Gas discoveries in the Eastern Mediterranean have been enthusiastically received by international observers, although the current price dynamics advises caution. This commentary both explores the opportunities of political and economic collaboration for the states of the region and beyond, and analyses the financial hazards of gas extraction and selling in a global scenario characterised by low prices and decreasing demand. The arguments put forward are that considerable public investment from regional and European states and a clear stance towards Turkey are necessary conditions to exploit gas opportunities and that the time has come for governments to take these steps. In greater detail, European states and regional governments should soon make a final decision on whether or not to build a pipeline from the gas fields of Egypt, Israel and Cyprus to Italy (EastMed) and on if Turkey should be included in the Eastern Mediterranean Gas Forum (EMGF): a regional platform to manage gas prices and the energy flow from producing to consuming states.

Opportunities for cooperation revolve around the shared economic interests for basin states to exploit the local energy resources and export them to Europe and elsewhere. The drivers of collaboration are a relatively high amount of gas in the regional basin, the proximity of the gas fields, and the existing infrastructural landscape. When looking at the Eastern Mediterranean gas fields, the total reserves for Israel is about 886 billion cubic metres of gas (bcm) (Leviathan: 450 bcm; Tamar 318 bcm; Dalit 55 bcm; Tanin 55 bcm; Karish 8 bcm); 850 bcm for Egypt (Zohr 850 bcm; Noor – yet to be established); and 299 – 359 bcm for Cyprus (Aphrodite 129 bcm; Calipso 170 - 230 bcm). Putting the data into perspective, the total of reserves is 2.035 – 2.095 bcm, which is roughly 4 years of the gas consumption for all European States^[1] (554 bcm in 2019^[2]). When looking at the expected internal consumption, Egypt scores around 57 bcm for a year^[3], Israel is around 10 bcm for a year^[4], and Cyprus is around 1 bcm for a year in 2013^[5]. It is worth stating that the fields mentioned above comprise the entire gas reserves for Israel and Cyprus, while Egypt has more fields within its territory. It follows that Eastern Mediterranean gas will both cover the internal consumption and allow for exports. In such a scenario, coordinating the extraction process would lower prices, making the gas more competitive in the international market. Eastern Mediterranean gas fields, in fact, are located within a ray of 100-150 km^[6], and it is, therefore, highly cost-effective to connect them for export. To understand this point better, it is worth mentioning that the current project of transporting gas to Italy through a pipeline, as designed by Israel, Cyprus and Greece in a preliminary deal^[7], would require to connect all the regional fields to maximise the project profits. The alternative is transporting gas by tankers, which would also benefit from existing regional infrastructures. Gas can be brought to the Liquid Natural Gas (LNG) complex of Damietta and Idku to reach both Europe and Asia by tank ships.

The financial hazards revolve around the cost of extracting gas from the regional fields vis-à-vis current global prices. Eastern Mediterranean gas is often located tens of kilometres from the coasts and in relatively deep waters. These two elements make its extraction expensive when compared to other sources in Russia and the US. To better understand this point, it is useful to look both at the estimation of extraction costs and the existing contracts. Charles Ellinas, CEO of Cyprus-based energy consultancy ECP Natural Hydrocarbons Company and among the leading experts of the Eastern Mediterranean energy market, estimates the average extraction cost for the gas in the region to be around 4.5 $ per mmBTU^[8]. An agreement between the Jordan National Electric Power Corporation (NEPCO) and the Israel Leviathan consortium fixes the selling price for Leviathan gas to $4.79 for mmBTU^[9]. It follows that the breakeven point of Eastern Mediterranean gas is probably somewhere between 4.75 and 5 $ for mmBTU when selling it to the neighbouring countries. This price is similar to the average gas selling cost for Europe in 2019, which scored 4.80 $ for mmBTU^[10], but it would make the Eastern Mediterranean gas uncompetitive when including transport costs. Carrying the gas by LNG ships would not help in solving the problem, as the average 2019 prices for Europe (5.05 $ for mmBTU^[11]) and Asia (5.53 $ for mmBTU^[12]) are too low to make the Eastern Mediterranean gas attractive for buyers. Furthermore, the current low prices might be here to stay when looking at the future outlook in a time of gas bonanza. The Energy Information Administration (EIA) expects that the price for selling natural gas in the period between 2020 and 2035 will be around 4 $ for mmBTU, while the price should reach 5 $ for mmBTU from 2035 to 2050^[13]. It follows that Eastern Mediterranean gas lacks competitiveness due to the current price environment. This issue would be partially solved with a pipeline which connects the producing areas of the Eastern Mediterranean to Europe. The infrastructure would surely reduce the transport costs, but such a project requires a high financial investment to be completed. The estimated costs to carry 10 bcm of gas from the producing area to Italy by pipeline is expected to be around 7 billion euro. Ellinas estimates the unit cost of the pipeline to be around 3.50 $ for mmBTU, and the profitable price of gas at 8 $ for mmBTU when including the extraction cost^[14]. It follows that energy companies might find the pipeline investment not worth the price. Therefore, member states of the EU should step in and fund the project to make it more competitive

