Israel exposed to lawsuit from Noble Energy's Cypriot co | Globes

Israel exposed to lawsuit from Noble Energy's Cypriot co

The State Comptroller is probing whether Noble Energy asked to transfer ownership of its Israeli licenses to a Cypriot subsidiary.

15/12/2015, Hedy Cohen

The State Comptroller is probing the sequence of events that led to Israel being exposed to a huge lawsuit by Noble Energy Inc. (NYSE:NBL) in Cyprus, sources inform "Globes." Among other things, the State Comptroller will examine whether ownership of the natural gas reservoirs in Israel has been transferred to a Cypriot company, whether Noble Energy requested permission for a transfer of ownership, and if it did, whether the Ministry of National Infrastructures, Energy, and Water Resources approved it. A "Globes" inquiry shows that there are different versions of the required permits and processes.

Perpetual threat

Three months ago, Noble Energy president and CEO David Stover said, "Noble Energy remains fully prepared, and is well positioned, to take the actions necessary to protect the value of its assets." Indeed, Noble Energy is well prepared. As Deputy Attorney General Avi Licht said in a Knesset Economic Affairs Committee meeting two weeks ago, Noble Energy has established a subsidiary in Cyprus, which enables it to sue Israel if the gas plan is not approved, according to the bilateral convention for protection of investors.

The company in Cyprus was apparently founded after the Sheshinski Committee completed its work and substantially raised the tax rate on gas. "What is happening is that one of the companies in the Noble Energy ownership structure is a Cypriot company, and it is therefore utilizing our trade agreement with Cyprus. They argue that they have grounds for this - that it is not based on the Israeli law, but on international trade agreements - and we are exposed there," Licht explained.

In other words, even though the rights in Noble Energy's oil licenses are registered in the name of Noble Energy Mediterranean, incorporated in the Cayman Islands, Noble Energy is liable to institute legal proceedings against Israel through its Cypriot company, in accordance with a convention that went into effect in 2003.

Noble Energy will probably demand international arbitration with Israel if the gas plan is not approved, but that is not the end of the story. Even if the plan is approved, Israel will always be under the threat of such a claim. Under the stability clause inserted into the gas agreement, for example, Israel will not be entitled to change its regulation in the gas sector for the next 15 years, and if it does so, it will be exposed to an international lawsuit that will continue for years. Two questions now arise: was Noble Energy required to obtain approval from the relevant parties in Israel for recognition of the Cypriot company's rights, and if it did require such approval, was such approval legally granted?

Among other things, obtaining state approval for changes in the ownership structure of rights is required in order to prevent a company's oil rights from being transferred to a hostile company. For example, Prime Minister Benjamin Netanyahu recently told MK Stav Shaffir (Zionist Union) that such a transfer of ownership would not be possible without the consent of the Minister of National Infrastructures, Energy, and Water Resources.

A clarification of Article 76 of the Israeli Petroleum Law, published in October 2010, states that a change in the control of a corporation holding oil and gas rights, whether direct or indirect, as well as the granting of a benefit related to such control, requires approval from the Antitrust Authority director general, after consultation. A benefit in this context can be any economic benefit arising from the right, including through direct or indirect holdings, royalties, information, liens, etc.

"Globes" asked Noble Energy and the Ministry of National Infrastructures, Energy, and Water Resources whether approval for the transfer of ownership had been obtained, and received contradictory answers. Noble Energy said that it had "been operating in Israel since 1998, and had always complied with the legal regulations and obtained all the legally required approval for all of its activities." The Ministry of National Infrastructures, Energy, and Water Resources said, "The Ministry has received no request for a transfer of rights, and therefore none was approved."

The Ministry of Justice declined to respond, and referred the question back to the Ministry of National Infrastructures, Energy, and Water Resources. The Cypriot embassy in Israel was unable to answer the question.

"Grave failure"

A perusal of Noble Energy Mediterranean's deed of incorporation for the purpose of identifying the company's owners shows that it states only that the company is based overseas and has no board of directors or shareholders. A search for the Cypriot subsidiary that owns the company in Israel also turned up nothing. According to the Bloomberg news agency, Noble Energy has several subsidiaries in Cyprus.

