Israel and Cyprus: In search of solutions to natural gas challenges in the Eastern Mediterranean

October 10, 2016 Written by Antonia Dimou The Eastern Mediterranean’s gas […]

The Eastern Mediterranean’s gas resources can promote cooperation, resolve conflicts and deliver financial benefits, resulting in contributions to the economic

development of Israel and Cyprus.

Gas discoveries in Israel have the potential to transform the country’s energy outlook but despite opportunities, the exploration and development of gas fields with proven reserves have faced a stalemate due to regulatory issues and political concerns.

In an effort to overcome obstacles and reignite a number of preliminary agreements to export gas, the Israeli government approved a revised framework for gas regulation that favors the development of Leviathan and the expansion of Tamar fields seeking to establish a stable business climate and paving the way for Israeli gas to be exported. The main outlines of the gas regulatory framework center on the mandatory sale by Noble, Avner Oil & Gas and Delek of all their rights in the Israeli Tanin and Karish fields; and, a stability clause which foresees that the Israeli government guarantees regulatory stability for ten years. Additionally, as prescribed, the development plan of Leviathan field whose 9 billion cubic meters (bcm) annual gas surplus is destined for export will be carried out in two stages: The first lies in four development wells and an annual capacity production of 12 bcm. The second lies in four additional wells and an increase of the capacity production by another 9 bcm. Leviathan’s exports are destined to satisfy Israeli domestic demand, Jordanian and Egyptian power and industrial needs, as well as Turkish ambitions of becoming a hub for Eastern Mediterranean energy.

The supply of natural gas from the Leviathan and Tamar fields to Egypt which suffers from domestic gas shortages due to export obligations and a growing population is considered geopolitically important. Israel’s energy policy vis-à-vis Egypt has a dual dimension focusing not only on the sale of gas from Israeli fields, but also on the use of Egypt’s LNG facilities as export terminals to reach markets like Europe and Asia.

Partners of Israel’s Tamar field signed a non-binding letter of intent to export up to 2.5 trillion cubic feet of gas over 15 years via the Damietta LNG plant in Egypt operated by Union Fenosa Gas, a joint venture between Spain’s Gas Natural and Italy’s ENI. Similarly, Leviathan partners reached a preliminary agreement with British Gas (BG) to negotiate a deal to export gas to BG’s liquefied natural gas plant in Idku (northern Egypt) via a new undersea pipeline. The first formal approval by the Israeli energy ministry for the export of gas from the Tamar field to Egypt’s Dolphinus Holdings has been granted in late 2015. Although it still hinges on bureaucratic approvals, the decision paves the way for enhanced bilateral cooperation in the gas sector.  

Another prime Israeli export option is linked to Jordan whose 90% of energy requirements depends on imports. The growing number of refugees from Iraq and Syria further increase energy demand, which burdens Jordan’s public finances. At a time of regional instability, reliable gas imports could strengthen Jordan’s energy security. It is in this context that in mid-September 2016 Leviathan’s main partner Noble signed an agreemet with Jordan’s National Power Electric, which will act as buyer of the gas, to supply 1.6 trillion cubic feet (tcf) over a fifteen-year period.  

Regarding export routes, a combination of options is on the table prioritizing the need for the construction of an 8-kilometer pipeline from Israel to Jordan that would transfer natural gas from Leviathan at a border location to be specified. A related project focuses on the construction of a 25-kilometer pipeline that would connect northern Israel to northern Jordan, facilitating the supply of natural gas to major Jordanian manufacturing plants. Infrastructure partnerships between Israel and Jordan are deemed to provide real incentives to normalize relations, given that the supply of cheap and reliable energy can bolster Amman’s economy and Leviathan partners’ export earnings can increase.

The option of a pipeline from Israel’s gas fields to Turkey has given rise to a divergence of views. On the one hand, advocates to the pipeline option argue that the construction of the 480-kilometer pipeline that would connect Leviathan field to the Turkish coast is not only financially viable but also guarantees Israeli access to the Turkish domestic market which consumes 40 bcm annually and to transit routes across Turkey into Europe. The recent reconciliation between Israel and Turkey is estimated that it can cement a lucrative gas export agreement to be supported by bankable contracts, thus supporting the level of Leviathan’s scheduled development plan. All this, on the provision that the Cyprus conflict is resolved given that Cyprus could effectually veto the crossing of the pipeline through its Exclusive Economic Zone under its rights as a signatory of the United Nations Convention on the Law of the Sea (UNCLOS).

