The race to harness Mediterranean gas resources

In the past 15 years, a number of significant gas discoveries have been made in the Eastern Mediterranean. The first countries to exploit these resources will have their pick of customers. Published in MEED, 3 June 2014

In early May, the operators of Israel’s Tamar gas field signed a letter of intent to supply up to 2.5 trillion cubic feet of natural gas to a plant run by Spain’s Union Fenosa Gas in Egypt. For now, it remains a non-binding deal, but the field’s operators, led by the US’ Nobel Energy, say they hope to sign a full agreement within six months.

It was the third export deal involving gas from the offshore Tamar field this year, following an agreement in January to sell gas to Palestinian Power Generation Company and another in February to supply two customers in Jordan – Arab Potash Company and Jordan Bromine Company.

Israeli finds

These deals are a sign of the shifting balance of energy power in the Eastern Mediterranean and, for now at least, there is one clear leader. Since 1999, there have been at least 12 gas discoveries in the region and all but two of them have been in Israeli waters. The most significant finds came in 2009 and 2010 with the Tamar and Leviathan fields, which are thought to hold 10 trillion cubic feet and 19 trillion cubic feet respectively.

Cyprus is some way behind in a promising, if distant, second place, having made one large discovery in 2011 with the 5 trillion-cubic-feet Aphrodite field. The other countries are trailing even further behind, however. There has been a discovery of 1 trillion cubic feet in the waters off the Gaza Strip, but it has yet to be exploited, while Lebanon is struggling to move ahead with its first licensing round and the civil war in Syria means activity is on hold indefinitely in its territorial waters.

If they can catch up with Israel, the potential gains for these countries are obvious, both in terms of secure energy supplies for their own economies and revenues from nearby export markets.

Countries such as Jordan, for example, are energy poor and keen to find new sources of fuel at a time when gas supplies from Egypt have become unreliable due to the political instability there. Governments in Southeast Europe are equally keen to diversify their sources of energy so they can reduce their reliance on Russian gas.

So with a ready supply of customers on their doorstep, the challenge for the countries that border the Eastern Mediterranean is to see if they can match Israel’s success. Cyprus seems the most likely to be able to make the jump from hope to reality.

In a speech to a conference in Limassol on 28 April, Cyprus’ energy minister, Yiorgos Lakkotrypis, confirmed that further drilling work is due later this year on Block 12, which is where the Aphrodite field was discovered. Exploration drilling is also expected to start in five other offshore blocks in the third quarter.

Cyprus faces a dilemma in dealing with the gas it has already found, however. The initial euphoria over the first discoveries at the Aphrodite field in December 2011 had to be tempered when the initial estimate of 7 trillion cubic feet proved to be over-optimistic. The revised total of 5 trillion cubic feet meant the original plans to develop an onshore liquefied natural gas (LNG) terminal have had to be reviewed.

LNG terminal

The Cypriot government appears convinced an onshore LNG terminal is still the best way to go, but it has yet to prove that the numbers add up. However, the country is also keen to act as a hub for other gas producers in the region, which could help to make an LNG facility economically viable.

“A scalable LNG export terminal will bring by far the greatest overall economic benefits to Cyprus and is the most suited for multiple discoveries as it can be easily expanded,” said Lakkotrypis in his April speech. “It also opens up the way for Cyprus to become an energy hub in the Eastern Mediterranean and provides a secure option for the export of gas reserves from neighbouring countries.”

Cyprus recently signed a deal with Greece and Israel to cooperate on energy and water resources and this could offer the foundation for further collaboration. The memorandum of understanding agreed in August 2013 covers items such as an electricity interconnection and provides a framework for further joint initiatives in energy infrastructure, but it remains to be seen how far this will go.

In Lebanon, the situation is far less promising, with the country’s first offshore licensing round hit by a series of delays. In April, 12 companies were prequalified as operators and a further 34 firms were prequalified as non-operators, but the actual bidding deadline has been postponed from 10 April to 14 August. It is the fourth extension to the licensing round, which was meant to happen in November last year.

