The discovery of offshore gas reserves in the eastern Mediterranean has given rise to intense speculation and political debate in recent years.
The hype following the major discoveries that began in 2010 was that the large gas reserves might pave the way for greater economic integration between eastern Mediterranean states and, consequently, lead to greater regional stability. If so, the discoveries could offer major benefits for Europe, providing an opportunity both to diversify away from its reliance on cheap Russian gas and to support the development of deeper relations between Europe’s regional partners.
Exploration of gas reserves in the Levantine Basin is still underway,but it has ramped up following major discoveries in the waters of Cyprus, Egypt, and Israel over the past 8 years.Lebanon is on the cusp and will begin exploratory drilling for offshore oil and gas in 2019.
The discovery of Aphrodite led to hopes that Cyprus might begin producing gas both for its domestic market as well as for other European markets, given that the relatively low level of gas consumption in Cyprus would leave remarkable reserves for export.However, there is consensus that Aphrodite is too small to justify the capital investment needed for its development. For export to begin, Cyprus would either have to transfer its gas through an onshore or offshore LNG terminal or through pipeline.With no infrastructure currently in place, this would require significant capital investment.
Given that Cyprus is a new entrant into the world of gas, any prospective LNG terminal would be a greenfield infrastructure project, and the return on invested capital from projected gas flows would be insufficient to make the project worthwhile.There are similar financial restrictions when it comes to plans for a pipeline to southern Europe, along with additional political challenges regarding the feasibility of construction, due to difficult terrain near Crete.
Furthermore, any such pipeline from Cyprus to Europe would have to recieve Turkey’s blessing, given that it disputes portions of Cypriot maritime territory.
Prospects for export from Aphrodite are therefore slim. For the time being, Cyprus has redoubled efforts to pursue further exploration of other offshore blocks in its EEZ. In December 2016, Cyprus successfully completed an international bidding process and awarded the rights to explore Blocks 6, 8, and 10, to four international firms – Eni and Total; Eni; and ExxonMobil and Qatar Petroleum International, respectively.Total has also expanded its exploration activities in Block 11, where it hopes to discover a field that rivals the huge Zohr field in Egypt ,but Total’s closely-watched Onesiphoros West-1 wildcat off Cyprus has discovered only non-commercial volumes of gas.
In the event of more Natural gas discoveries,Cyprus might also be able to consider other onshore pipeline options that could link into the Trans Adriatic Pipeline, or to the Balkans.Given the size of current reserves in this region, Cyprus might discover additional resources that could empower it to act as a sole exporter. Until that time, the country has to consider regional options for co-exporting jointly with other countries in the region, or face the possibility that resources in the Aphrodite field could remain stranded.
Until recently, Israel was a net gas importer. The country only had a small level of domestic production from an offshore field called Mari B. The rest of its gas was imported from Egypt through a gas pipeline that crossed the Sinai Peninsula into southern Israel. In January 2009, Noble Energy discovered Tamar, a 10tcf gas field located 80 kilometres west of Haifa, in the country’s EEZ. This was a timely discovery.As unrest spread through Egypt in 2012, the pipeline delivering Egyptian gas to Israel came under attack by Sinai-based militants, making Egyptian gas increasingly unreliable. Both Israel and Jordan, the other recipient of Egyptian gas, clamoured for alternative supply sources.
In 2013, production from Tamar commenced and replaced Egyptian gas, meeting Israel’s domestic needs and improving its Energy independence.A year after Tamar was discovered, Noble Energy found the much larger Leviathan gas field, around 50 kilometres southwest of the Tamar field. This reserve, which is estimated to hold approximately 17.6tcf, was the largest discovery in the eastern Mediterranean at that time because the Zohr field off Egypt had not been discovered.Leviathan was touted as a “game-changer”, with the ability to transform Israel from a net gas importer to a net exporter, changing its relations with regional actors, and strengthening relations with Europe too.
Like Cyprus, Israel is a newcomer to the world of gas exporting, and, like Cyprus, it faces domestic obstacles.Early on, Israel’s Supreme Court challenged a controversial deal between the government and operators of the Leviathan field to accelerate extraction, citing that it wasn’t in a position to make the long-term commitments that Noble Energy sought.In 2016, an agreement was struck and the path was cleared for field operators to move towards production.
Despite the confidence of Israel’s Minister of Energy and the wider government that Leviathan could export to the EU,Israel faces two big hurdles:securing long term buyers in order to facilitate production, and identifying feasible export routes.
