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    Exclusive Interview: Turkish Energy Expert Says Israel's East Med Natural Gas Diplomacy Might Backfire

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Summary

Speaking with Natural Gas Europe, Mehmet Öğütçü analyses the geopolitics in the East-Med region. He says Israel should develop its two smaller reservoirs first.

by: Ya'acov Zalel

Posted in:

Top Stories, , Cyprus, Turkey, Egypt, Israel, East Med Focus, Expert Views

Exclusive Interview: Turkish Energy Expert Says Israel's East Med Natural Gas Diplomacy Might Backfire

Israel's nascent natural gas industry is facing hard choices. By mid-December, the long-awaited regulatory framework will finally be approved when Prime Minister Benjamin Netanyahu signs Article 52 of the antitrust law. The article will enable the government to sidestep the anti-trust authority in order to exempt the natural gas monopoly from complying with the authority on grounds of national security and national interests.

The Israeli government argues that in light of gas shortages in Egypt and Jordan, supplying them with Israeli produced gas will strengthen and stabilize Israel's relationship with both countries and help the survival of those regimes. However Mehmet Öğütçü has warned that Israel’s natural gas diplomacy might backfire in so many ways unless grounded on realistic and business-friendly terms. Mr. Öğütçü is President & CEO of Global Resources Partnership, an energy investment advisory group; the executive chair of Bosphorus Energy Club; a former Turkish diplomat; and a former BG executive.

"I think there is a euphoria that gas and energy can be an instrument for peace and confidence building measures in the region," said Mr. Öğütçü in an exclusive interview with Natural Gas Europe on the sidelines of the 2015 Universal Oil & Gas conference, held last week in Tel Aviv, Israel. "However, experience shows us that energy is often a source of confrontations and conflicts in the rest of the world."

He continued, "Energy has not been always peaceful. Look at Russia, what happened to Ukraine; look at South China Sea [and] the 'Malacca dilemma' for China, Central Asia where China is leveraging its power very significantly at the expense of Russia; the disputed waters of the Caspian; and also look at north of Africa, West Africa,  Latin America.

"I hope we can set a good example to emulate here in the East-Med where Turks, Israelis, Egyptians, Cypriots, Lebanese can work together and make that part of the Mediterranean an island of peace. There is a strong chance that this could be wishful thinking."

Mr. Öğütçü sees not only geopolitical risks lurking in the wings but also economic risks for Israel, emanating from trading with relatively poor clients of gas in the neighboring Middle East.

"Turkey has lost some of its credibility in the region following the Arab Spring and after what happened in Libya and Syria, but it is gradually regaining it," Mr. Öğütçü said in analysis of Israel's options. "The fundamentals are there. Whoever in the region wants to sell to high-value markets--I underline 'high value', not poor countries with recurring payment problems like Egypt, Jordan, and Palestine Authority--have to be tied either to Europe or Turkey.

Expanding on some of the issues companies operating in the region have faced, he explained, "BG has declared force majeure because of the difficulties of payments on the part of Egypt. Israel or companies buying from Israel will likely face the same problem of receivables, let alone Egypt’s new discoveries [that] could reduce the need for Israeli gas.If it is just using the current underutilized LNG plants in Idku and Damietta, that is fine, but you have to have the right price and long-term assurance. But if you will be forced to sell to the [Egyptian] domestic subsidized market, there is dilemma you will encounter."

He continued, "Jordan is very important politically, but who will pay on its behalf? Companies are not in the business to finance geopolitics. Either the U.S. has to insure, or Israel has to subsidise it. And the same goes for the Palestinian Authority. A real regional collaboration should include all the players on the basis of common denominators and we have to do everything possible to reduce geopolitical tensions and excessive regulations that deter investors."

When the geopolitical tensions are eased and resolved, Mr. Öğütçü would like to see the private sector taking the lead role in the developement of natural gas resources, and for the governments to take a back seat if the narrow window of opportunity is to be seized.

Asked if Israel or any other start-up state in the energy business should adopt the Norwegian model in energy development, he said: "This is jumping the gun as Israel has been cluttering the legal and institutional framework with excessive legislation and policies. Of course, you have to consider the best ways of attracting investors at a time when many E&P projects have been either postponed or cancelled due to reduction in international demand and lower prices. Investors will not come to high-risk geology, high-risk political environments, and high-risk projects without believing in a high rate of return. Initially, you have to provide it, then you can try at a later stage to skim the milk from the investors. You have to reward your investors. Then you reach a balance of interest later on.

