09.03.2018 | Race to exploit Mediterranean gas raises regional hackles

Turkey, Egypt, Cyprus, Israel and Lebanon vie over claims to gas reserves

Click here to read Alaco's article in the FT.

 

The race to exploit huge gas reserves in the eastern Mediterranean is raising regional tensions as disputes over ownership of offshore fields escalate into a war of words between countries with stakes in the potential energy bonanza.

Turkey, Egypt, Cyprus, Israel and Lebanon have engaged in a round of verbal salvos in recent weeks over contested claims to gas reserves — the first of which were discovered a decade ago. The deposits could in time transform the fortunes of the region’s economies, but currently seem more likely to be the source of further confrontation.

The process of exporting gas from the Levant Basin fields to energy-hungry Europe will be difficult enough even without the emerging tensions which, if they continue to grow, could complicate plans to build pipelines linking producer countries to consumer markets.

The eastern Mediterranean has been attracting a host of international energy companies in recent years, eager to explore the region’s substantial gas fields. The reserves may not only help to satisfy domestic demand in littoral countries but could also enable Europe to diversify its supplies, crucially allowing it to reduce reliance on Russia and compensate for dwindling North Sea deposits.

Yet political turbulence as well as economic and engineering challenges may frustrate extraction and export plans. Notably, there is an emerging dispute between Turkey and Egypt over exploration around the divided island of Cyprus and Israeli opposition to Lebanon’s intention to drill in the vicinity of their contested maritime border.

There are other concerns too. Questions have been raised about the feasibility of a planned pipeline running from Israel to Italy via Cyprus, and hopes are fading for one linking Israel and Turkey. Heated exchanges between Turkey and Egypt were sparked in early February when the Turkish foreign minister Mevlut Cavusoglu told a Greek newspaper that his country was set to start exploring for oil and gas in the eastern Mediterranean and did not recognise Nicosia and Cairo’s 2013 agreement to co-operate on the development of hydrocarbon reserves in the vicinity of their shared maritime border.

Mr Cavusoglu accused Cyprus, whose government Ankara does not recognise, of “unilateral” exploration activities, stressing that Turkish Cypriots in the north were “co-owners” of the island with “inalienable rights” to its natural resources. Turkey also claims that some of Cyprus’s prospecting areas lie within its jurisdiction.

In response to Mr Cavusoglu’s remarks, Egyptian foreign ministry spokesman Ahmed Abu Zeid warned that Egypt would not tolerate any violation of its “economic rights” to the eastern Mediterranean. Tensions were further raised when Turkish naval vessels, on manoeuvres in the region, intercepted an exploration rig, owned by the Italian company Eni, which was being deployed off the Cypriot coast. The president of Cyprus, Nicos Aanstasiades, said Ankara’s interference violated international law.

The EU urged Ankara to exercise restraint. Turkey’s President Recip Erdogan then entered the fray warning those “who overstep the mark in Cyprus and the Aegean”. He drew an ominous comparison between the situation off the Cypriot coast and northern Syria where Turkish forces are engaged in an offensive against Kurdish fighters. The exploration rig is now reported to be moving out of the disputed area, after Ankara refused to budge.
The week before Turkey’s naval intervention, Eni and its French partner Total announced that they had discovered promising gas reserves off the southwest coast of Cyprus that looked geologically similar to Egypt’s Zohr field, to date the biggest find in the Mediterranean.

Buoyed by the success of Zhor, which could make Egypt self-sufficient in gas in the next 18 months, Cairo is keen to expand exploration in the region. It has said that it will not be put off by Ankara’s threats, which have stirred anti-Turkish sentiment in Egypt, rooted in Turkey’s support for Mohammed Morsi’s government, overthrown in 2013.

Meanwhile, Israel is embroiled in an equally fractious sovereignty row with Lebanon, which wants to explore for gas in a region close to the disputed maritime border with its southern neighbour. In December the Lebanese approved a tender bid by an international consortium — comprising Eni, Total and Russian company Novatek — for an exploration block in this zone, with drilling expected to start next year.

But in late January, Israel’s defence minister Avigdor Lieberman described the auction as “very provocative”, saying the Lebanese had put out a tender for a gas field that is “by all accounts ours”. Lebanon’s premier Saad Hariri dismissed the claim as part of Israel’s attempts to “threaten regional security”.

The powerful Lebanese Shia party-cum-militant group Hizbollah warned it would defend the country’s “oil and gas rights”. The tension has prompted US mediation. Jerusalem also looks to have fallen out with Ankara, calling into question plans to develop a US-backed Israeli-Turkish pipeline that would help diversify Turkey’s gas supplies and offer Israel’s Leviathan and Tamar fields an outlet to European markets.

After a period of estrangement, in 2016 Erdogan looked to repair relations with Israel, prompted by a falling out with Russia over the downing of a Russian jet near the Syrian border. Turkey was concerned about its reliance on Russian gas, and saw Israeli supplies as an alternative source. But the pipeline project has been put in jeopardy by a flare-up following US President Donald Trump’s decision to move America’s embassy in Israel from Tel Aviv to Jerusalem.

Mr Erdogan reacted bitterly to the move, denouncing Israel as a “terrorist state”, his rapprochement with Moscow seemingly unburdening him of the need to keep ties with Jerusalem on an even keel. Israeli premier Benjamin Netanyahu responded to the barbs in kind and while Israel has not closed the door on the Turkish pipeline, its prospects are now far from promising. The Israelis do have another export option — in the form of the EU-backed EastMed pipeline.

In December energy ministers of Cyprus, Greece, Israel and Italy signed a memorandum of understanding for the $6bn project, which would pipe gas from the region to European markets. However, there are several concerns. The financial viability of the project, with the low price of gas possibly putting off investors, and serious engineering challenges posed by seabed depths of up to 3.3km and volcanic activity along the route of the proposed pipeline.

There is also the matter of Turkey’s attitude towards Cyprus. A more practical solution to the export conundrum is Egypt’s liquefied natural gas (LNG) capacity. Its LNG plants, in Idku and Damietta, are currently largely idle. But in view of the logistical, economic and geopolitical challenges that may undermine the case for major eastern Mediterranean pipelines, the Egyptian gas processing facilities could offer Cyprus and Israel a cost-effective and secure distribution route to Asia, through the Suez Canal, and Europe.

Last month, Israel agreed a landmark $15bn gas export deal with Egypt, the Israeli supplies mostly serving Egyptian domestic needs. But the contract bodes well for the country’s possible role as a regional exporting hub. Indeed, a recent report commissioned by the European Parliament on the region’s gas sector took the view that “in the short-term Egypt seems to hold the key to the Eastern Mediterranean’s gas future”.

While hopes dim of co-operation across the wider eastern Mediterranean region, the prospect of Cyprus, Israel and Egypt joining together to overcome geopolitical and transit challenges would be a ray of much-needed optimism for an energy sector whose political and security risks have recently been so openly exposed.

Yigal Chazan is an Associate at Alaco, a London-based business intelligence consultancy.

This article originally appeared on the FT’s Beyondbrics platform.