Noble Energy International also owns the rights to the Aphrodite gas reservoir in Cyprus. "Someone has to answer for the opening of a company in Cyprus that can sue Israel. If the Ministry of National Infrastructures, Energy, and Water Resources allowed Noble Energy to transfer its rights to a Cypriot company, it is a grave failure. If, however, it turns out that Noble Energy transferred the ownership without obtaining such approval, the failure is even worse - it is gigantic," says Van Leer Institute Chazan Center for Social Justice and Democracy research fellow Amnon Portugali. "The Cypriot subsidiary was set up just after the Sheshinski Committee for a single obvious purpose - to sue Israel when necessary."

Indeed, sources inform "Globes" that the State Comptroller's Office intends to probe the matter. The State Comptroller's Office said, "Although the matter was not raised in the report published on the development of the natural gas sector, we plan to conduct an initial query in this matter as part of the State Comptroller's policy of continual monitoring of the natural gas sector."

Published by Globes [online], Israel business news - www.globes-online.com - on December 15, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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Egypt aims to reduce oil product subsidies | Reuters

Egypt aims to reduce oil product subsidies

Mon Dec 14, 2015  

CAIRO Dec 14 (Reuters) - Egypt is relaxing a commitment made by the previous government to abolish subsidies on gasoline, diesel and natural gas, following a slide in crude prices and the discovery of an offshore gas field.

The previous government had committed to getting rid of the subsidies that were diminishing the country's foreign currency reserves over a five-year period starting in July 2014.

Prime Minister Sherif Ismail said on Monday that Egypt now planned to reduce the subsidies to 30 percent of where they stood in July 2014, over the same time period.

"We respect the previous government's decisions and are committed to them, but there are changes we need to adhere to in the case of oil product subsidies, such as global energy prices and new discoveries," Ismail told a news conference.

He said lower global oil prices and the discovery of a massive offshore gas field meant Egypt could relax that goal.

The Zohr gas field, discovered by Italy's Eni, is the biggest in the Mediterranean. With an estimated 30 trillion cubic feet of gas, it is expected to plug Egypt's acute energy shortages and save it billions of dollars in precious hard currency that would otherwise be spent on imports.

Egypt is suffering from a foreign exchange shortage that has seen goods pile up at ports. About $6 billion was deposited in Egypt's central bank by Gulf Arab allies earlier this year to help replenish its dwindling foreign currency reserves.

Ismail is due to meet Saudi Arabian Deputy Crown Prince Mohamed bin Salman on Tuesday, when a new Saudi deposit will be on the agenda, he said.

The government is also targeting growth in gross domestic product of close to 6 percent and a reduction in its budget deficit to 8.5 percent by the end of the 2017-18 financial year, Ismail said. (Writing by Ahmed Aboulenein; editing by David Clarke) 

© Thomson Reuters 2015 All rights reserved

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Egypt has leverage over Israel, being the bottleneck to Tel Aviv’s gas: Official | Daily News Egypt

Egypt has leverage over Israel, being the bottleneck to Tel Aviv’s gas: Official

EMG has not been paying for gas in 10 months, we warned about terminating contract several times, says former minister

Mohamed Adel  December 14, 2015 

A senior official in the Egyptian government said they did not intend to announce the court ruling in favour of the Israel Electric Corporation (IEC), and had hoped to settle the conflict through negotiations.

The IEC’s decision to leak the information to the media forced them to announce the details of the verdict, continued the official, who requested to remain anonymous.

The arbitration will be complete through negotiations between Egyptian sovereign bodies and Israel in exchange for allowing them to export their natural gas production through Egyptian territory, which is the only outlet.

“Egypt stands on solid ground, being the only way out for Israeli gas,” the official said.

Shearman & Sterling law firm informed the Egyptian General Petroleum Corporation (EGPC) Saturday that the International Chamber of Commerce (ICC) ruled in favour of East Mediterranean Gas (EMG) and the IEC, obliging Egypt to pay a compensation of $2.048bn.