Leviathan’s operators must have a minimum value of committed purchases to justify the investment necessary for extraction to proceed. In September 2016, Jordan became the first official buyer, signing a 15-year $10 billion agreement that commits Israel to deliver a total of 1.6tcf of gas to Jordan beginning in 2020.
In February 2017, Leviathan’s developers announced that they had reached a Final Investment Decision (FID) to make a capital investment and to develop the first phase of the field, which would allow for extraction of 12bcm per year.Production is set to begin at the end of 2019 or beginning of 2020.
These positive developments indicate that Israel will be able to produce and deliver gas locally and to neighbouring regions. But neither Jordan nor the Palestinian buyers are large enough on their own to cover the cost of full-scale production from Leviathan, or to justify major investment in export infrastructure. Instead, Israel must secure commitment from larger markets, such as Turkey or the EU.The Turkish market is relatively large, and estimates indicate that Turkey will still be looking to import around 15bcm per year by 2025.
Even if Turkey does agree to purchase Leviathan gas, Cyprus and Turkey’s contested claims over maritime space could cause a headache. Any pipeline connecting Leviathan to Turkey would have to traverse Cyprus’ EEZ. Given the longstanding conflict between Cyprus and Turkey, it is unlikely that Cyprus would allow such a pipeline to proceed without a resolution to the dispute. However, Israel believes it could still push on with this despite the dispute. Even if Israeli gas does reach Turkey, the extra costs associated with its transit to the EU would reduce Israel’s ability to compete with either Russian gas or American LNG.
Given these considerations, there is little hope that Turkey will receive Israeli gas by direct pipeline or, indeed, that Turkey would act as a conduit of Israeli gas to Europe. Instead, the likeliest outcome is that Israel and Turkey continue their discussions, each with the understanding that the Leviathan field represents a ‘Plan B’ in the case of a resolution to the Cyprus dispute – however unlikely that seems at the moment.
Aside from pipeline options, Israel has two other means of exporting gas from the Leviathan field, both of which involve developing Israel’s domestic LNG export capacity. Israel’s limited shoreline and strong environmental and security factors make the construction of an LNG terminal challenging.One of the options explored involved the use of a Floating LNG (FLNG) terminal that would allow Israel to circumvent domestic opposition to an onshore LNG terminal.
Israel, like Cyprus, has to consider options for joint export alongside other regional players if it is to circumvent these obstacles. Unlike Cyprus, however, Israel is well-placed to utilise Leviathan resources domestically and regionally. The Israeli gas market has been evolving at a considerable pace since the discovery of these reserves and the country’s gasbased electricity generation is growing.Given the various infrastructure and pipeline issues faced by Israel, Leviathan’s first phase is likely to serve local and regional markets (namely Jordan and possibly Egypt), rather than export markets further afield. In the meantime, Israel will exploit resources for its own purposes and continue to seek a critical mass of purchase agreements so that its exporting activities can be commercially viable.
In August 2015, Israel’s aspirations to become the region’s gas export superpower were undermined by Italian firm Eni’s discovery of the Zohr gas field, over 150 kilometres off the Egyptian coast. Located in deep waters, Zohr is estimated to hold about 30tcf, making it bigger than both the Israeli and the Cypriot gas fields put together.Egypt had operated as a regional exporter since 2003, initially by pipeline and then by LNG. Exports began dropping after 2011 and ended entirely by 2014. In addition to the Jordan Gas Transmission Pipeline, through which it used to export gas to Israel and Jordan, Egypt has two LNG export facilities: Damietta, which is operated by Eni and Unión Fenosa, and Idku, which is operated by Shell. Both these facilities have run at a loss on minimal utilisation ever since Egypt ceased exporting LNG. Even though this infrastructure could facilitate Egypt’s re-entry into global LNG markets, the country’s capacity to resume its role as an exporter remains a hotly contested issue.
The main challenge for Egypt is internal. The country has high domestic gas consumption, estimated at 50bcm per year, and growth is proceeding unchecked due to heavy government subsidies that artificially lower the price of electricity for end consumers.
The initial production rate of Zohr is around 350m standard cubic feet per day (mscf/d), which will increase Egypt’s current production from 5.1bn cubic feet per day (bcf/d) to 5.4 bcf/d, according to Petroleum Minister Tarek El Molla’s statement. The discovery of Zohr injected much needed gas into Egypt’s Energy balance, as it is projected to produce between 20/30bcm per year for two decades.Given Egypt’s domestic demand, the bulk of Zohr’s gas will probably be directed to internal markets. Yet the size of the gas field suggests that, at maximum production, a surplus could be set aside for export, allowing Egypt to resume its role as a regional exporter by 2020-2021, after the current LNG glut has passed.The main question now is how much additional gas Egypt will be able to export after local demand has been met.