Lebanon is currently at a political impasse in trying to elect a new president, and several vital decrees and a petroleum tax law have yet to be approved, so further delays are a real possibility. The continual setbacks are a cause for concern, according to Mona Sukkarieh, co-founder of Middle East Strategic Perspectives, a Beirut-based consultancy.

Time factor

“The fact that Lebanon is behind its neighbours in exploiting its resources means that these countries will be eating up parts of what Lebanese officials consider as Lebanon’s natural markets,” says Sukkarieh. “This is part of the reason why the time factor is essential and should not be disregarded by the Lebanese authorities.”

Nassib Ghobril, chief economist at Lebanon’s Byblos Bank, says he is not hopeful that the August deadline can be met.

“I’ve learnt to be very cautious and not have high expectations on anything related to reforms and major economic and financial decisions, especially about oil and gas,” he says. “Now that we have a vacuum at the presidential level, there’s a question mark over whether the cabinet will go ahead with the bidding process in August. Constitutionally, it has the authority to do so, but I don’t think they will take a major decision like that in the absence of a president.”

There is some evidence that, if it can get things moving, Lebanon might also be able to find large quantities of gas in its waters. More than 70 per cent of the country’s offshore area has already been covered with 3D surveys of excellent quality, according to Sukkarieh, and estimates of the quantity of natural gas that may be there range from 25-30 trillion cubic feet.

The most comprehensive assessment of the wider region was made by the US Geological Survey in 2010. It estimated there is about 1.7 billion barrels of recoverable oil and 122 trillion cubic feet of recoverable gas across the Levant Basin, an area that takes in the territorial waters of Israel, Cyprus, Lebanon, Syria and the Gaza Strip. Another US body, the Energy Information Administration, says this amount of oil would meet domestic demand in these countries for about 20 years at current levels of consumption, while the natural gas resources “could meet current regional demand almost indefinitely”.

The countries in the region could certainly do with the fillip. Cyprus was one of the hardest hit in Europe by the global financial crisis, with its economy contracting in four of the past six years, while Lebanon is buckling under pressure from 1.4 million Syrians seeking refuge from their civil war. Israel’s economy is in better shape, but it is growing relatively slowly – the Washington-based IMF estimates that, excluding contributions from gas, it expanded by just 2.5 per cent last year.

All three countries are also energy poor and have to rely on imported fuels, so big finds in the Mediterranean could be transformative. But there are plenty of issues that could yet disrupt their hopes. For example, the territorial waters of Lebanon and Israel are not properly demarcated, and the historic problem of a divided Cyprus and its lack of diplomatic relations with Turkey appear to preclude pipelines taking the most direct route to Europe.

Other territories are also affected by political problems, not least the Gaza Strip. Gas was discovered in the waters off Gaza in 1999/2000, but progress since then has been extremely slow. The UK’s BG Group has a 90 per cent interest in the field, with the remaining 10 per cent held by Athens-based Consolidated Contractors Company.

Two wells were successfully drilled at the Gaza Marine field in 2000 and a technical review conducted the following year recommended that a pipeline be built to an onshore processing terminal. In 2002, an outline development plan was approved by the Palestinian Authority, but the project has not moved forward since then.

Differences in opinion

Even some of the schemes that are moving ahead in Israel are suffering hiccups. On 21 May, Australia’s Woodside Petroleum pulled out of talks to take a stake in the Leviathan field, apparently because the existing operators wanted to concentrate on exporting to regional customers via pipelines rather than through an LNG terminal that Woodside would have helped with. Despite this, Nobel Energy, the largest shareholder in the field, says development work is continuing and the first production is scheduled for 2017.

In the meantime, Nobel Energy is pressing ahead with negotiations to secure more customers for the gas from both the Tamar field and, once it comes on stream, the Leviathan field. The company says about 40 per cent of the discovered resources in Israeli waters are exportable.

“We are in a number of additional negotiations to sell significant quantities of natural gas from both fields [Tamar and Leviathan] to multiple customers,” said Keith Elliott, senior vice-president for the Eastern Mediterranean at Nobel Energy, in February.

By the time gas from the Leviathan field comes on stream, some of Israel’s neighbours will be hoping they too have made some meaningful progress on their own fields. If they do make significant discoveries, the competition for export customers in the years ahead could become an intense, political affair.