Changing Tides for East Med Natural Gas

Ongoing political, diplomatic and corporate developments with regards to Eastern Mediterranean natural gas reserves are taking yet another turn with obvious signs of a shift in Israel’s policy towards Turkey, amidst intense geo-economic antagonisms by various regional and global players.

Recently, a leading Cypriot politician met with a high ranking Israeli official where he was rather astonished to find out that Tel Aviv has not excluded the possibility of a pipeline eventually connecting Leviathan reserves to Turkey. This would however contradict earlier statements and guarantees made by the Israeli Cabinet, both to Greek and Cypriot governments. During an October meeting between Greek energy Minister Ioannis Maniatis and his Israeli counterpart, Silvan Shalom.  The latter assured of his opinion to push forward options other than a pipeline to Turkey. During talks with Israeli officials in early December, he explained that all options are on the table. 

Concurrently, Gideon Tadmor, President of Israeli Delek, which owns parts of the Leviathan and the Aphrodite reserves offshore Cyprus, stated at the 2013 Atlantic Council Energy and Economic Summit held in Istanbul on November 22nd that a pipeline to Turkey is an option and is certainly the least expensive way for gas to flow into international markets. The other big player, Noble Energy, is considering a pipeline to Egypt or to Jordan via Israel, according to company president Charles Davidson. In the meantime, frictions remain between Australian Woodside and the aforementioned companies. Although, the Australians from time to time have relayed their interest in having a pipeline going to Turkey as a basic element for their involvement in the Leviathan project. 

Delek also announced lower than expected reserves in the Aphrodite field of approximately 4 tcf, a quantity almost half of the estimates made by mostly Cypriot officials last summer. Thus, prospects for an eventual LNG terminal in the country were reduced, whilst more appraisals are going to be made. In the event reserve estimates are reduced event further, then the only hope of an LNG terminal in Cyprus would be through the injection of Israeli gas. The meeting between an Italian delegation and their Israeli counterparts revealed yet another plan - the transfer of the gas to Eni's terminal in Egypt before it is re-exported to international markets. What is interesting though is that the Turkish side has not remained idle and through corporate channels Ankara offers full financing of a $2.5 billion pipeline to Turkey from offshore Israel, plus pre-conditioned, long-term imports of gas that will be added to the Turkish gas mix and then re-exported to the international markets.

At this point, US diplomacy is indirectly involved, via former US diplomat currently based in Istanbul, Matthew James Bryza.

Istanbul-based Turcas Holding Company, which is affiliated with Azeri SOCAR, appointed Bryza as a board member an stated in September 2013 that “the 470-kilometers-long pipeline would have a capacity to transfer 16 bcm of natural gas a year." The former diplomat also stressed that “if the political problems between Turkey and Israel effect construction, all cost and responsibility would be assumed by Turcas." 

Furthermore, Turkey’s Zorlu Group, a significant investor already in the Israeli energy market, is also pushing forward the pipeline option to Turkey and is said to be in collaborations with Turcas. At a wider level Turkish diplomatic and corporate arguments in favor of this pipeline is the resurrection of Nabucco West through the addition of Israeli and Azeri gas, along with new amounts of Iranian gas that will boost the capacity of Turkey to offer to countries such as Bulgaria, Romania, Hungary and Austria 30 to 40 bcm per year natural gas volumes. This would be a direct bid to oppose the ongoing plans of Gazprom to construct the South Stream project.

According to well placed sources within the regional energy community, this plan is being seriously considered by a substantial segment of the US State Department, which in turn exercises indirect pressure on Tel Aviv. Although Netanyahu’s government is for the moment adamant om accepting a transfer of the gas to Turkey for geopolitical reasons and its complete lack of trust in terms of security relations with Ankara. 

At the same time, as the ongoing negotiations between Iran, the US and EU unfold, the Israeli gas may not be necessary for a "Nabucco West" redux, since there is potentially more than enough of this commodity in the Iranian reserves for decades long supply to certain EU states. If this would be the case, the proposed East Med pipeline plan from Israel to Cyprus and Greece on the way to the EU is also effectively scraped since no additional gas volumes will be needed until then. The LNG terminal option would remain but it will be natural to assume that it will be established in Israeli territory and not in Cyprus, unless in the coming years Eni, KOGAS and Total manage to find large amounts offshore Cyprus that would justify such an investment, which could exceed $8 billion.

Lastly, the role of Russia and Gazprom is of significant importance since the Kremlin retains a web of influence across the East Mediterranean and Middle East, whilst the re-entrance of Iran into the international energy and gas markets may cause a tectonic shifts in the Middle East with Israel and Saudis coming closer to Moscow, and vice versa, Teheran and Baghdad coming closer to Washington. In any case the developments ahead are estimated to be promising and of great proportions, whilst it will be unsafe for the time being to make a definite estimation on the eventual road ahead, while the political variables are in constant flux and other players such as Egypt, Greece, Brussels (EU), France and Germany have not yet formulated their secondary scenarios.

Finall, Lebanon's great offshore prospects should not be forgotten, which should emerge on the market in the mid-term. Should this be the case, a variety of scenarios could be formed that will include entities such as Hezbollah, the battered Assad Administration and Saudi Arabia through various individual but influential local players.