On the other hand, opponents to the pipeline option support that post-coup Turkey is expected to consolidate regional power through the cementing of relations with Russia and Iran, while the Turkish presidency is deemed to become more autocratic. This may undermine prospects of the undersea pipeline option since Israel appears unwilling to permit its gas to be held hostage. In general, changes in regional politics such as Turkey’s orientation could endanger the sustainability of Israeli gas exports, as has happened with Egyptian exports to Israel. Reservations are also expressed regarding financial security in any future framework energy agreement between Israel and Turkey, with suggestions on that financial security could be provided by a third party such as the U.S. Overseas Private Investment Corporation, the U.S. Export-Import Bank, or the German Euler Hermes company.

In search of progress, it is evident that Israel looks into multiple gas export options so that its gas is not tied to a single market where changing bilateral relations or geopolitical conditions can affect the sustainability of exports and thus impact negatively its energy wealth.

Coming to neighbouring Cyprus, the island is assessed to gain significant economic benefits from its commercially viable levels of hydrocarbon resources. These benefits come in the form of job creation, foreign direct investment, royalties, and taxes paid to the state treasury by energy suppliers. The island’s recent third licensing round for the blocks 6, 8 and 10 within its Exclusive Economic Zone has attracted major international energy players such as ENI, Total, Exxon Mobil and Qatar Petroleum on the basis of closeness to the Egyptian Zohr and the Israeli Leviathan gas fields. The plan would be to connect gas discoveries in Cyprus with Egypt’s by pipeline and re-export reserves as liquefied natural gas by utilizing the Egyptian Idku and Damietta LNG facilities. The development of Cypriot gas fields necessitates synergies among local and international players, users, and producers eager to export gas to a broader market.

The criteria for the evaluation of the third licensing round’s applications are related to the technical and financial ability of the energy companies; the financial proposal of the applicant to obtain a license; the applicant’s commitment to training of personnel; political considerations in having major international energy players involved in the Cypriot blocks; and, any irregularities and lack of responsibility that the applicant may have demonstrated under a previous license in Cyprus or in any other country.

The declaration of commerciality of the Cypriot Aphrodite field in 2015 by Noble, Delek and Avner Oil & Gas partners has been considered a significant step for the transition from the stage of exploration to that of exploitation, and a step towards the monetization of the island’s indigenous gas reserves both for domestic use and exports. Nevertheless, Cyprus faces multiple challenges to monetizing natural gas resources that are associated with regional export options, such as the pipeline project that would connect Israel’s gas fields to the Turkish coast. There is growing consent that the natural gas discoveries in Cyprus could prove a catalyst for a breakthrough in the strategic impasse over the island, which is still divided between Greek-Cypriot and Turkish-Cypriot communities. There are estimates according to which the breakthrough can also pave the way for the export of gas from Cyprus to Turkey given that distances from the Cypriot to the Turkish coasts are short and the length of an undersea pipeline would be approximately 100 km.

No doubt that Cyprus’s natural gas discoveries present a strategic game changer that poses all kinds of risks and opportunities for the island’s economic recovery. Looking ahead, what needs to be examined is the creation of a Cypriot sovereign wealth fund, based on the Norwegian model, to recycle revenues, and the establishment of a regional sponsor-supported non-governmental organization or council that would include energy companies, energy industry service providers, energy industry associations, and other related stakeholders in the region. Once established, the council could seek government participation from the littoral states of the Eastern Mediterranean. It could then become a point of reference and also an avenue of communication between governments and industry, as well as a clearinghouse for ideas and plans for mutually beneficial energy development in the region. If successful on regional energy, such an organization could eventually focus on a broader scope of regional cooperation.

Unquestionably, Israel and Cyprus present two countries that can serve as pillars of energy cooperation and development in the Eastern Mediterranean. Working from this collective strength, they can pursue bilateral and regional policies for the prosperity of their peoples and the coming generations.

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