This paper was written for King’s College London, European Centre for Energy and Resource Security (EUCERS), “Reflections” Working Paper Series, Volume 3, Spring 2017.
The discovery of substantial gas reserves in the Eastern Mediterranean is infusing new dynamics into a region that has long been defined by conflicts, uneven socio-economic development and limited intra-regional cooperation. Located north of the prolific Nile Delta Cone, the Levant Basin – a mostly offshore area covering approximately 83,000 Km2 in the Eastern Mediterranean – is estimated to hold a mean of 1.7 billion barrels of recoverable oil and a mean of 122 trillion cubic feet (tcf) of recoverable gas. This is significant for the small and resource-poor countries of the region, but is not a global game-changer. This is compounded by the fact that these resources are spread over various countries and jurisdictions, their extraction is costly and their exploitation rendered even more difficult by the lack of relevant infrastructure.
The hype that surrounds the discovery of hydrocarbon resources in the region is how one would expect resource-poor countries to welcome the discovery of hydrocarbon wealth, and contrasts with more measured responses beyond the Eastern Mediterranean. The difference in perspective is noteworthy because it explains how various actors view the added-value behind these resources, and how this, in turn, defines their policies: For many in the region, the newly discovered reserves propel the region into the league of large oil and gas producers. For those outside, and because of their modest size, the added-value of these resources lies elsewhere: For the United States in particular, “the successful exploration, production, and export of the natural gas resources in the Eastern Mediterranean will require exactly the political cooperation and economic integration that the United States has long supported in the region. This remains a top foreign policy priority for the United States”.
How do these differences in perception translate on the ground?
At the regional level: Grandiose ambitions and an unprecedented surge in diplomatic activity… both lacking a strategic vision
The discovery of gas resources in the Eastern Mediterranean has initiated a surge in diplomatic activity in the region. Trilateral tracks have been launched, at the core of each we find the same duo: Cyprus and Greece pursuing different – but not entirely separate – tracks with Israel, Egypt, and to a lesser degree Jordan and Lebanon. The flurry of diplomatic activity is unprecedented: Cypriot President Nicos Anastasiades, Greek Prime Minister Alexis Tsipras and Egyptian President Abdelfattah al-Sisi held a total of four summits since November 2014. The Cypriot and Greek leaders also met with Israeli Prime Minister Benjamin Netanyahu in Nicosia in January 2016 after which the three heads of State announced a second tripartite summit would be organized in Israel in the second half of 2016. That is not counting the numerous bilateral summits or ministerial- and director-general- level meetings over the past few years.
On the energy front, several projects have been put forward, and perpetually reaffirmed although their viability was not always ensured. Following the discovery of Aphrodite, the Cypriots made the construction of an onshore LNG plant in Vasilikos that would process Cypriot and Israeli gas a priority. It took some time for Cypriot officials to admit the project was not commercially viable in this context due to a lack of enough gas in Aphrodite and no commitment to send Israeli gas, forcing a refocus of the Island’s energy policy.
Attention then turned to the East Mediterranean pipeline, a mostly subsea pipeline intended to carry Israeli and Cypriot gas to Greece, and from there to European markets. While technically feasible, the pipeline carries an exorbitant price tag that strips it of any commercial viability at this point.
Gas exports to and via Egypt appeared for a while to be the most viable option. But the global LNG glut and falling prices would make Israeli or Cypriot gas liquefied in Egypt’s LNG plants uncompetitive in Europe, at least until the market rebalances and prices adjust. As for supplying the Egyptian market with gas, the discovery of Zohr in 2015, and coming on stream of several other projects expected to be developed by 2020, will reduce and probably eliminate the need for imports by the early 2020s, according to Egyptian officials. The short timeframe makes this option challenging, particularly that two of the three gas fields in question, Aphrodite and Leviathan, are not expected to be developed before 2020. In the rush to supply the local Egyptian market before the need for imports dissipates, Israel’s Tamar gas field, already in production, appears to have an advantage, although challenges remain.
While energy is one important driver behind this flurry of diplomatic activity, the troubled relationship each of these countries has had with Turkey, at one point or another over the past few years, has been a decisive factor. For Israel in particular, the mere prospect of improved relations with Turkey appears to have limited the extent of its involvement with Greece and Cyprus. Israel, which views its gas resources as a strategic commodity, is hoping these would provoke a geopolitical change that would strengthen its position in the region. The idea is to weaken animosity towards it by creating shared interests with its neighbors, specifically those countries and societies that have a tendency to question the legitimacy of the State of Israel. For years, Turkey was the only Muslim-majority country maintaining ties with Israel, breaking a near perfect Arab and Muslim boycott of Israel. This is the strategic edge that Ankara can still provide. Israel has made efforts to nurture relations with Athens and Nicosia, but stopped short of a full-commitment that would jeopardize the prospects of amending its relations with Turkey. Coincidence or not, no Israeli gas was committed to the proposed LNG plant in Vasilikos, rendering the project unfeasible at the time, and effectively making the development of Aphrodite a very challenging endeavor. Similarly, no unitization agreement has been signed yet between Cyprus and Israel, after years of negotiations, further complicating the development of Aphrodite, a small part of which extends into the Israeli Exclusive Economic Zone. There are many reasons why Aphrodite has not been developed yet, five years after its discovery, but it would not be misplaced to say the Israelis did not facilitate the task.