The source said however that consultation with the international legal adviser found that the Egyptian Natural Gas Holding Company (EGAS) has the right to appeal and annul the ruling, according to Swiss law.

Israel faces a major challenge implementing the development processes for its Mediterranean fields, whereby it does not have the infrastructure to produce gas from concession areas and export it.

Egypt has been clear on importing gas from Israel. “However, Tel Aviv equivocated and exploited media to claim that Egypt will import Israeli gas through Dolphins Holding,” the source said.

The official explained that Israel attempted to import gas through Jordanian pipelines, but did not follow through after the public’s rejection. Transferring gas through Turkey requires establishing pipelines through Syria and Lebanon, which is unsafe in light of the current circumstances in the region.

Egypt has the largest terminal for gas in the Mediterranean that can receive up to 9bn cubic feet of natural gas per day, in addition to a liquefaction plant that can export 1,880m cubic feet per day.

The Egyptian government froze negotiations carried out by Egyptian companies to import Israeli gas last week. The government said no approvals will be granted until the arbitration is successfully appealed.

Former minister of petroleum Osama Kamal said the IEC is not a party in any contracts with EGAS or EGPC, and only EMG has the right to sue.

He explained that the contract with EMG provides for the conduction of arbitration in Cairo, hinting at Egypt’s right to stop exporting gas to Israel due to failure to meet payments.

EMG stopped paying for gas for 10 months and ignored all warnings issued by Egypt. “Contracts provide for Egypt’s right to stop pumping gas,” Kamal said.

Meanwhile, Israeli Prime Minister Benjamin Netanyahu announced that he will send a delegation to Cairo to discuss the issues that arose following the ICC’s ruling, though he did not specify the date.

Israel produces gas from eight fields, in addition to the newly discovered Ishai field in the Israeli and Cypriot territorial waters.

The official said resolving the arbitration with Israel will enable it to export its gas through the liquefaction factories in Idku and Damietta and use the national gas pipelines in Egypt. In exchange, this will resolve four petroleum arbitration cases against Egypt, including cases brought forth by the IEC, EMG, and Unión Fenosa, which owns the Damietta liquefaction plant.

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Delek Group Response To Media Reports on Leviathan Development Plans | Delek Group

Tel Aviv, December 14, 2015. Delek Group (TASE: DLEKG, US ADR: DGRLY) (“the Company”) announces that attached are Immediate Reports published by both Delek Drilling Limited Partnership and Avner Oil Exploration Limited Partnership concerning their response to media reports about the development plan for the Leviathan field.

In respect of the media reports of a reduced development plan for the Leviathan field that is in the area of the I/14 "Leviathan South" and I/15 "Leviathan North" leases ("the Leviathan Field"), the Partnerships wish to clarify that contrary to what has been published, the basic outline development plan for the Leviathan Field, advanced by the project partners, is intended to produce and handle a maximum daily output of natural gas of approximately 1.6 - 1.8 BCF (maximum of 16 - 18 BCM per annum) using various engineering alternatives.

This is in order to supply gas from the Leviathan Field to customers in the Israeli market, to NEPCO in Jordan, customers in Egypt (mainly BG) and to the Palestinian Authority, in accordance with the letters of intent signed to date.

The Partnerships are assessing, as required, together with their partners in the Leviathan Field, different possibilities to adapt the capacity of the development plan to the various marketing programs for gas from the Leviathan Field, and nevertheless, as stated above, the basic development plan outline has not been altered.

Partners in the Leviathan Reservoir and their percentage holdings are as follows:

Noble Energy Mediterranean Ltd. Avner Oil Exploration - Limited Partnership Delek Drilling Limited Partnership Ratio Oil Exploration (1992) - Limited Partnership

39.66% 22.67% 22.67% 15.00%

This is a convenience translation of the original HEBREW immediate report issued to the Tel Aviv Stock Exchange by the Company on December 14, 2015.

