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Eastern Mediterranean Natural Gas Culminations

Ioannis Michaletos, August 18, 2013

The nascent natural gas sector in the Eastern Mediterranean has been making local headlines for quite some time, with great expectations for countries such as Cyprus and Israel to become important players in world energy markets. In the midst of intense geopolitical antagonism in one of the most volatile and important areas in the world, various initiatives are taking place, with ramifications that expand beyond the locale.

The governments of Greece, Cyprus and Israel recently signed an energy accord that further strengthens their ties in respect to joint plans to exploit the natural gas resources of the region, while Turkey strives to become the ultimate destination for the onshore transfer of the commodity. Greek Energy Minister Yannis Maniatis, his Cypriot counterpart Giorgos Lakkotrypis and Israeli Silvan Shalom signed a memorandum that stipulates the three states' joint cooperation in energy infrastructure and transportation, with a special focus on offshore gas projects, such as the Aphrodite in Cyprus and the Leviathan and Tamar in Israel.

In the meantime, negotiations are underway to resolve the frozen Cyprus issue between the Greek and Turkish sides, and reports suggest that all interested sides have put natural gas on the table. Ankara has proposed a resolution to the problem and withdrawal of its military under the condition that gas be exported to its territory before it is transferred to international markets. The Cypriots and the Israelis have agreed in principle but have not definitely decided on establishing a liquefied natural gas (LNG) terminal in the designated region of Vasiliko in Cyprus. A debate is already underway in Tel Aviv to create its own LNG terminal either in Haifa or in Eilat, for reasons of security and autonomy. In such case, a project in Vasiliko, which would cost up to $6 billion, according to estimates from the local energy ministry, is not possible since the Cypriot reserves, as presently accounted for, are not sufficient to cover the profitability of such a project alone.

Delek Energy, a stakeholder company in the offshore projects, is considering building a pipeline to Turkey, and is considering options to export gas to Jordan, Egypt and the Palestinian Authority. Delek's partner, Noble energy, which first discovered the Cyprus gas reserves, is in talks with the Cyprus government to push forward the Vassiliko LNG terminal. And in Athens, Maniatis revealed that the European Union has agreed to back the EuroAsia Interconnector electricity project as a "project of common interest." This cable would connect Greece with Israel via Cyprus and be able to transfer 2,000 MW of electricity, which would be produced by a plant operating with locally produced gas, consequently rearranging plans for the export of gas and optioning for the local consumption of it. The role of the European Union is important because it directly intervenes in local plans and seems indifferent on pushing an export of the gas reserves into the E.U. either through LNG or through Turkey. The cable is estimated to cost $1.5 billion and could be ready by early 2016.

Delek Company has also left the door open for LNG exports to Asian markets, and has signed a Memorandum of Understanding with the Cyprus government and Noble Energy to proceed with the Vasiliko terminal. At the corporate level, matters are in flux, with no definite decisions being made in the short term. However, by present estimations, viability for exports of both Israeli and Cypriot gas is to be found only in the Asian markets, since U.S. and E.U. markets are importing the commodity at 10 percent to 40 percent less than the offshore production costs. Hence, if the export route is chosen, Asian markets represent the only viable alternative.

On a political level, an energy advisor of the Israeli government commented, "Israel is concerned mostly with securing its own needs first and having energy autonomy. On a second level, the Asian markets are very promising, and in that case an LNG terminal in Eilat in the Red Sea has a definite advantage. We would not like to see ourselves dependent on Turkey, and also security issues, in light of the instability in the Eastern Mediterranean, are taken under serious consideration."

Cyprus is expecting a second confirmation for drilling on its Aphrodite reserve by Noble Energy in the coming period, which will be a decisive factor for future developments, because if the quantities are larger than expected, then it has the chance of persuading the Israeli side to join hands for the LNG infrastructure. Otherwise, they may part, and then Nicosia will face a dilemma of either postponing an investment decision or accepting the Turkish offer, which is coupled with political benefits.

Overall, prospective natural gas exports in the Eastern Mediterranean have been entangled in multilevel political and corporate games, while political risks in the region have been increasing due to the implosion of neighboring Egypt, the ongoing Syrian civil war and the delicate political landscape in Lebanon, another country vying for hydrocarbon explorations in the near future.

Last but not least, the prospect of long-term gas production in the Mediterranean is hindered by global political and corporate interests in the energy sector who do not want to be left on the sidelines, and who do not want to see their market shares decrease in light of new suppliers. Thus, if a thriving gas production market in this particular region is going to develop, it will take time.

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