E Med: Short-Term Problems Cloud Longer-Term Outlook

There’s still a lot of optimism surrounding the eastern Mediterranean, despite a recent decision by the High Court in Jerusalem that will delay Israeli field developments and continuing disputes between Cairo and Shell concerning Egyptian field development.

Cyprus has demonstrated its confidence that the region’s fortunes will bounce back by announcing a third licensing round; while the European Commission’s Vice President for Energy Union, Maros Sefcovic, has publicly stated EU backing for a pipeline to Greece.

It’s certainly a contradictory background, made all the more difficult to assess because access to the most commercially viable regional market, Turkey, depends on two major political developments: rapprochement between Israel and Turkey and a solution to the 41-year-old partition of Cyprus.

What this means is that there is a fundamental difference between what can be achieved in the short term and the much larger prospects and possibilities in the long term.

In the immediate future, the emphasis will remain on Egypt, and on whether the development of Israel’s giant Leviathan field and of the much smaller Cypriot field, Aphrodite, will be tied in to Egyptian supply, demand and export requirements.

In the longer term, the question is whether output from Leviathan and Aphrodite, and from any further discoveries that might be made in an increasingly interesting geological context, will be able to reach Turkey, either by pipeline or as a result of marine-based development of floating compressed natural gas or floating liquefied natural gas.

Only in the very longest context imaginable – perhaps a 10 or 15-year period in which further discoveries both multiply and extend geographically the current resource base – is it reasonable to envisage a pipeline to Greece.

The Israeli High Court decision rejecting the stability clause of Israel’s newly-enacted natural gas regulatory framework effectively means that the Israeli government will have to embark on a fresh round of negotiations with the companies developing Leviathan – essentially the local Delek and the US Noble – concerning how best to provide a stable framework that will ensure reasonable rates of return on the investments.

But while Delek seems ready to accept the delays inherent in such discussions, Noble appears to be keeping open the option of seeking billions of dollars in damages by means of arbitration in the International Court of Arbitration in Geneva.

In Egypt, Shell still has to decide how far it will go in order to push its claim, inherited as a result of its takeover of BG, for either the early repayment of some $1.1 bn owed by the Egyptian General Petroleum Corporation (EGPC) or settle for a higher price for gas to be delivered to EGPC.

As it stands, EGPC is offering to pay Shell’s BG unit $5.88/mn Btu, while Shell, in the absence of any debt repayment plan, is holding out for $7.00/mn Btu. Failing agreement on these matters it is hard to see how development of Shell’s 9B concession area will proceed.

In Cyprus, the realisation that the geology underpinning Egypt’s giant Zohr field discovered last August may also extend into Cyprus’s exclusive economic zone (EEZ) was the prime reason for proceeding with a new licensing round at a time when so many other eastern Mediterranean factors remain in doubt. Moreover, the June 21 deadline for submissions is quite close and almost certainly means that companies seeking to secure stakes in Blocks 6, 8 and 10 – the blocks likely to attract the greatest interest – will have to submit their offers without knowing whether Cyprus really is moving towards a resolution of the long standing division of the island into essentially Greek-Cypriot and Turkish-Cypriot ruled regions.

There are two main reasons why this is important. First, until there is a settlement to the Cyprus problem, it is not possible to lay a pipeline between the Israeli fields and Turkey, since such a line would have to pass through Cypriot waters on both the Greek and Turkish sides of the island. Second, the management of hydrocarbon resources will clearly be a priority for any new federal government in a post settlement Cyprus.

And neither community has yet indicated just how it thinks either the limited resources Cyprus is already known to possess, or any future resources it might discover, should be used.

If discoveries are limited, then development plans for Cypriot hydrocarbons will have to mesh with those of its neighbours; but if substantial discoveries are made, there will almost certainly be calls for a revival of former Cyprus government plans for a gas liquefaction facility in the current Greek Cypriot port of Vasilikos.

And there is always the really long-term hope. When he visited Greece on 10 March, Sefcovic discussed a host of issues with the prime minister Alexis Tsipras, including how Greece might one day become a regional gas hub. But his most striking comments on this visit came on March 29, when he issued a blog saying that Greece’s “highly ambitious plans with the governments of Cyprus and Israel to create the eastern Mediterranean natural gas pipeline would inject additional sources from the newly-found gas reserves. This goes hand in hand with the EU Energy Security Strategy which aims to diversify Europe's energy sources in order to increase competition in the energy market.”

There is no doubt that the current governments of Cyprus and Greece would both love to see an eastern Mediterranean pipeline carrying Israeli and Cypriot gas to Europe by way of Greece. But the commercial case for such a line is almost impossible to conceive unless further gas discoveries are made not only in the Israeli, Cypriot and Egyptian sectors of the sea, but also in Greek waters.

And that raises a host of complex questions concerning what might constitute the respective exclusive economic zones of Greece and Turkey in the eastern Mediterranean – and whether either Athens or Ankara really wishes to raise once again the extremely thorny subject of their maritime boundaries.

Perhaps the bottom line is that so much really depends on Turkey. The Turkish government would dearly love to have access to eastern Mediterranean gas in order to diminish its reliance on gas imports from Russia. Indeed, Ankara’s determination to demonstrate that it does have alternatives even prompted reports that Turkish gas imports in January included a tiny element of LNG imports from the US, a remarkable achievement seeing as how actual US LNG exports did not start until 25 February.

But if Turkey is to import eastern Mediterranean gas – and Turkey is Europe’s fast growing gas market – then it will have to finalise its current negotiations on a rapprochement with Israel and it will have to sign off on a Cyprus settlement. These are both quite possible, but a Cyprus settlement, in particular, may take time to deliver. And this means caution should remain a watchword both for current and prospective eastern Mediterranean investors.

John Roberts, Chief Analyst, Natural Gas Europe.