by Matteo Mozzi
Israel and Cyprus, which have had increasingly close ties, sit on an estimated 3,450 billion cubic meters of gas buried in the Levant Basin, according to a U.S. Geological Survey. Those reserves are worth some $700 billion and constitute enough gas to supply the entire world for a year. And those are only the discovered reserves. A recent seismological survey conducted by a French consultancy suggested that Israel alone may be sitting on nearly three times as much gas as it was first thought. Cyprus announced on Sunday that the offshore reserves in its Aphrodite gas field have been declared commercially exploitable, however the problem is not only the prohibitive cost of drilling, but also the expensive construction of a trade route which does not yet exists. While a portion of the gas would go for domestic consumption, the vast majority is earmarked for export. Unless Israel and Cyprus succeed in securing long-term export contracts, the costs of developing the deepwater fields would be unbearable and the rich assets may never be fully exploited. Jordan, which has a peace treaty with Israel, may be a long-run buyer of Israeli gas, but it constitutes a quite thin market while neighbouring Lebanon and Syria – both enemies of Israel – are obviously not an option. Shareholders in Israeli Leviathan offshore gas field have signed a landmark deal to supply Jordan’s National Electric Power Co (Nepco) over fifteen years, in a deal valued at $10bn. The contract provides that the Leviathan will deliver 45 billion cubic meters of gas once the field starts the production and the transportation systems in Israel and Jordan to deliver the gas to Nepco are ready.
In 2014, Jordan and the Leviathan partners signed a letter of intent on the gas supply agreement, but the idea of purchasing gas from Israel has fueled protests in Jordan from political activists and MPs opposing any business relationship with the Jewish state. Jordan’s industry minister told the Financial Times last week that his country was expecting Tel Aviv to allow more Jordanian exports into the West Bank and cover the costs of a section of gas pipeline due to the energy shock which had been damaging the Jordanian economy since 2011, when the political chaos of the Arab Spring disrupted the supply of low-price Egyptian gas on which it relied.
Turkey as a potential game-solver.
Instead, Turkey and Egypt, with respectively 80 million and 93 million inhabitants, would be a more convenient long-term commercial partner. Initially, the plan was to send part of the gas to Egypt, which already has minor contracts to purchase gas from Israel. Unfortunately, in recent years Egypt has found out the presence of natural gas off its own coastline and the Egyptian President Abdel Fattah al-Sisi has declared he intended to invest heavily to develop national energy resources. On the other hand, Turkey imports most its gas from Russia, but Ankara’s ties with Moscow are strained, particularly over the Syrian conflict. Given Turkey’s rapid economic growth, the demand of gas from this country is set to double over the next decade, so diversifying the supply could be strategic. That is why, on the sidelines of a summit held in Washington DC last March, Turkish President Erdoğan privately met with Israel’s energy minister, Yuval Steinitz. It was the highest-level contact between Israel and Turkey since the break-down of their diplomatic relations six years ago after the Israeli raid against a Turkish ship for Gaza killing 10 Turkish activists.
In an interview, Steinitz confirmed the Washington meeting. “I’m a great proponent of this effort to resume diplomatic relations with Turkey.” Since then, high-level officials from Turkey and Israel have talked privately in Geneva and London to hammer out a deal on restoring relations between the former allies.
Discussions have at times faced difficulties: Israel wants Turkey to cut its relations with Hamas representatives based in Turkey; Ankara wants reassurances about the provision aid to Palestinians in Gaza. Overall, though, Israeli officials believe an agreement can be reached in the coming weeks. “We have resolved 80 to 90% of the difficulties” Steinitz said. There have also been positive voices from Turkish energy companies sharing that view. Both Zorlu Enerji and a consortium of Turcas and Enerjisa have been in talks with Israel over gas prices and potential pipeline routes. Building a pipeline to Turkey or Egypt is about the same distance, around 540 km, and about the same cost, around $3 billion. However, Turkey is more attractive because of its position as a gateway to Europe.
The elephant in the room: Cyprus
Though Steinitz is hopeful, regional analysts remain skeptical. “A lot of the talk is pie in the sky,” said Michael Leigh, senior fellow at the German Marshall Fund in the United States and expert on gas windfalls in the East Mediterranean. He believes there are too many political and commercial obstacles to get the gas out of the seabed and bring it to the market. Perhaps the trickiest issue is Cyprus. Since 1974 the island has been split between the Republic of Cyprus in the south and the Turkish Republic of Northern Cyprus, after the Turks invaded the island backed by Greece.
There are no diplomatic ties between the south, which is a member of the European Union, and Turkey. Considerable reserves of gas are located in the territorial waters of the Republic of Cyprus, so if the country had an agreement with Israel to coordinate their export strategy – and if Turkey were to be one of the routes – finding a solution to the divisions within the island would become urgent, analysts say. The reason is that at least part of the pipeline would have to pass through Cypriot territorial waters into Turkish territorial waters. Experts are not convinced that the Leviathan gas field would be a sound investment, given the decline in gas prices and the cost of extracting the gas and piping it to markets. Steinitz remains optimistic, convinced that Israel’s economic stability and energy security depend on developing the country’s gas resources in whatever way possible: “We have to overcome all the difficulties and do it because it is essential for Israel’s future” he recently declared.
A project for the longest subsea pipeline in the world
Recently Israel has publicly voiced its ambition to become an exporter of energy to Europe, concluding a preliminary agreement with Cyprus, Greece and Italy to pump natural gas across the Mediterranean through a planned $6bn-$7bn pipeline. The proposed project would be the world’s longest and deepest subsea pipeline: extending from Israeli and Cypriot offshore gas fields to Greece and Italy, it would run for about 2,200 km and reach depths below 3 km. Yuval Steinitz said an preliminary study showed the project could be completed by 2025. Israel and Cyprus are promoting their gas reserves as viable alternatives to Russia and the North Sea, today EU’s main gas suppliers; indeed the former launched the $3.75 bn first phase of its Leviathan gas field in February and the latter recently concluded its third licensing for offshore blocks. The amount discovered so far is “just the tip of the iceberg” according to Steinitz, and Israel could potentially make more than 3,000 bcm of gas available for export within a few years.
Carlo Calenda, the Italian minister for economic development, claims that the pipeline project is “a top priority for our country”. Giorgos Stathakis, Greece’s energy minister, described Israel as “the most reliable export option”. Mr Steinitz said the four countries aim to conclude government-to-government agreements by the end of this year. Mr Steinitz foresee that the pipeline might be extended to other countries in western Europe or the Balkans. Moreover he has already discussed the plan and other Israeli energy projects with JPMorgan, Morgan Stanley, Goldman Sachs and other banks and that potential investor interest was enough to “pave the way for a very good and speedy project.”. But the initiative is likely to face industry skepticism in the face of low gas prices and concerns about political risk and Israel’s patchy record with energy investors. “The government would be better served growing the domestic market and finding solutions to make gas flow to Egypt, Jordan and Turkey […], it’s a long shot and at this stage it’s a pipe dream,” declared Amit Mor, chief executive of Eco Energy, an Israeli consulting firm. “The implementation of such projects sometimes takes decades. There is also a need to establish more proven reserves.”. Steinitz recalled that many were interested in this project and other potential gas developments in Israel and Cyprus since Europe could provide an attractive outlet for Eastern Mediterranean gas in the decades to come thanks to its geographical proximity and stable market for investors. Minister Carlo Calenda considers the pipeline a priority project for his country, “We think this project in the next decades can be a real pillar of our energy strategies” he said. “Now, we need to speed up the project to realize it.”