Geopolitical rivalries cloud prospects for Mediterranean gas finds

Fields are attractively close to Europe but political risks make development complex

When gas started flowing from the Zohr field last month it was an important step in Egypt’s drive for energy independence and signified that the eastern Mediterranean was finally establishing itself as a force in gas production.

Claudio Descalzi, chief executive of Eni, the Italian group leading the $12bn project, said Zohr would “completely transform Egypt’s energy landscape, allowing it to become self-sufficient and turn from an importer of gas into a future exporter”. Zohr is the largest hydrocarbon discovery made in the Mediterranean and the hunt is on for more. Israel and Cyprus see similar potential to end dependency on energy imports and generate an economic windfall by exporting surplus supplies. 

Lebanon is also opening its waters to exploration. The prospect of a big new source of gas on Europe’s doorstep looks strategically attractive when North Sea reserves are in decline and the region is fretting about its dependence on Russian supplies. Yet development of eastern Mediterranean resources is far from straightforward because of the cocktail of political risks and rivalries involving the countries concerned. 

“The exploitation of gas reserves could change dramatically the political and economic climate in the eastern Mediterranean,” says Emmanuel Karagiannis, an energy security specialist at King’s College London. “At the same time . . .[it] has the potential to exacerbate decades-old border disputes and generate new tensions.” Even if the politics can be resolved, the economics are just as tricky. Global energy markets are awash with cheap gas from Russia, the US and elsewhere. Zohr made sense because of domestic demand but Israel and Cyprus require exports for their projects to pay off. 

“The obstacles are commercial as much as political,” says Gareth Winrow, an independent energy and foreign policy analyst. “It’s going to be difficult for the eastern Mediterranean to compete.”

Despite these doubts, progress is being made. A drilling ship leased by Eni and its partner Total of France arrived off southern Cyprus last month to explore west of the Aphrodite field, which was discovered in 2011. Work started last year to develop Israel’s long-awaited Leviathan gasfield in a $3.75bn project led by Noble Energy of the US, and the go ahead is expected this year for the nearby Karish and Tanin fields controlled by Energean of Greece. Finding and developing gas is only half the challenge, however. 

At least as difficult is establishing the export routes to reach international markets. Political support has been given to a proposed €6bn pipeline from Israel to Italy via Cyprus and Greece. The four countries signed a provisional agreement last month to jointly develop the project with an aim for completion by 2025. But, at 2,000km in length and depths of up to 3km, it would be the longest and most difficult subsea development of its kind. 

Many experts doubt its viability. A cheaper option would be a pipeline via Turkey but Arab-Israeli hostilities rule out a path through Lebanese and Syrian waters, even if Israel and Turkey could overcome their own differences. An alternative route close to Cyprus is no easier given Nicosia’s fraught relationship with Ankara, which supports the breakaway Turkish part of the island. Mr Karagiannis says a pipeline could form part of an eventual settlement of the Cyprus dispute but that is an uncertain prospect after peace talks broke down last year.

For now, hydrocarbons look more likely to inflame tensions. Turkey has condemned the latest drilling off Cyprus as an “unacceptable” violation of “the inalienable rights” of the Turkish Cypriot people. A Turkish seismic research vessel has been positioned off northern Cyprus in a sign of Ankara’s desire for a stake in the region’s resources. 

Analysts question whether energy companies will commit the billions of dollars needed to develop Cypriot gas in the absence of a deal to remove the political risks. 

Aphrodite is still undeveloped six years after discovery. Egypt has found it easier to attract investment because of its much larger domestic market. Zohr came on stream less than three years after discovery, compared with the seven taken to start development of Israel’s Leviathan.  There is already an export route for Egyptian gas via the country’s two liquefied natural gas terminals, from which tankers can serve not only Europe but also Asia through the Suez Canal. The LNG plants have been dormant in recent years as falling domestic production turned Egypt into a gas importer. 

But the arrival of Zohr, together with new developments by BP in the Nile Delta, could produce surpluses in the 2020s. Israel and Cyprus could also feed gas into the Egyptian LNG terminals via much shorter pipelines than those proposed to Italy and Turkey. A report for the European Parliament last year deemed this the most realistic option. “Egypt seems to hold the key to the eastern Mediterranean’s gas future,” the report said. Tarek El-Molla, Egypt’s petroleum minister, told the Financial Times last year that his country was willing to work with neighbours to create an energy hub. “We are ready to receive this gas, liquefy it and sell it to the international market,” he said. The incentives for co-operation are strong but so too are the barriers. 

As Egypt reaps the rewards of Zohr, its neighbours face difficult choices if they are to unlock the full energy potential of a region that has mixed commerce and conflict for millennia.

By Andrew Ward - Source of article Financial Times