About The Delek Group

The Delek Group, Israel's dominant integrated energy company, is the pioneering leader of the natural gas exploration and production activities that are transforming the Eastern Mediterranean's Levant Basin into one of the energy industry's most promising emerging regions. Having discovered Tamar and Leviathan, two of the world's largest natural gas finds since 2000, Delek and its partners are now developing a balanced, world-class portfolio of exploration, development and production assets with total gross natural gas resources discovered since 2009 of approximately 40 TCF.

In addition, Delek Group has a number of assets in downstream energy, water desalination, and in the finance sector.

For more information on Delek Group please visit www.delek-group.com

Contact

Investor Relations Delek Group Tel: +972 9 863 8444 Email: investor@delek-group.com Source

Leviathan partners prepare scaled-down development plan | Globes

14/12/2015
Hedy Cohen
With exports to Egypt in doubt, the Leviathan partners are mulling cutting development plans in half.
The Leviathan partners are drawing up a contingency plan for developing the gas field in the event that exports to Egypt do not materialize, sources inform "Globes." The partners are mulling various alternatives including a more limited development of the field. Instead of building a floating production, storage and offloading vessel (FPSO) with a 16 billion cubic meters (BCM) annual natural gas capacity as originally set out in the development plan, a facility half the size might be built, a senior source at the gas developers told "Globes."

In June 2014, the Leviathan partners signed a letter of intent with British Gas (BG), which has a liquid gas terminal in Egypt. The letter of intent said that Leviathan would export 105 BCM to the BG facility over 15 years. The deal would enable finance the first stage of Leviathan's development, which will cost an estimated $7 billion.

Turkey's Natural Gas Strategy: Balancing Geopolitical Goals & Market Realities | Turkish Policy Quarterly

Emre Tunçalp |  Sunday, December 13, 2015

Though it is a rapidly growing emerging market, Turkey lacks indigenous reserves of the world’s two crucial fossil fuel sources, namely oil and natural gas. As a result, the country is highly dependent on imports to meet its demand (the country has 98 percent import dependency in natural gas and 92 percent in oil), and energy security has been a chief component of Turkey’s energy strategy for the past two decades. Natural gas, in particular, has remained at the forefront of Ankara’s energy policy due to its rapid increase in Turkey’s energy mix and the rigid and long-term nature of natural gas supply contracts. Over the past couple of decades in Eurasia and the Middle East, it has become virtually impossible to separate the conversation about natural gas from geopolitical and foreign policy discussions. This is definitely true of Turkey.

Turkey’s Natural Gas Market: A Need to Diversify

Despite natural gas’s significance in today’s economy, Turkey’s experience with it is a relatively new affair. Turkey’s first gas imports came from Soyuzgas in the USSR in 1986, and consumption began in 1987.[1] The country’s natural gas demand has steadily increased ever since,[2] with natural gas overtaking oil as the country’s single most important fuel source, representing 35 percent of the country’s primary energy mix.[3] Turkey’s own “rush to gas” occurred in the past decade, as the country’s demand tripled from 15 billion cubic meters (bcm) annually in 2000 to 47.6 bcm in 2013,[4] registering the second biggest increase in demand in the world behind China.[5]

Turkey is estimated to consume around 50 bcm of natural gas in 2015, still experiencing demand growth despite slowing economic growth and a host of geopolitical risks affecting Turkey’s neighborhood. In fact, Turkey is expected to be among the International Energy Agency (IEA) member countries with the fastest energy demand growth in the medium- and long-term. It is also important to note that, in addition to its high share in Turkey’s total energy mix, natural gas plays a particularly crucial role in the country’s economy, with electricity generation and industry representing a big portion of the country’s total natural gas demand.[6]

Considering these internal trends and indicators, and barring any game-changing indigenous natural gas discoveries, Ankara’s reliance on imported natural gas will only increase in the future. What makes matters worse from an energy security standpoint is Turkey’s asymmetric reliance on a single supplier, Russia. In 2014, Russia’s natural gas exports to Turkey reached 26.9 bcm, representing 54.76 percent of Turkey’s total natural gas imports (49.2 bcm). Russia was followed by Iran (18.13 percent), Azerbaijan (12.33 percent), Algeria (8.48 percent via LNG), Nigeria (2.8 percent via LNG), and spot LNG (3.43 percent).[7]

