January 05th, 2016
After years of activity accompanied by little action, 2016 has the potential to turn out to be the year of decisions for the Eastern Mediterranean natural gas industry. And, if I ignore for the purpose of this article the climate surrounding the global energy markets, then the most dominant forces, which can either accelerate the industry's development or halt it for a decade or two, are currently the geopolitical ones.
How will Israeli relationships with Egypt from the south and Turkey from the north develop? Will the reunification of Cyprus come to pass? Will Turkey and Russia clash again or will their relationship stabilise on a new low? What are Russia's motives in its presence in Syria? And what are the implications for natural gas production in the East-Med?
Each of these questions, and there are probably a few more, has its own branches and ramifications on the natural gas industry. In other words the geopolitical situation in the East-Med is quite intricate and a lot of diplomatic efforts and action will be needed in order to turn the East-Med a natural gas hub (though a few more trillion cubic feet of gas are needed as well).Egypt
Egypt's leaders are probably hoping to see a rapid and successful development of their offshore natural gas fields by BP and Eni S.p.A. Eni's development schedule of Zohr and the gas field's full potential should become clearer during 2016. Its development is scheduled to start in January 2016. In the meantime, until its new gas fields are operational, Egypt will have to rely on relatively expensive LNG and hope that it will find the cash to pay the suppliers.
In the geopolitical sphere, Egypt became entangled with Israel, or vice versa, when an ICC tribunal awarded Israel Electric Corp (IEC) and EMG about $2 billion following the cancellation of a 20-year gas supply contract in 2012. It is still not clear whether Egypt will seek an appeal; however, it is clear that diplomats and envoys will be bothered by attempts to put out the fire that has a potential to derail export plans from Leviathan and Tamar, the Israeli gas fields.
More urgent, however, is the solution needed in order to activate the contract between the Tamar Partnership and Dolphinus Holdings. That is a small contract, 5 billion cubic metres in 7 years, at a value of $1.2 billion. Despite the contract approval by the Israeli Energy Minister, the chances of its implementation are negligible due to security issues and current Israel-Egypt relations. The pipeline that would be used, stretching from Al-Arish to the Nile Delta, would be susceptible to terror attacks, and such attacks have the potential to sour Israel-Egypt relations. Those relations already under pressure following the arbitration process mentioned above.
Jordan
The Arab Potash Company and the Jordan Bromine Company will likely start receiving gas from Tamar by mid-2016. Public opinion in Jordan is against the purchase of Israeli gas, even if it's cheaper than LNG. However, those chemical producers are located on the eastern shore of the Dead Sea, close to the Jordan-Israel border, far away from the kingdom's centre, controlled by the Canada Potash Corp, and therefore less affected by public opinion.
NEPCO, the National Electric Company of Jordan, will keep relying on the FSRU anchored in Aqaba bay for the supply of gas through LNG shipments for power generation. NEPCO was supposed to be one of Leviathan's anchor customers. A contract between Israel and Jordan for gas supply was due to be signed in a ceremony on the White House lawn last January, following American mediation between the two countries. However, because of the regulatory turbulence in Israel, the ceremony was delayed indefinitely and Jordan has cancelled the contract. Now that the new regulatory framework has been approved, Israel will enact all levers of influence over Jordan in order to renew the contract and to sign it. However a few experts are sceptical, saying that Jordan will be unable to pay the prices the Leviathan partnership is expected to demand. Others say that it may end up with Israel subsidising gas export to Jordan. One way or the other, intensive negotiations between the two sides, with American mediation, are expected this year.
Toward the end of 2014, Jordan became involved in gas diplomacy when the country's Energy Minister met with his Cypriot counterpart. The two tried to draw plans to export Cypriot gas to Jordan through Egypt. For various reasons, the feasibility of this option looks doubtful; it would likely be much more economically viable to transport the gas to Jordan through Israel.
Israel
The natural gas regulatory framework saga could be over by February when the High Court of Justice is due hear four petitions (and probably more) seeking to block the natural gas regulatory framework from approval. The framework's approval has caused some jubilation among senior executives in Delek Group. In the last week of December, they company presented their roadmap for the development of their gas assets and despite the difficult environment--or according to their proclamation, because of it--they are quite sure that by the end of 2016 Israeli gas will flow in two directions (east to Jordan and south to Egypt) and the development of Leviathan and Tamar expansion will start.
