international analysis and commentary

The Med: hub or flashpoint?


Enduring conflicts and unresolved disputes in the Eastern Mediterranean promise to shape – and constrain – the development of offshore energy in the near future. Shaky relations throughout the region hinder a growing roster of global stakeholders, forcing geopolitical and commercial interests to maintain a fine balance. Still, barring dramatic new strategic risks, development of the region’s offshore energy resources is bound to continue.

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Under ideal conditions, the natural gas resources of the Eastern Mediterranean could be a force for regional stability and make a meaningful contribution to European energy security. But conditions are far from ideal. Politics clearly trumps commercial logic in much of the region, and where there is conflict and strife, there is fear and uncertainty.

AN AGE OF DISCOVERY. Since the discovery of the Tamar gas field offshore Israel in 2009, swiftly followed by Leviathan in 2010 and by the Aphrodite field offshore Cyprus in 2011, as well as by various smaller finds, Eastern Mediterranean energy has become a fashionable theme in geopolitical debates. With continued discoveries – most notably eni’s substantial 2015 find in the Zohr field (estimated at 850 billion cubic meters) – the region has acquired increased weight in energy commerce. From the perspective of regional exporters and consumers, the new discoveries, together with older proven reserves, are meaningful. This is especially true for economies that have faced financial crises, such as Cyprus. Egypt continues to experience even more serious economic stress, coupled with growing domestic demand for gas. Israel has its own approach, with a strong interest in energy independence alongside the potential longer-term revenue from gas exports. Turkey, Lebanon, Syria and Gaza are also potential stakeholders in the development of offshore resources in the Eastern Mediterranean.

Turkey, in particular, has the potential to be an energy hub for oil and gas trade from Eurasia as well as the Mediterranean. Cooperation between the leading offshore energy stakeholders and Turkey would be a transforming development for regional energy projects. But Ankara’s ability to play this role is complicated by its deteriorating relations with regional partners, and declining confidence in Turkish stability. The increasingly fraught relationship between Israel and Turkey, in particular, deprives energy developers of the most cost-effective access to the European energy market.

Taken together, the potentially available offshore resources are significant for regional producers and consumers, and could make a meaningful contribution to wider energy trade as liquefied natural gas (lng) becomes more of a global commodity. Geopolitical realities, however, ensure that this full potential is unlikely to be reached.

Many of the recently discovered fields are in close proximity, and would benefit from joint development. But unresolved sea space disputes and contested exclusive economic zones have emerged as a direct constraint on the development of the region’s energy resources. Exploration in the waters around a divided Cyprus has been particularly contentious, and the lack of progress toward a political settlement on the island makes it hard to contemplate joint development projects involving the Republic of Cyprus and the Turkish community on the island. The dispute also drives Turkish policy, which has become more assertive in its opposition to Cypriot exploration. In a well-publicized February 2018 incident, Turkish naval vessels blocked an eni drilling ship from operating in disputed waters southeast of Cyprus. Turkey has also opposed a 2013 maritime demarcation agreement between Cyprus and Egypt. This, too, has had an inhibiting effect on offshore exploration.

THE LOGIC OF COOPERATION. Flexible and scale-able transport is key to “bankable” offshore energy projects. This is where the outlook for offshore energy in the Eastern Mediterranean becomes more complicated. In an ideal world, producers would seek out the most cost-effective means to bring resources to market, including markets in Asia and across Europe, where gas will likely command a higher price. Both deep-water undersea pipelines and lng plants are expensive to build, and there are strong incentives to use existing terminals and pipelines. The region has some good infrastructure of this kind in place, including an extensive pipeline network linking Turkey to European markets, and underutilized lng facilities in Egypt. Gas arriving in Italy can plug into a dense transport infrastructure. However, cooperation is lacking.

In the absence of access to the Turkish pipeline system, regional actors are moving ahead with other arrangements, most aimed at national markets in the Eastern Mediterranean and the Levant. Israel has signed a ten year multi-billion dollar deal with Jordan to supply gas from its Leviathan field. It will make Israel the largest supplier of gas to Jordan. In 2018, Israel concluded an even larger deal to supply natural gas to Egypt. Cyprus reportedly plans to follow suit with an export agreement of its own. These supplies will contribute to meeting Egypt’s own burgeoning demand for gas. But Israel and Cyprus are also looking to liquefy and export gas to global markets using Egypt’s existing lng facilities. Under the prevailing political conditions, Egypt could well emerge as a leading energy hub in the Eastern Mediterranean.

The costs of disputes over sea space and resources go beyond constraints on the commercial exploitation of energy resources. They also affect the safety and environmental security of offshore energy operations. An increasingly dense array of offshore platforms, pipelines, and associated marine services will inevitably accompany further exploration and development.

The ability to respond to accidents would also improve significantly if response equipment could be prepositioned ashore, and shared among adjacent states. The ongoing disputes involving Israel and Lebanon, Turkey and its neighbors, Israel and the Palestinian Authority in Gaza, and others, makes this impossible. Lack of cooperation spells increased risk. Not a small concern for a region with a substantial tourist economy.

