The eastern Mediterranean has recently become the focus of increased industry and international interest. The region is on the way to becoming an important natural gas province following a series of major discoveries made off the shores of Israel and Cyprus. If developed in a timely and successful way, current and future discoveries may significantly change the energy picture not only in the eastern Mediterranean, but also in the wider Mediterranean region.
Developing these resources, however, will require overcoming numerous major challenges and obstacles with geopolitical implications. Rising conflicts over the unresolved demarcation of maritime borders are arguably among the most sensitive ones. Therefore, being perhaps the only common denominator, energy will increasingly become a main component of the geopolitical struggle in the eastern Mediterranean and its surroundings.
An overview of exploration activity in the eastern Mediterranean
The history of offshore drilling in the eastern Mediterranean goes back to the late 1960s. The wells drilled until 1999 either encountered oil and gas but not in commercial quantities, or came out dry. After decades of fruitless searching for hydrocarbons, five modest natural gas discoveries in 1999 and 2000 at shallow depths west of the coastal town of Ashkelon in Israel and Gaza Strip (Noa, Or, Mari-B and Nir in offshore Israel, and Gaza Marine in offshore Gaza Strip) have increased hopes.
These modest discoveries accelerated exploration efforts and promoted the acquisition of geophysical data throughout the entire eastern Mediterranean area, particularly the Levant basin. There have been three large-scale offshore gas discoveries in this basin since 2009 (Tamar in 2009; Leviathan in 2010; Cyprus-A in 2011) that have opened up a new deep-water province and hence a gas bonanza in the region. The Tamar and Leviathan fields were among the world’s largest deepwater gas discoveries between 2001 and 2010.
If some other recently discovered fields (Dolphin, Dalit and Tanin) are added to the above-mentioned fields, the total discovered natural gas resources in the Levant basin up to June 2012 amount to over 1025 billion cubic meters (bcm). And yet, the eastern Mediterranean remains one of the world’s under-explored or unexplored regions and has good prospects for additional gas, and perhaps oil, reserves.
A recent (May 2010) United States Geological Survey (USGS) assessment concerning the undiscovered oil and gas resource potential of the Levant Basin Province in the eastern Mediterranean confirms this. The study estimated a mean of 1.7 billion barrels of recoverable oil and a mean of 3450 bcm of recoverable natural gas in the Levant Basin Province.
These discoveries and the USGS assessment have not only significantly augmented perceptions of natural gas potential in the eastern Mediterranean, but have also raised expectations for further increases in the region’s hydrocarbon reserves in the future. Naturally, the region has emerged as one of the most promising exploration markets. Today, all countries in the region are racing to secure their own slice of this lucrative market.
So far, of the eleven gas discoveries in the Levant basin, nine have been made in Israeli waters. Several companies who hold exploration licenses and permits are either continuing or will shortly commence drilling in the Mediterranean waters.
Although a late comer, the Republic of Cyprus has also been eager to search for hydrocarbons in Mediterranean waters. In February 2007, Cyprus launched its first offshore licensing round. That round resulted in the award of only one block, Block 12 located on the southeastern side of Cyprus (50 km from Israel’s Leviathan field). U.S.-based Noble Energy, operator of the block, discovered a large gas field (the Cyprus A) in December 2011. Cyprus launched its second licensing round in the February-May 2012 period. Five companies and ten consortia submitted bids for nine blocks out of twelve offered.
Some of these blocks overlap with what Turkey considers its continental shelf and with areas where the Turkish Republic of Northern Cyprus (TRNC) gave Turkish state oil company TPAO exploration licenses. Turkey reached an agreement in September 2011with the TRNC on the continental shelf and offshore oil and gas exploration. Turkey and Turkish Cypriots signed an agreement in September 2011 delineating their continental shelf. In November 2011, TPAO was given exploration licenses for seven blocks, six of them offshore including in Greek Cypriot areas, and one onshore in Famagusta in the north. In April 2012, TPAO started onshore drilling with Turkyurdu-1 well.
Offshore Syria and Lebanon are considered frontier exploration areas given that no wells have so far been drilled. However, both countries have been slower than Israel and Cyprus to take the first steps toward the exploitation of their offshore resources.
With the hope that discoveries similar to offshore Israel and Cyprus could be made in its own offshore areas, Lebanon decided to launch its first licensing round for offshore gas exploration in the first quarter of 2012, but that target has been pushed back first to mid-2012 and now possibly to October 2012 due to the delays in establishing a state petroleum administration.
Syria has been keen to attract foreign companies for offshore hydrocarbon exploration activities in order to offset its declining oil output and reduce gas imports. The country announced an offshore exploration licensing round for three blocks in March 2011 with a closing date of December 2011. However, the round is on hold due to the ongoing crisis in the country.
What to do with the discovered gas
Discoveries make sense if reserves are converted into production capacity. Companies will carry on costly exploration and field development endeavors if they see the ability to commercialize their discoveries with a favorable rate of return. Much will depend on the gas price the companies will be getting by selling the gas to their domestic market, the availability of an export option and transport means, and stability in the countries’ regulatory, fiscal and gas policy as well as political atmosphere. Eventually, any country in the region will be hard pressed to attract companies for upstream business without the export option and an effective policy scheme.