The concerns over Turkey’s dependence on Moscow for natural gas imports, and its constraining impact on Ankara’s foreign policy and geopolitical strategy, were put in the spotlight recently due to increased tensions between the two countries after Russia stepped up its involvement in Syria. Russia’s belligerence in Turkey’s neighborhood over the past several years – including the invasion of Georgia in 2008, the annexation of Crimea in 2014, and now the intervention in the Syria crisis – have highlighted the importance of supply security, in particular the diversification of energy suppliers and supply routes, for Turkish national security and foreign policy.[8]

When it comes to natural gas, Turkey’s decades-long desire to become a regional energy hub[9] and Ankara’s tendency to play up its favorable geostrategic position (Turkey is located in close proximity to 70 percent of the world’s conventional oil and gas reserves) adds another dimension that goes beyond the economic fundamentals of supply and demand.[10] Conveniently located between the world’s second-largest natural gas consumer after the US, Europe, and major natural gas reserves in Central Asia, the Middle East, and Eastern Mediterranean, Turkey does have the potential to significantly benefit in both economic and political terms as a transit country, connecting natural gas producers to natural gas consumers through a network of pipelines on its territory. Ankara’s strong historical ties and relationship with the EU have been crucial components of Turkey’s natural gas supply diversification efforts and transit ambitions.

These factors were behind Turkey’s involvement in the European Commission’s Southern Gas Corridor (SGC) project, launched in 2008. Aiming to bring natural gas resources from the Caspian Basin and the Middle East to Europe, the project was initiated as a way for the EU to diversify its natural gas supply portfolio in response to the Russia-Ukraine gas supply dispute of 2006.[11] However, plans for the Nabucco Pipeline, considered a key piece of the SGC, failed to materialize despite strong political support from the EU and the US. Today, Nabucco serves as a note of caution in the heated debate pitting geopolitical desirability against commercial viability when it comes to such large-scale, expensive energy infrastructure projects.

It is true that geopolitical dimensions and political considerations have often distracted analysts from discussing the actual market dynamics or financial realities of different projects. This is a dangerous distraction that in recent years particularly dominated the natural gas industry in Europe and the surrounding region.[12] The right balance would be somewhere in between assessing projects based on the principle of commercial viability and realizing that energy resources, especially natural gas, are very prone being exploited as a means to strengthen countries’ political and economic preeminence in the region.

Energy’s Role in a Fast-Changing Region

Turkey’s natural gas policy over the past couple of years can be defined as proactive, ambitious, pragmatic, and at times opportunistic. Realizing that the Nabucco project had become a mere pipe dream due to various commercial and financial issues, Ankara teamed up with the government of Azerbaijan to propose a new infrastructure project, the Trans-Anatolian Pipeline (TANAP). Financed by Azerbaijan’s sovereign wealth fund, TANAP is designed to carry the natural gas that will be produced during the second stage of Azerbaijan’s Shah Deniz offshore field. It is important to note that this move by Ankara and Baku almost entirely reshaped the planned configuration of the SGC, as TANAP became an integral part of it. In December 2013, Shah Deniz shareholders reached a final investment decision on the second phase of the field and selected the Trans-Adriatic Pipeline (TAP), which is to connect TANAP with Italy via Greece and Albania.

