incyprus — 19/09/2015
By Charles Ellinas
We had some powerful messages coming out of meetings in Berlin and Brussels this week.
As a follow-up to the East Med regional expert workshops organised by the Friedrich-Ebert-Stiftung (FES) Foundation and PRIO in Nicosia and Istanbul, and reported in the Cyprus Weekly last June, high-level meetings took place this week in Berlin and Brussels.
These included industry, the Federal Ministry for Economic Affairs and Energy, the Federal Chancellery and the Ministry of Foreign Affairs in Berlin, and MEPs at the European Parliament, EU Directorate General for Neighbourhood Policy and Enlargement, Directorate General for Energy, European External Action Service, the Norwegian Embassy and a number of think tanks in Brussels.
The key message to Berlin and Brussels was that the European Union should recognise the East Med as an important source of hydrocarbons for Europe and assist the countries of the region to cooperate in order to achieve this.
In a regional environment of rapidly changing realities, there is a sense of urgency for regional platforms of dialogue, including civil society in addition to regional governments, to contribute to the social and economic welfare of the local populations and the protection of the regional environment.
A number of important and sometimes surprising messages came out of these meetings which are discussed in the remainder of this article.
Messages from Berlin
There was considerable interest from EoN and BP to see gas from the East Med exported to Europe through the Southern Corridor pipeline. However, timing is important.
Delay the decision making process and the opportunity may not be there in a few years. Gas consumption in Europe is not actually increasing, due the push to renewables led by Germany.
But Europe still needs to replace the depletion of indigenous gas resources in the North Sea and the Netherlands. This, combined with the drive in Europe to diversify supplies, has created opportunities but there are currently many competing sources of gas to fill this gap.
These include piped gas from Russia, the Caspian region, Iran, North Africa and LNG from North America. It will not take long before the European gas markets are saturated, leaving no room for East Med gas.
This demand may not be there in three-five years. East Med gas is not a priority for western Europe’s energy needs.
The other major factor is prices. Gas markets are changing rapidly.
Russia has now lowered its gas prices to Europe down to about $6.2 per mmBTU, as a result of oil price indexation.
East Med gas will have to compete with cheap gas if it is to gain an entry into Europe. In the end when it comes to gas sales commercial realities prevail, not politics.
The German position is that the energy sector should be regulated by markets. State governments and the EU have no role in building infrastructure, gas trading or producing and delivering energy. These must be driven by industry.
Germany, and Europe, want diversification of supplies to reduce excessive dependence on Russia, but not to endanger the relationship, which they have found dependable even at difficult times.
There is awareness that lack of transparency in the region is feeding corruption and they are supportive of the Extractive Industries Transparency Initiative (EITI), but it is for countries in the region to adopt and apply.
With regards to safety of offshore oil and gas operations and protection of the environment the EU offshore directive should help but it needs to be adopted by all countries in the region, not just Cyprus.
Germany is interested in the East Med region, but mostly in terms of security and stability, and for political and economic reasons – not for its gas. They see gas as having a bridging function as they move to renewables – they have a target to achieve zero emissions by the end of this century.
There is no interest to import electricity from North Africa or the East Med to Europe – this is now overtaken by the switch to renewables. The focus for Germany is to empower countries to supply themselves with renewable energy.
Messages from Brussels
Energy security and climate change are the key issues. Gas is needed as a bridging resource as Europe moves to renewables. The EU supports regional cooperation and the area through which to achieve it could be energy.
The EU is ready to assist Cyprus to develop its hydrocarbons and even more so if gas can assist reconciliation. The possibility of a gas pipeline through Cyprus EEZ to Turkey, provided the Cyprus problem is resolved, to transport Israeli and Cypriot gas and feed the Southern Corridor is of interest and would support it.
Southern Corridor is a priority project. But East Med gas must be competitive against European gas prices, it must secure markets and meet time schedules.
They are following the recent developments in the region with the massive discovery by ENI in Egypt. ENI’s CEO Descalzi was in Brussels this week expounding his ambitious goals to turn Egypt into a regional energy hub.
But there was some scepticism that perhaps this may be a little bit too ambitious and commercial realities and the challenges in Egypt might temper what can be achieved. I was actually challenged to a bet on this, when I said ENI has the incentives to drive this project.
The East Med gas is attracting considerable interest from policy-makers in the EU, but in their view it still needs to be developed and mature. It is a region with major geopolitical challenges.
As such it is a region of top priority to the EU, not because of its gas but because of the need to achieve stability and cooperation in the development of this gas to satisfy regional demand and help regional economies. In this context the new gas discovery in Egypt should contribute to its self-sufficiency and possibly the resumption of LNG exports to generate additional revenue for the country.
Cooperation between Cyprus and Israel to develop their gas and possibly export it by pipeline to Turkey and Europe or as LNG should help regional stability.
Environmental issues are very important and require regional coordination to ensure the safety of offshore operations.
The EU offshore directive can help achieve this and in addition to Cyprus, the EU is assisting Lebanon and Israel in this direction. However, it is a regional issue and regional outreach strategies must evolve to achieve it.
Key messages
East Med gas is not a top priority for Europe. There is a market but it will not be available forever. Global gas markets are shifting rapidly, with supply outstripping demand, with LNG gaining ground and prices being very competitive.
If East Med wishes to join these markets it must secure firm gas sales and meet these competitive prices. The EU is politically very supportive of the Southern Corridor and this might provide an opportunity for the region to export its gas, but not at any price and at any time!
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