"If you start with restrictive regulation and the models like the Norwegian, which Oslo can afford, you are doomed to fail," he continued. "Israel is starting at the fledgling stage and needs to establish its hydrocarbon industry first on solid grounds, then customize its legislation and policies as it goes along. It is a huge challenge to bring in oil and gas majors such as BP, Shell and ExxonMobil because they may run the risk of being blacklisted in the more lucrative Arab world for having invested in Israel. They cannot take that risk."

As for the relationship between Turkey, his homeland, and Israel, Mr. Öğütçü sounds cautiously optimistic. "Despite a current low point in diplomatic relations between Israel and Turkey, trade between the countries continues to grow. Mutual trade volume reached over $5.6 billion in 2014, representing a nearly 50% rise over 2009.

"Politically speaking, the relationship is on hold because of Mavi Marmara [a Turkish boat that in 2010 led a flotilla that tried to break the Israeli maritime siege on Gaza, and was intercepted and caught by Israeli commandos. Nine Turkish nationals were killed during the operation], and also regional geopolitics. The main bone of contention between the AKP-led Turkish government and the Likud-led government in Israel remains the Palestinian issue."

Despite the political friction between Israel and Turkey, Mr. Öğütçü noted that economic relations between the two countries were strengthened during the last few years, as trade volume has expanded significantly, and Israel has become the corridor for Turkish trade with Arab countries, as the Syrian civil war blocked overland access routes from Turkey to those countries.  

"Politically, with a new stable Turkish government, things are moving towards normalization, but do not expect it to happen quickly unless there is some face-saving progress on the Palestinian issue,"  Mr. Öğütçü said.

So what are the chances of exporting Israeli gas to Turkey? Natural Gas Europe asked.

"I believe that Turkey will be involved in Leviathan phase two, which requires a big off-taker," he replied. "Turkish utilities and traders can sign a 10 bcm purchase and sale agreement."

Mr. Öğütçü views price as the number one determinant. He believes an Israeli deal with Turkey cannot go ahead if the price is not competitive with other suppliers to the Turkish gas market.

That market is already served by a multitude of gas pipelines from Russia, Azerbaijan, Iran and soon Iraq’s KRG, as well as LNG. Besides the price, Turkey cares much about the diversification of source, he said.

"Like the EU, Ankara wants to reduce its dependence on Russia. Right now about 65% of Turkish gas is coming from Russia. Also Turkey is trying to reduce the dependency on natural gas for power generation from 44% today to 30% by 2030, so there probably will be less demand for natural gas as renewables and nuclear displace gas."

As for developing an axis or united front between Israel, Cyprus and Greece against Turkey, Mr. Öğütçü says that "the decades-long Cyprus problem is moving towards a resolution, and there is a new leadership in the Turkish part of Cyprus serious on political settlement. However, the mentality and mindset needs to change on the [Greek] Cypriot side as well. I see that as an opportunity to achieve a settlement, but it will not be lasting unless both parties are satisfied, because in international relations and negotiations, it has to be win-win. If it is a zero-sum game, namely 'I win and you lose', you can't have a long lasting settlement. With regards to Cyprus, Egypt and Israel coming together that's fine. However, without Turkey, this regional picture will always be incomplete because Turkey is the largest powerhouse in the Mediterranean–Europe's seventh largest economy, the world's 16th, NATO's largest army after U.S., 80-million-strong population, and a vibrant economy”.

At the end of last September, Russia started a military campaign against rebel organizations in Syria. Some pundits have connected it to Russia's desire to defend, among other interests, its natural gas interests.

"I believe it is wrong to contend that Russia needs to control Syria to protect its dominance of the European gas market," says Mr. Öğütçü,"in particular from a proposed Qatari pipeline that would cross Syrian territory. Although Gazprom has a vital strategic interest in maintaining its 30% share of the European gas market and keeping an eye on potential competition including from Israel, the actual or potential role of Syria in this is irrelevant to Russia’s involvement in the Syrian conflict. Thanks to its strong military presence in the western part of Syria, Russia will have direct access to the East Med–this is a wake-up call for Turkey and other East-Med nations as well as for the West, particularly for NATO."

The last piece of advice Mr. Öğütçü had for Israel was that since oil majors's CEOs are not about to present their passports at the control desks at Ben Gurion Airport anytime soon, Israel should rethink its development strategies. Israel, he says, has to lure small or middle size independents and help them for successful operations in various ways.One of the options is to go for relatively small projects, like developing first the two small gas fields Tanin and Karish.

"Small is beautiful. Success breeds success," he said. "If you start with big capital ticket projects, $6-7 billion, if you can find it, the likelihood that you will fail is not small. If you focus more on CNG, Karish and Tanin, and floating LNG, these will pave the ground and lead to bigger projects. International capital markets today are scary and have shelved many attractive but big-ticket projects."

 Ya'acov Zalel