The same kind of pragmatism manifested itself in Turkey’s energy dealings with Russia. The energy relations between the two countries are often described as a good example of the compartmentalization of different aspects of bilateral relations in order to obtain cumulative gains. Despite strong disagreements on many issues in the recent past, including over Georgia, Ukraine, and Armenia, Moscow and Ankara have not only maintained a strong relationship in the field of energy, they managed to expand it even further with new deals such as the 20 billion dollar agreement signed in 2010 for Rosatom to build Turkey’s first nuclear power plant in Akkuyu, Mersin.[13] Although this “Turco-Russian rapprochement” was put to the test in recent months as a result of the Syrian crisis, it is true that the countries have become economically interdependent in a way that would make any dramatic derailment in the relationship a very costly affair for both sides.[14] The downing of a Russian jet by Turkish F-16s on November 24 and the ensuing crisis demonstrates the risk of potential spillover from the volatile geopolitical backdrop in Turkey’s region. Although it is clear that the heightened rhetoric in the immediate aftermath of the incident is not sustainable, early signs indicate it will be difficult for Ankara and Moscow to go back to the glory days of rapprochement that dominated the past decade in their bilateral relations.

Its pragmatism and eagerness to close deals also proved to be a liability for Ankara at times. The nuclear agreement with Rosatom was widely criticized in Turkey both for environmental and security reasons and for further increasing Turkey’s dependence on Russia. It is indeed true that it was this overdependence, among other things, that resulted in Turkey’s muted response to Russia’s illegal annexation of Crimea in March 2014, drawing the ire of Ankara’s Western allies. Today, Turkey remains the only NATO country that did not join the sanctions regime against Russia. In fact, Turkish Economy Minister Nihat Zeybekçi even said in August 2015 that he was “very glad about the new developments, as Turkey will benefit from what has been going on in Russia,” referring to the opportunities for Turkish exports due to Western sanctions.[15]

The discovery of a significant amount of natural gas in the Eastern Mediterranean reignited debates about the relationship between regional geopolitics and energy. Notably, the finds had prompted many observers to suggest that energy could be the game-changer to solve long-standing conflicts in the region.

The long-stalemated conflict in Cyprus and Turkey’s uneasy relationship with Israel since the Mavi Marmara incident in 2010 present daunting political roadblocks to any Turkish involvement in the offshore discoveries in the region. However, despite all the rhetoric about geopolitics, it was instead commercial issues[16] in Cyprus, and domestic policy and regulatory issues in Israel that proved to be the biggest impediments to the development of natural gas.[17] In fact, Ankara’s resilient economic relationship with Israel gave reason to be optimistic about future cooperation in the field of energy despite bilateral relations reaching a historic low on a political level. The trade between Israel and Turkey in 2014 increased by 11.5 percent compared to 2013, as bilateral trade reached an all-time high at 5.44 billion dollars, despite the ongoing political crisis and increasingly hostile anti-Israel rhetoric in Turkey.[18] Moreover, Turkish companies Zorlu Group and Turcas were among those bidding for the tender to construct a pipeline with an annual capacity of 7 to 10 bcm, transporting natural gas from the giant Leviathan field to the Turkish mainland.[19] Although a scenario involving Turkish companies’ participation in the short term looks unlikely in the current conjuncture due to political obstacles, such examples serve to show Turkey’s pragmatic approach in the energy field.

Finally, Iraq recently emerged as a significant potential oil and gas supplier that could offer Turkey an alternative to diversify away from Russian supply. The potential of Iraq’s energy sector was of such magnitude that the IEA, in its special Iraq Energy Outlook report in 2012, stated that the country “can make a major contribution to the stability and security of global energy markets.”[20]

Turkey’s dealings with the Kurdistan Regional Government (KRG) of Iraq are another case in point for Ankara’s recent foreign policy and natural gas diplomacy approach. With an estimated range of three to six trillion cubic meters (tcm) of natural gas reserves, the KRG has the potential to play an important role in Turkey’s efforts to become an energy transit country.