Energy-wise, the results of increased diplomatic activity have so far been underwhelming. The countries involved have yet to translate their political wishes into actual projects. Political convergence alone is not enough. Solid partnerships require more robust foundations, which do not solely rely on circumstantial factors, but on a strategic vision. Effective energy cooperation requires a long-term stabilization of political relations, not just a partnership based on provisional circumstances and positions vis-à-vis a third state at a certain point in time.
Beyond the region: Fostering political cooperation and economic integration
Beyond the Eastern Mediterranean, the hype factor gives way to a more pragmatic approach. Perhaps because of their nature and modest size, the added-value of these resources is perceived from a different angle – fostering political cooperation and economic integration in a region with a history of conflicts and a poor record of intra-regional cooperation, in addition to their possible contribution to the diversification of gas supplies in the European and Turkish markets. The United States is a case in point. While intra-regional cooperation, and in particular the gradual integration of Israel in the region, has been a priority for Washington’s Mideast policy, the U.S. administration sees recent discoveries as an additional instrument that can be put to use to achieve this objective. Following the major discoveries in the Eastern Mediterranean it has steered its policy with these objectives in sight.
Encouraging political cooperation
The maritime border dispute between Lebanon and Israel, which emerged in 2010, triggered a U.S. mediation activity between both sides, first led by special coordinator for regional affairs in the Department of State’s Office of the Special Envoy for Middle East Peace, Frederic Hof, then by Amos Hochstein, currently serving as Special Envoy for international Energy Affairs at the Department of State [Note: this paper was written in November 2016. Hochstein has since left the State Department]. In parallel, the U.S. put its weight behind amending the ties between two of its key allies in the region, Turkey and Israel; and it also played an important role in restarting negotiations between Greek and Turkish Cypriots to settle the decades-old dispute that has divided the island in two.
Up until this point, the size of gas discoveries in the Levant Basin, and the size of the local markets, did not grant the countries in question the autonomy they would have wished for to exploit and export these resources. It’s important to be precise: These resources are not an instrument for peace. But by their very nature, they impose cooperation. Convenient, if the objective is to create “physical interdependency”.
Promoting economic integration
There is considerable attention to support Israel’s economic integration in the region – especially with its Arab and Muslim neighbors – which has encountered resistance, even after a number of Arab countries signed peace agreements with the Jewish State. the U.S.-brokered Israeli apology to Turkey in March 2013 has revived chances of energy cooperation between the two countries. A pipeline linking the two countries is being considered, with the active backing of the U.S., although significant challenges persist, including the Cyprus Problem.
Due to their functional nature, countries do not enjoy full sovereignty over their Exclusive Economic Zone (EEZ). Third States enjoy the “freedoms of navigation and overflight and of the laying of submarine cables and pipelines and other internationally lawful uses of the sea related to these freedoms”, as long as they “comply with the laws and regulations adopted by the coastal State”. Theoretically, passing the pipeline through the Cypriot EEZ may be possible, but it is unlikely to go ahead against an outright Cypriot refusal. A breakthrough in the negotiations between Greek and Turkish Cypriots would be helpful. Absent that, the Cypriots may be encouraged to move forward with a comprehensive settlement, at a faster pace than they would have wished. In a way, Israeli reluctance to commit gas to the Vasilikos, and to sign a unitization agreement with Cyprus, both of which have contributed to delaying the development of Aphrodite, can be seen as indirect pressure on Nicosia. Indeed, Aphrodite will be harder to exploit if the island remains divided.
The same logic of economic integration applies to Jordan. The U.S. was instrumental in facilitating two contracts to supply Jordan with Israeli gas. In February 2014, the Tamar partners signed a deal to provide two Jordanian companies, Arab Potash and Jordan Bromine, up to 2.2 billion cubic meters (bcm) of natural gas over a period of 15 years, for a total of $500 million. The deal required Amos Hochstein to hold 14 meetings with the parties involved over a period of 18 months. It was only a prelude to a much larger agreement, once again facilitated by the Americans and requiring several rounds of secret negotiations. It was signed in September 2016 between the Leviathan partners and Jordan’s National Electric Power Company. Under the terms of the agreement, the consortium will provide the Jordanian company with 45 bcm of natural gas over a period of 15 years, thus turning Israel into Jordan’s main gas supplier.
Negotiations with Egypt are ongoing on whether to supply the local market – knowing that the need for imports is expected to dissipate in the early 2020s – or to liquefy the gas in one of the country’s two LNG plants for re-exports. Once again we find the Americans in the role of facilitators. Here too, obstacles stand in the way, including market conditions, and an Egyptian decision to freeze gas import talks following a ruling by the International Chamber of Commerce in favor of Israeli companies, requiring Egyptian companies to pay $1.7 billion to the Israeli Electric Corporation. While it might be difficult to overcome the first, the second appears to be within reach.
The above showcases a marked difference between regional actors and outside actors in their approach to newly discovered resources in the Eastern Mediterranean. An energetic, but in some way, chaotic approach by regional actors, lacking a strategic vision. And a well-defined policy, setting attainable goals and working towards achieving them – already claiming a number of achievements – by outside actors. The region has more to gain if energy issues are addressed in a sober, pragmatic and result-oriented way. That said, the flurry of diplomatic activity and determination to establish regional working mechanisms – even if they have to be calibrated and rationalized – is in itself an accomplishment: It has taken intra-regional cooperation – marginal at best until the discovery of offshore resources – to a new level. Shared interests, including but not limited to the hydrocarbon wealth, is creating new dynamics. This natural wealth could provide the economic incentive needed and might indeed play a role in cementing a new state of affairs in the Eastern Mediterranean.
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