Israel and the Republic of Cyprus are investigating how to best utilize their gas resources. In the case of Cyprus, the main idea is to export the surplus gas, since its domestic market’s need is very small. Things are different for Israel. The Israeli government is more inclined to secure gas for domestic use. An Israeli government committee, known as the Tzemach Committee on energy policy, is preparing a study on a state export policy. The committee recommended in its April 2012 session that large offshore fields be allowed to export up to 50% of their reserves. For smaller fields (which are often not economically viable and hence may need incentives to be developed), this share could be increased up to 100%. It is yet to be seen what the final verdict and its implications will be.
How to bring the gas to the customers beyond the domestic market
Neither Israel nor Cyprus has any gas export infrastructure, but there are numerous options.
A pipeline to Turkey and from there onward to Europe through one of the legs of the Southern Gas Corridor from the Caspian could be the most cost-effective and attractive route, but this option seems less relevant in the current geopolitical climate.
Connecting to the Arab Gas Pipeline could in theory take in gas also from Lebanon and Syria (if gas is found there in the future), but this option is considered to be very limited in the short to mid-term.
A long pipeline (1200 km) to Greece from Cyprus, if combined with the “EuroAsia Interconnector,” an underwater power cable project that would link Israel to the pan-European electricity network via Cyprus, Crete and the Peloponnese by 2016, would be technically feasible but too costly, in addition to the potential political problem it could cause with Turkey.
Most recently, the Greek DEPA proposed the potential utilization of the Interconnector Greece-Italy/Poseidon section of the Interconnector Turkey-Greece-Italy pipeline project, Greece’s LNG regasification terminal and the Interconnector Greece‐Bulgaria pipeline as potential entry points to southeastern European markets for Israeli and Cypriot gas. This would require building a 1,100 km subsea pipeline connecting Cyprus to Crete and then on to the Central Peloponnese. Thereafter, part of the gas could be transported to Italy via IGI/Poseidon and a smaller portion could be exported to Bulgaria via IGB, which is planned to be completed by 2013.
Building an LNG plant in Israel—on the coast or offshore—is quite a challenge due to security, environmental and suitable space grounds. Routing the gas to Egypt and hence using the spare capacities at Egypt’s LNG plants could be a cost-effective option, but current political tensions between Israel and Egypt would make access to these plants difficult. Building an LNG plant at Vassilikos or nearby, on the south coast in Cyprus, seems like a strong option. In this case, the gas from Leviathan and other offshore discoveries around would be brought to the plant by pipeline. Another option is to take the gas to the Israeli coast and send it by pipeline to Eilat in Israel, and then on to Jordan’s special economic zone at Aqaba where an LNG facility could be constructed. However, this option would be too cumbersome and costly.
In sum, although there are several options, none are front runners yet.
Gas discoveries bring numerous challenges with geopolitical implications
The gas bonanza we are witnessing in the eastern Mediterranean offers big opportunities in terms of energy security and economic prosperity. However, it also presents enormous technical, administrative, security, legal and political challenges.
The technical challenges are centered on infrastructure and financing. Administrative challenges include the governments’ ability and long-term vision to make the best use of the gift from Mother Nature. Security challenges come along with perturbed political relations between the countries in the region. Legal and political challenges are being manifested in the debates and disputes over conflicting claims about the ownership of resources and the demarcation of maritime borders. This is arguably the most pressing challenge.
All these, in essence, have contributed to the shaping of a new regional balance of power in the eastern Mediterranean. We are witnessing shifting alliances (such as the Greece-Cyprus-Israel triangle) and emerging rivalries between regional actors, in line with the changing national interests of each actor. A zero-sum game logic in the region leads nowhere. Assertive foreign policy stances may bring short-term gains by winning domestic support. But the escalation of confrontations in the region is a serious threat to the stability and security of the whole Middle East.
Large gas discoveries since January 2009 and the prospect of substantial hydrocarbon resources waiting to be tapped beneath the eastern Mediterranean waters have sparked major international interest. These resources present an opportunity for regional cooperation and prosperity in the region, even though they have the potential to fuel new conflicts, exacerbate existing ones and add anxieties to an already volatile region, one of the most entangled political regions on Earth. Unless they are developed for the benefit of all, frictions will likely get more heated, and in some cases, might even escalate into a full-scale confrontation.
What the future holds is hard to predict, but myopic policies pursued by all the countries indeed further complicate the challenges the region already faces and shrink the room for optimism. Until and unless these pressing challenges are managed carefully and with wisdom, converting them into opportunities will be more and more difficult. What is needed to help turn controversies into possible cooperation is a balanced but pragmatic approach through a constructive and frank dialogue between the countries in the region and outside powers. This, however, will not be easy either.
So far, the European Union has been eager to diversify its gas supply sources and routes, but it has been rather quiet on the eastern Mediterranean gas finds and their possible contribution to EU energy supply security, as a fifth gas corridor or as a new leg to the Southern Gas Corridor. After taking over the rotating EU presidency on July 1, 2012, the Republic of Cyprus (together with Greece) will likely raise awareness in the EU about this issue.
Arguably, hydrocarbons might also be a turning point in the EU-Turkey accession talks. The Republic of Cyprus will probably announce the results of its offshore licensing round before its EU presidency ends. The following developments will show us the light at the end of the tunnel.