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Research Report

Hydrocarbon Developments in the Eastern Mediterranean: The Case for Pragmatism

Charles Ellinas
John Roberts
Harry Tzimitras
Foreword by David Koranyi
Copyright Date: Aug. 1, 2016
Published by: Atlantic Council
Pages: 34
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Table of Contents

  1. (pp. 1-1)
    David Koranyi

    The Atlantic Council, through its Eurasian Energy Futures Initiative,¹ covers energy and climate change issues that are of crucial importance from both a transatlantic and global perspective.

    Hydrocarbon resources in the Eastern Mediterranean have been at the forefront of the Initiative’s agenda since 2013, while the Council as a whole has been active in driving transatlantic engagement with the region.

    The Council has taken a twin-track approach: promotion of analytical work and facilitation of dialogue on developing the Eastern Mediterranean’s hydrocarbon resources in a manner that supports regional cooperation on a host of issues, including energy infrastructure development, regulatory and...

  2. (pp. 5-8)

    Egypt will be at the center of Eastern Mediterranean oil and gas activities in 2016 with new production expected to come online, along with prospects of major new discoveries. However, Egypt is experiencing serious pressure on its energy resources due to past misguided policies and ever-increasing demand. This is one of many challenges the country now faces as it develops its indigenous resources.

    Israel, following resolution of its regulatory issues, will be looking to work out how the 620 bcm of proven reserves in its giant Leviathan field (see map 1) can best be harnessed to meet both economic and...

  3. (pp. 9-10)

    Egypt has gone through turmoil over the last few years. The government of President Abdel Fattah al-Sisi has brought a degree of stability, but terrorism and security risks remain quite serious, as evidenced by the downing of a Russian passenger jet last year and regular incidents on the Sinai.

    A major reduction in tourist revenues, coupled with reduced foreign government grants due to the oilprice crisis, has led to foreign exchange shortages and fiscal deficits. The shortfalls create difficulties for Egypt in maintaining its payments for LNG imports and reducing its debt to international oil companies, thus representing a serious...

  4. (pp. 11-13)

    Gas development in—or rather off—Cyprus has two contrary characteristics: slow progress regarding development of the already discovered Aphrodite field, and anticipation that Egypt’s Zohr discovery will prove the precursor of a successful third licensing round in Cyprus. The tension between these two elements contributes to the uncertainty surrounding the role that gas might play in contributing to a solution of the Cyprus question, as potential benefits appear to be receding, well into the next decade.

    Cyprus has granted a two-year extension to Eni’s lease of Blocks 2, 3, and 9 (see map 2), until 2018, but further drilling...

  5. (pp. 14-16)

    A host of questions currently surrounds Israeli gas development. Is energy a national security issue? Is it a social justice issue? What balance should be struck between the retention of gas resources to ensure domestic energy security and their availability for exports? Is the approval of the agreement on the gas regulatory framework going to put a stop to these arguments?

    Such questions prompted both uproar and introspection throughout 2015. The new gas regulatory framework deal, brokered by the government and Noble/Delek (the principal shareholders in Leviathan, and Tamar, (see table 1)) and which Prime Minister Benjamin Netanyahu signed in...

  6. (pp. 16-16)

    Lebanon is surrounded by a complex and troubled region, particularly Syria and Israel, with inevitable consequences on the balance of power between rival entities, both inside and outside. Seismic surveys conducted over 70 percent of Lebanon’s exclusive economic zone show prospective gas reserves are high.29 After a flurry of activity, gas exploration in Lebanon has been frozen for more than two years. Without a stable environment and government, it is difficult to see when activities will be resumed.

    Greece is currently too preoccupied with its many problems, and therefore development of its hydrocarbons does not appear to be a priority...

  7. (pp. 17-18)

    Regional cooperation is required in order to ensure the effective development of Eastern Mediterranean resources as a whole. At its most basic level, this requires bilateral cooperation. For example, Cyprus and Israel will need to finally conclude their longstanding negotiations on a unitization agreement to ensure development of any resources that may span the boundary between their respective EEZs (see map 1), such as Aphrodite. Egypt and Cyprus concluded a unitization agreement in December 2013.

    Closer cooperation within the Mediterranean framework can be built block by block, as demonstrated by the January 27, 2016 tripartite summit of Israel, Cyprus, and...

  8. (pp. 19-23)

    Gas is changing Israel’s national security and foreign policy perceptions. Eastern Mediterranean policy, in particular, is being driven by energy considerations, both in terms of field development and export markets.

    A key focus is Turkey. Israel and Turkey have been negotiating on a pipeline to transport and sell Israeli gas to Turkey and possibly to Europe via Turkey, since 2014. About 8-10 bcm/y could be consumed within Turkey,35 but additional volumes of Israeli and Cypriot gas could be exported to Europe through Turkey, provided this is commercially viable.

    Two political developments are required to enable such a project: the restoration...

  9. (pp. 24-24)

    Exporting Eastern Mediterranean gas through pipelines is subject to multiple risks, particularly those with their origins in historic and current tensions between the prospective producers and consumers in the region. Only options that are under the full control of the exporting country, such as FLNG or FCNG, can eliminate this risk. The first CNG transport ship in the world, certified by the technical and inspectional services company ABS Group, has been successfully launched in Indonesia.52

    Such systems “could potentially unlock the full potential of Eastern Mediterranean hydrocarbons. FLNG and FCNG could also be commercially viable, limiting costs so as to...

  10. (pp. 25-25)

    The European Commission has been expressing strong interest in the Eastern Mediterranean in terms of promoting regional security and stability, but also “as an important source of hydrocarbons for Europe and to assist the countries of the region to cooperate in order to achieve this. In a regional environment of rapidly changing realities, there is a sense of urgency for regional platforms of dialogue, including civil society in addition to regional governments, to contribute to the social and economic welfare of the local populations and the protection of the regional environment.” 57

    Gas consumption in Europe is recovering slowly, with...

  11. (pp. 26-27)

    The Eastern Mediterranean potentially holds substantial amounts of natural gas, some already discovered but with a lot more to come. Even though substantial quantities of this gas can be consumed within the region, mostly by Egypt, Israel, and Turkey, potential discoveries are such that eventually there will be exports to Europe and beyond. One question is whether export-led development will lead to the creation of a regional trading hub.62

    Gas trading hubs are well established in the northwestern states of the EU and are gaining ground in parts of Southern Europe, such as Italy, and in Central Europe. But elsewhere...

  12. (pp. 28-28)

    There is a need for realism throughout the Eastern Mediterranean. If it is to secure export markets, then the development of Eastern Mediterranean gas, whether in Egypt, Israel, or Cyprus, will have to be competitive in a European gas price environment. And, faced with the challenge posed by the arrival of US LNG, it will have to meet some tough time schedules as well.

    Zohr should serve as a catalyst for revived Egyptian export prospects. But Zohr cannot deliver an Egyptian gas trading hub. That may be a longer term target and will require Egypt to reform its internal price...