Zohr could go well beyond Egypt’s boundaries, due to its geographic location and infrastructure. Zohr is located only 90 km away from Aphrodite (Cyprus), which in turn is only 7 km off from Leviathan (Israel). This proximity could allow a coordinated development of the fields and thus the creation of the economies of scale needed to put in place a competitive regional gas export infrastructure.

Egypt already has in place a large LNG export infrastructure in Idku and Damietta, that currently sits idle.

This would allow to export any volumes from Zohr and other fields not used in the domestic market.

Given the growing domestic demand in Egypt, it is fair to assume that some export capacity would be left for Israeli and Cypriot gas – if it could be brought to the Egyptian terminals. As both LNG plants can be expanded, Israeli and Cypriot developers would have a flexible outlet.

For Israel and Cyprus, cooperating with other players in the region is crucial. Building the export infrastructure and developing the fields is a circular problem: if there are political or commercial risks that no export infrastructure will be in place when the production starts, a lot of money will be lost. If the field underperforms compared to expectations, expensive export infrastructure will sit idle. Consequently, bringing together an underused and scalable export infrastructure with several promising fields could be the key to unlocking untapped regional potential.

So, in the short-term Egypt seems to hold the key to the Eastern Mediterranean’s gas future. It could decide to proceed alone by exporting the gas volumes that will progressively become available on top of the domestic demand, or it might decide to proceed together with Israel and Cyprus, by creating a new Eastern Mediterranean gas hub (‘hub’ to be understood as a crossroads of physical flows, not as a trading hub) based on its existing export infrastructure.

Creating a new Eastern Mediterranean gas hub seems to represent the best option for all players involved, allowing Egypt to enhance its role in the region and secure revenue from a transit scheme, and Israel and Cyprus to fully exploit their gas reserves. It would also present an opportunity for Europe, where gas import requirements will grow post 2020 due to declining domestic production and the expiration of long term contracts with Norway and Russia.

A joint regional export scheme via Egypt’s LNG facilities could also provide a first opportunity to test gas cooperation between Egypt, Israel and Cyprus. A cooperation that could scale-up during the 2020s, should new gas resources be found in the region and should gas demand in export markets justify the construction of additional infrastructure, such as an Israel-Cyprus-Greece pipeline.

Albeit economically sound, the creation of an Eastern Mediterranean gas hub based on Egypt’s LNG facilities will ultimately depend on the evolution of regional geopolitics. Regional gas developments are unlikely to function as a catalyst for regional stability, for at least two key reasons: i) Eastern Mediterranean gas reserves are, for the time being, too limited in size to overcome the region’s profound geopolitical rifts such as the Cyprus issue, the Palestinian issue, Israel-Turkey relations, Israel-Egypt relations and the Israel-Jordan territorial disputes; ii) Geopolitical stability represents a fundamental prerequisite to allow international companies to invest in costly and long-term energy infrastructure. In short, Eastern Mediterranean gas developments should be considered as a function of regional geopolitical stability, and not vice-versa.

For the EU, the materialisation of an Eastern Mediterranean gas hub would be beneficial for both energy policy and foreign policy considerations. In terms of energy policy, the joint exploitation of Eastern Mediterranean gas resources could, already in the short-term, provide substance to the long-lasting EU gas supply diversification strategy. In terms of foreign policy, even if Eastern Mediterranean gas cooperation could not function itself as a catalyst for regional stability, it certainly represents one of the few areas where sensible regional dialogue could be established. This could also provide substance to the EU Neighbourhood Policy’s target of strengthening EU energy dialogue with neighbourhood countries on energy security.

The Eastern Mediterranean region has become a hotspot of international energy discussions following a series of large-scale gas discoveries in the offshore of Israel, Cyprus and Egypt.

This study seeks to provide a comprehensive analysis of these developments, taking into consideration all their geological, legal, economic and geopolitical dimensions, with the ultimate aim of assessing the implications of these recent gas findings for countries in the region and for the EU.

Chapter 1 discusses the relevance of Eastern Mediterranean gas issues for EU energy and foreign policy. It focuses on the Energy Union initiative, the Union for the Mediterranean (UfM) Euro-Mediterranean Energy Platforms and the EU Neighbourhood Policy. By reviewing these initiatives, the chapter illustrates how Eastern Mediterranean gas could fit into both the EU’s energy and foreign policies.

Chapter 2 provides an overview of Eastern Mediterranean gas issues, covering geological, legal, economic and geopolitical aspects. In particular, the chapter offers insights on the respective offshore
gas developments of Israel, Cyprus, Egypt, Lebanon and Gaza.

Chapter 3 provides a detailed analysis of Eastern Mediterranean proposed gas export routes. It explains pipeline projects such as the Israel-Jordan and Israel-Gaza pipelines, the Israel-Cyprus-Greece pipeline, the Israel-Turkey pipeline, the Israel-Cyprus-Greece electricity interconnector, as well as floating LNG (FLNG) projects in Cyprus and Israel. The chapter also discusses the option of using existing LNG plants in Egypt for the export of regional gas resources.

Chapter 4 analyses key destination markets for Eastern Mediterranean potential gas supplies: LNG, regional markets (Jordan and Palestine), Europe and Turkey.

Chapter 5 presents, on the basis of the previous analysis, a reflection on the potential role of energy as a shaping factor for regional stability. [Full Study]

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