The previous analysis suggests that the Eastern Mediterranean gas potential might remain untapped for the upcoming years unless European and regional states or European institutions give political and financial support to the pipeline. Such a decision would have a high political valence, as it reflects European and regional states stance to the current Turkish policy in the Mediterranean. Ankara has made it clear that it opposes the EastMed pipeline^[15], which would hinder Turkey’s role as energy bridge between iddle Eastern production and European consumption area. Furthermore, Ankara might make a claim to participate in the resource management mechanism of the EMGF in the coming years. In a nutshell, the Turkish strategy points to obstacle the infrastructural project in the area as long as other states keep excluding Ankara from collective decisions. The signing of the Exclusive Economic Zone (EEZ) agreement with the internationally recognised Libyan government (Tripoli) and current gas exploration in the Turkish-recognised Northern Cyprus EEZ should be understood within this framework. The deal with Libya also serves to obstruct the construction of the pipeline by putting up legal pretexts; the gas exploration in the Northern Cyprus EEZ aims at finding gas to make a case for participating in EMGF as a country involved in the gas extraction in the area. European and regional states currently lack a coherent strategy to respond to the Turkish plan, and such uncertainty is advantaging Ankara. A collective response can take two possible paths. The first is to recognise Turkey’s political interests as legitimate and thus engage Ankara as a partner in the Eastern Mediterranean. This option would have the advantage of calming some of the current tensions, but it also encourages Turkey to take an even more assertive stance in the region. The second is excluding Ankara from the infrastructural and decisional mechanism in the Eastern Mediterranean to contain the Turkish outlook. Such a strategy would not only harm Turkey’s regional ambitions but also exacerbate existing tensions with Ankara. Whatever decision is made, European and regional states should take a clear stance on Turkish activism in the following months. The upcoming period is decisive both because the Libyan conflict will shape the regional environment vis-à-vis competition between Cairo and Ankara as well as because Turkey might find new gas fields in the area, which would give this country a claim to join the EMGF. At the moment, Turkey is still the elephant in the room with regard to Eastern Mediterranean gas. A clear stance towards Turkey needs, therefore, to be addressed before any project can be seriously undertaken.

 

 

[1] European states includes Turkey but excludes Russia in the British Petroleum Report

[2]Statistical Review of World Energy 2019, British Petroleum

[3] Egypt: Natural gas consumption, Ceic Data

[4] Egypt: Natural gas consumption, Ceic Data

[5] There are not recent available data, but it is very likely that the current data are not quite dissimilar to those of 2013 due to the limited population of the country (1,17 million), 23 December 2013:

https://cyprus-mail.com/2013/12/24/emergency-meeting-called-on-interim-gas/

[6]Energy: A shaping factor for regional stability in the Eastern Mediterranean?, Directorate General for External policies – Policy Department (European Parliament)

[7] Paul Tugwell, Leaders from Israel, Cyprus, Greece sign EastMed pipe deal, Bloomberg, 2 January 2020

[8] Charles Ellinas, Changing priorities threatens viability of EastMed gas pipeline, Cyprus Mail, 6 January 2020

[9] Amiram Barkat, Leviathan gas: The good, bad, and downright confusing, Globes, 9 January 2020

[10]World Bank Commodities Price Data (The Pink Sheet), World Bank, 2 June 2020

[11] Regional LNG Prices (Monthly Average), BlueGold Research: https://bluegoldresearch.com/regional-lng-prices

[12]Ibidem

[13]Annual Energy Outlook 2019 with projections to 2050, Energy Information Administration

[14] Charles Ellinas, Changing priorities threatens viability of EastMed gas pipeline, Cyprus Mail, 6 January 2020

[15]Ankara slams EastMed pipeline, opposes any gas project excluding Turkey, Daily Sabah