What makes the KRG a particularly interesting story is the close economic and energy relationship between Ankara and Erbil over the past several years. In a turn of events that confounded many outside observers due to Turkey’s decades-old conflict with its own Kurdish population, Turkey quickly became one of Erbil’s most important political and economic partners and an outlet for the Iraqi Kurdistan’s energy exports to the world, despite strong objections from Baghdad and Washington.[21] The tensions between Ankara and the Iraqi government of Nouri al-Maliki had come to such a point that then-Foreign Minister Ahmet Davutoğlu’s plane was not given permission to land in Erbil’s airport[22] by the central-government-run Iraqi civil aviation authority.[23] Meanwhile, Turkey and the KRG signed an agreement in November 2013 that envisioned exports of four bcm of natural gas annually by 2017, 10 bcm by 2020, and 20 bcm thereafter.[24] Turkish-Iraqi bilateral relations have improved since then in the Haider al-Abadi government. Unfortunately, the emergence of the Islamic State of Iraq and the Levant (ISIL) in Iraq dramatically transformed the geopolitical dynamics in the region, posing significant security challenges to further investment. However Ankara’s stance in any event demonstrates the Turkish government’s willingness and desire to push forward to close energy deals.

What Does the Future Hold for Turkey’s Natural Gas Strategy?

In light of Turkey’s domestic market realities and its track record over the past couple of years, it is clear that supply diversity will be a top priority in Turkey’s quest to enhance its energy security. Despite Turkey’s recent efforts, some of which have had significant negative consequences for the country’s security and foreign policy, Ankara still finds itself in a position of high vulnerability in terms of energy security.

The Ministry of Energy and Natural Resources, in its five-year strategic plan for 2015-19, recognizes the country’s considerable import dependency in oil and natural gas, and names diversification of import countries and routes as a major priority in ensuring the security of energy supply.[25] This goes hand in hand with Ankara’s desire to integrate with regional energy markets and become a more powerful regional actor in the energy industry.

In short, the risk related to natural gas supply security is clear, and the government is trying to tackle this on both the domestic and foreign fronts. Domestically, the Ministry’s strategic plan aims to reduce the share of natural gas in electricity generation from 44 percent to 38 percent by the end of 2019. Externally, it limits the dependency on a single country for imports of natural gas to 50 percent by 2019, a figure that is still dangerously high.[26] Coupled with Turkey’s desire to become a natural gas hub, these targets make for one ambitious list and unfortunately, the road ahead is a difficult one.

Domestic Market Challenges

Turkey’s longstanding desire to become a regional natural gas hub faces both internal and external challenges. First, the country needs to implement a series of domestic market reforms in order to deepen its natural gas markets and establish a properly functioning legal and regulatory framework. Lack of competition and transparency in the Turkish domestic market, coupled with infrastructure issues (such as transmission bottlenecks and inadequate storage capacity) are main hurdles that need to be overcome. Finally, BOTAŞ’s monopoly needs to be broken up. There are no immediate solutions to these problems and no easy ways to establish the market conditions necessary for Turkey to become an energy hub or a reliable transit country.[27]

Some positive steps have been taken in the right direction over the past decade. The establishment of the independent Energy Market Regulatory Board (EMRB) in 2001, and the Natural Gas Market Law (NGML) 4646 in the same year, marked an important start.[28] Unfortunately, the liberalization process ever since has been painfully slow. The initial law had aimed at reducing BOTAŞ’s share of imports to 20 percent of the country’s total consumption, but as of 2015 the figure is at 80 percent.[29] There are also plans to increase Turkey’s natural gas storage capacity from the current meager level of around three bcm to five bcm by 2019. The current storage capacity merely represents around 5.5 percent of total consumption.[30] Realizing that even this upgraded capacity would be a drop in the bucket, Turkey’s Economy Ministry announced it would offer up to 10 billion dollars for a new gas storage facility to be built on the Mediterranean coast.[31]