Transmitting the gas east is the easy part; transmitting it south, to Egypt as mentioned above, is a scenario that probably won't materialise. More significant are Delek's negotiations with BG, from which the two companies are interested in signing an agreement before Shell completes its acquisition of BG. However, it can be expected that BG's Idku LNG facility would be on Shell's $30 billion divestment list, so the contract will be put on hold.
Noble Energy already announced that a Final Investment Decision (FID) concerning Leviathan and Tamar will be taken by the end of 2016. Noble's financial situation is challenging at the least, and it is doubtful whether the company will have either the appetite or the ability to raise $3 billion investment, its combined share in Leviathan's development, and the Tamar expansion, particularly if, as is forecast now, gas prices remain low for years to come. That makes the LNG export option through Egypt marginally profitable as the expected wellhead price would be no more than $3 MMbtu.
Noble is also considering a small Leviathan option. If that comes to pass, it will only be because of the guaranteed high natural gas prices in Israel and in order to comply with its lease deed. Israel, in any scenario, has to explore viable options to increase its energy security.
Meanwhile Israeli diplomats and statesmen would be involved in negotiations with Cyprus and Turkey in order to create an opportunity for gas deals with Turkey. On 28 January 2016, a trilateral summit between the leaders of Greece, Cyprus and Israel will take place. From Israel's point of view, an improved relationship with Turkey has priority, because of its stature as the biggest economy and it has one of the biggest and strongest armies in the Middle East, in which the Israeli defense industries are showing huge interest. However, in coming closer to Turkey, Israel might encounter some resistance from Russia, an ally of Cyprus and Greece. The diplomats involved will have to call upon all their statesmanship skills in order to navigate those negotiations to a fruitful conclusion. Israel, it's important to remember, needs Cyprus' permission to lay a pipeline to Turkey through its Exclusive Economic Zone (EEZ) and has also to reach a unitisation agreement with the island country, another tricky obstacle to overcome.
Cyprus
Cyprus's fate is not in her own hands. If the Cypriot administration is able to convince BG, Noble and Delek Group to go ahead with the development of the Aphrodite gas field without linking it to Leviathan development, and supply the gas to Egypt and to the small Cypriot market, then there is a chance that Aphrodite will be developed in the next few years. However, Cyprus has to still agree to a unitisation agreement with Israel, though it can go ahead without reaching an agreement. Cypriots also have to hope for the island's reunification to enable gas export to Turkey.
Lebanon
Lebanon has still to issue licenses for exploration.
Turkey
Turkey will keep on relying on Russian gas for the foreseeable future. In addition, Turkey is relying on expensive Iranian gas, relatively cheap Azeri gas, and LNG cargoes. Turkish diplomats may try to mend fences with Russia in order to advance the Turkish Stream pipeline project, and unless any new or severe altercations between the two countries happens, there is no danger to Russian gas supply.
So far, a fortnight since the first leak about the normalisation negotiations between Israel and Turkey, no progress has been reported. On 28 January, at the trilateral summit between the leaders of Israel, Cyprus and Greece, talks will centre on energy and security issues. Israel, in order to advance its interests, will have to consider by then how much has been achieved in its negotiations with Turkey, and what still can be achieved. Turkey is interested not only Israeli gas but probably even more in Israeli weapons, according to the Turkish media.
New developments concerning the Israel-Turkey relationship and other natural gas contracts is expected just before Israel's High Court of Justice hears petitions against the natural gas framework in the beginning of February.
Russia
Russia's military presence in Syria and its conflict with Turkey has the potential to influence certain natural gas developments in the region. It would be preposterous to assume that the supply of Israeli gas to Turkey would or could endanger Russian dominance in this market. However, Vladimir Putin, the Russian President, is unlikely to welcome any kind of a threat, even a small one, unless he has a say in the deal. That he might try to achieve through Gazprom's potential involvement in the Israeli natural gas industry as was reported a few weeks ago. In light of the deteriorating financial situation of Noble Energy, it is not impossible that Gazprom, a geopolitical tool in Putin's hands, will try to be involved in the Leviathan project.
Conclusion
2016 in the East-Med is going to be a year that involves a lot of gas diplomacy. Egypt should witness the start of the development of a few important gas fields. Russia will try to influence the directions of developments in the region, keeping Turkey highly dependent on its gas; while Israel will continue to try to find ways out of its acute energy security problem.
Ya'acov Zalel
SOURCE