NEW ALIGNMENTS ARE SHAPING ENERGY PLANS. Under the conditions prevailing a decade ago, Turkey would be at the center of regional energy ties. The proposed Israel-Turkey pipeline project was a reflection of underlying geographic and logistical realities. Pipelines to Turkey are the most straightforward and cost-effective way to bring offshore gas resources to market. But here, geopolitics trumps geography. Israel and Turkey are not prepared to undertake substantial new cooperative projects while their leaders engage in a war of words and their overall relationship continues to deteriorate. Absent a settlement, bringing Cypriot gas to international markets via Turkey is an obvious non-starter.

In the meantime, Turkey’s estrangement has encouraged other regional geometries in political, security and energy terms. Ties among Israel, Greece, Cyprus and Egypt have flourished, with a notable energy dimension. As noted earlier, Israel and Egypt have embarked on an ambitious energy venture. There is growing political dynamism behind the proposed Eastern Mediterranean pipeline linking Cyprus and Italy via Crete and mainland Greece, although the technical and economic facets of the project are less clear-cut. If Eurasian sources are included in the equation, Turkey, too, remains a serious player, with the proposed tanap and tap pipelines.

GROWING COLLATERAL RISKS. There is little evidence that energy interests per se have spurred regional cooperation, although they are clearly part of the calculus encouraging cooperation between Israel, Jordan, Cyprus and Egypt. Against a backdrop of heightened nationalism across the region and elsewhere, states seem prepared to forego the benefits of economic cooperation where geopolitical disputes drive the foreign policy discourse. At the same time, control over offshore resources is unlikely to prove a rationale for conflict in the absence of other, more fundamental disputes. But where these disputes are present – and the region has no shortage of disputes – confrontations and miscalculations related to exploration and drilling are a very real risk. This was the case in the tense years of Greco-Turkish relations in the early and mid 1990s. There are disturbing signs of a return to these pre-détente conditions.

The involvement of American, European and Russian energy companies in offshore energy exploration and production in the Eastern Mediterranean introduces a new element into the equation. Transatlantic partners, and Russia, will hardly wish to be dragged into new regional crises as a result of clashes threatening their own nationals. The aforementioned incident involving the eni vessel operating in waters off Cyprus underscores the potential for risks of this kind. With growing commercial interest in the region’s energy resources, rising energy prices (which encourage new development), and mounting geopolitical tensions, offshore projects in the Eastern Mediterranean will be exposed to greater strategic risk in the years ahead.

WILL TERRORISTS TARGET OFFSHORE ENERGY ASSETS? Offshore platforms in the Gulf have been targeted on numerous occasions over the past decades, and the exposure of such facilities to attack is a longstanding concern. In the Eastern Mediterranean, experience is much more limited. In 2014, Hamas launched an ineffective rocket attack on a platform operated by Noble Energy and Delek. More recently, Hezbollah has threated to strike Israeli platforms. Offshore oil and gas infrastructure may be a tempting target for terrorist networks and the growing number of proxy militias operating in the Levant.

Islamist militants operating in Egypt may also see that country’s lng facilities as an economic target. But experts tend to agree that attacks on offshore platforms are not a simple proposition, even for more capable groups. Experience in Algeria and elsewhere suggests that onshore facilities and pipelines can be secured even under conditions of protracted chaos and conflict. The security of offshore energy facilities, and the related maritime traffic, will demand increasing attention from states and commercial operators alike. Yet, threats from non-state actors are unlikely to prove a significant constraint on development if the underlying market and geopolitical conditions are encouraging.

NEW GEOPOLITICAL CONTOURS. Technology, energy markets and the economic requirements of regional states should spur continued offshore development in the Eastern Mediterranean. At the same time, this development will be tied to global demand for lng and shaped by broader strategic trends. First, the prospect of protracted chaos and conflict in the Levant will impose some standing constraints. Levels of risk flowing from the ongoing crisis in Syria and instability in Lebanon may be manageable in energy security terms. But there is a very real risk of escalation involving Turkey, Iran, Israel, Russia and Western coalition partners, all operating in close proximity on the ground, in the air and in the sea space offshore. Israel and Iran are already engaged in a low key and increasingly direct conflict. A major escalation along state-to-state lines would surely affect the climate for expensive, long-term energy related investments. Worsening instability in a critical state, such as Egypt, would pose challenges of its own, and would jeopardize that country’s aim to serve as a regional energy hub.

Second, the worsening friction between Russia and the West now looks to be a structural factor in the energy security equation. Energy from the Eastern Mediterranean is set to become even more attractive as the European Union, with us support, seeks to reduce its reliance on Russian gas. The quantities likely to be available for export from the Eastern Mediterranean are unlikely to transform the outlook on this front, but they could make a measureable contribution to European energy security.

Syria’s ability to attract investment for its own energy development needs will be severely limited as long as the Assad regime remains in power and sanctions remain in place. Russia is the obvious alternative partner in developing Syria’s gas production. With Russia’s own ability to participate in regional projects limited by international sanctions, Moscow will have an interest in constraining new offshore projects in the region. The United States will have an interest in supporting them.

Finally, Turkey’s ability to develop its own potential as an energy hub will be limited by the growing tension between Ankara and Western partners, as well as strained relations with Israel and Egypt. This implies significant opportunity costs for potential regional partners and international consumers. Turkey is in an ideal position to serve as a relatively low cost transit state for Eastern Mediterranean energy. But in this case, politics clearly trumps commercial logic. Under these conditions, Turkey is likely to look east for new energy opportunities – a tilt to Eurasian options evident in other aspects of Turkish policy as well.

From Aspenia International n.79