Egyptian government officials have declared plans to increase Egypt’s production capacity by 50 percent by 2018, with aspirations to re-enter the export market by 2019.Officials have suggested that the Idku terminal could be running at full capacity by 2021,although these estimates are ambitious.It is more likely that Egypt will resume its role as an exporter by 2021- 2022, when production would have sufficiently expanded and balanced out domestic demand.Egypt has the largest natural reserves and already has the infrastructure in place to export. In this sense,Egyptian LNG would be cheaper than either Cypriot or Israeli gas, because no large capital investment is needed.
Egypt’s ability to resume its export role will depend on a number of factors, including the health of the Egyptian economy and the Energy sector at large, and the ability of Zohr to meet domestic demand and save enough surplus supply for export. If the Egyptian regime is able to maintain political stability and a healthy economy, it would be possible for Egypt to become the sole exporter from the eastern Mediterranean.
Lebanon could discover reserves within the same Levant basin as Egypt. Lebanon sits on the Levant Basin in the eastern Mediterranean where a number of big sub-sea gas fields have been discovered since 2009, including the Leviathan and Tamar fields located in Israeli waters near the disputed marine border with Lebanon.Lebanon has ten blocks of space off its shore that are yet to be licensed.Lebanese placed further hope on Lebanon’s potential oil and gas wealth. On December 14 2017, Lebanon’s Cabinet approved the offers of a consortium of international oil companies to explore for Natural gas in maritime blocks 4 and 9. France’s Total, Italy’s ENI and Russia’s Novatek will conduct extensive studies and surveys in 2018 and start actual exploration in 2019.
Beirut’s approval of a bid by a consortium of Russian, French and Italian Energy companies will help the Lebanese economy overcome the present difficulties and will contribute to the country’s economic development.The Lebanese government has estimated with a probability of 50 percent it has 96 trillion cubic feet of Natural gas reserves and 865 million barrels of oil
As for Syria, the country has relied on production from its onshore gas reserves for more than three decades. Although there has been much speculation regarding the role of gas in Syria’s ongoing conflict, there is still no indication that Syria has sufficient resources in the Levantine basin that would allow it to be an exporter in the future.Given its geographic location, Syria’s importance lies in its ability to act as a transit country for pipeline gas from the region to Turkey, and possibly to the EU. Such aspirations are entirely dependent on the outcome of the war and are contingent on an end to hostilities.
There is an almost unanimous view among analysts that options for joint export by gas-rich countries would enhance prospects in the region, particularly for Cyprus and Israel.The benefits for both are clear, because without such a regional approach, Israel and Cyprus are unlikely to be able to export beyond their local markets. Of the recent discoveries mentioned above, Zohr is the only one that could possibly export gas to European markets on its own. Yet even for Egypt there are advantages to joint export.Adopting a regional approach by pooling infrastructure and resources would create an ‘economies of scale’ effect that would offer Egypt commercial benefits, enhance market confidence, and expand the appetite for investment in the region as a whole.The idea that the gas discoveries in the eastern Mediterranean might enhance regional relations depends in large part on the fact that the emerging gas-rich countries need to pool their resources in order to export gas in either pipeline or liquefied Natural gas (LNG) form, thereby encouraging dialogue and cooperation. The need to adopt a joint approach to export is due to commercial, technical, or political difficulties that prevent each country from exporting gas independently.
2 main options for joint regional export have been touted as possibilities.
The first is the EastMed pipeline, a 1,900 km sub-sea pipeline with a capacity of 10bcm/yr that would link Israel’s Leviathan field with the Cypriot Aphrodite field to export gas to the European mainland through Greece and into Italy.The EU has designated the pipeline a Project of Common Interestand is currently completing a detailed feasibility study to assess its future prospects.Ahead of the anticipated results, the European Commission recently issued a statement arguing that the pipeline is both economically viable and technically feasible. Furthermore, the countries involved in promoting this pipeline see this project as the surest way for eastern Mediterranean gas to reach European shores
The second regional prospect that is often touted is the Egyptian option. This refers to the possibility of using existing LNG terminals on Egypt’s Mediterranean shore, which are now largely idle, as an LNG export hub.Egypt’s LNG export capacity could be filled: by domestic Egyptian gas from Zohr, the giant field that was most recently discovered off Egypt’s coastline; by Israeli or Cypriot gas that would be re-exported through Egypt’s LNG terminals; or by a mixture of all three.This option would allow export to global markets, rather than restricting access to European markets through the pipeline. It would also require minimal capital expenditure, given the availability of pre-existing infrastructure.