The draft law amending the 2001 NGML was submitted to Parliament in 2013 and is expected to help transform the sector into a more competitive, transparent, and financially stable one. It includes provisions limiting BOTAŞ’s market share to 50 percent, and placing a 20 percent cap on the amount of natural gas that can be sold by a single wholesale company.[32] The draft law also envisions the unbundling of BOTAŞ into three entities, in charge of transportation, LNG and storage operations, and imports, respectively. It also aims to increase natural gas storage capacity to 10 percent of consumption by 2019. Finally, the country is taking steps to improve its transmission infrastructure by building new high-pressure compression stations. The Erzurum station, completed in 2014, is the country’s ninth such facility, and there are also ongoing plans to improve the capacity of Hanak, Sivas, and Doğubayazıt compressor stations. The lack of adequate transmission infrastructure is especially problematic in the eastern parts of the country, as Ankara had to pay fees in the past for the contracted gas that it failed to take from Azerbaijan and Iran. While these projects demonstrate that Turkey’s plan to enhance its profile as a prominent regional natural gas transit country is certainly not a pipe dream, it will take some time before the country can develop the necessary domestic market conditions needed to achieve the goal of an energy hub.

External Challenges

The next obvious question is then the following: Where can Turkey turn to meet its increasing demand for gas? A cursory analysis would suggest that the external factors and developments over the past few years might have favored Ankara. The price of oil is at a record low (especially compared to the peak it experienced in 2008), providing a boom for import-dependent countries such as Turkey.[33] Similarly, the discovery of new large natural gas fields in Turkey’s neighborhood, including places like Israel, Cyprus, and Egypt, as well as the possibility of increasing supply from current providers such as Azerbaijan and Iran (though Russia would also be included on this list), means Ankara might soon have a multitude of options in terms of supplier and supply route diversification. Finally, even some geopolitical developments (such as Russia’s invasion of Crimea) that further increased the geopolitical risk premium in the region could have potential silver linings for Turkey. As Russia’s move sparked fears of supply crises in Europe similar to those of 2006 and 2009, it highlighted the concerns about security of the European energy supply and increased the profile of alternative supply routes such as the SGC.

Unfortunately, almost all of these supply route options face various challenges. Some have to do with geopolitical reasons; others face financial, economic, or logistical issues.

Where Would the Additional Gas Come From?

Azerbaijan is the first option that comes to mind. Azerbaijan currently supplies around six bcm annually to Turkey via the South Caucasus Pipeline. With its reserves at 1.2 tcm, the country is on its way to increasing its profile as a natural gas provider to Turkey and Europe.[34] With the construction of the TANAP pipeline, Azerbaijan is expected to start exporting an additional six bcm annually to Turkey at the end of 2018. TANAP is being built so that it can be upgraded to supply 23 bcm by 2023, and 31 bcm by 2026 from Azerbaijan (either from the later stages of Shah Deniz or Azerbaijan’s natural gas fields such as Absheron or Umit-Babek). However, such plans will have to wait until at least 2023 when TANAP can allow for additional supply; given the delays that were experienced in the run-up to the Shah Deniz II final investment decision in December 2013, and the new low oil price environment, more delays might affect later stages of the project.

With its huge natural gas reserves, estimated at 34 tcm, Iran could potentially be a true game-changer for the natural gas industry. Although the nuclear deal reached between the P5+1 countries and Tehran in July 2015 is a promising first step in opening Iran’s vast reserves to foreign investment, many obstacles need to be overcome before Turkey’s natural gas imports from Iran could be significantly increased from the current level of around nine bcm annually. The pre-sanctions contracting system used buy-back contracts whereby foreign companies conducted exploration and development without rights to the actual fields. Tehran is now working on a new contract regime in order to attract foreign investment.[35] There are also ongoing commercial disputes between Ankara and Tehran over the price of natural gas. Turkey on average is paying around 487 dollars per each 1,000 cubic meter of Iranian gas, a price that is significantly higher than that for Russian gas (418 dollars per 1,000 cubic meters) or Azeri gas (340 dollars per 1,000 cubic meters).[36] Finally, Turkey’s current infrastructure does not allow for significant additional piped natural gas from Iran, so it would have to go through TANAP pipeline.

Moscow’s plans to increase Russian supply to Turkey and potentially Europe through a new pipeline underneath the Black Sea have been one of the most hotly debated topics of 2015. Dubbed “TurkStream,” the first phase of the project will carry 15.75 bcm per year for Turkey’s consumption. Initially the project had envisioned four strings of pipeline with a combined capacity of 63 bcm, part of which would be destined for European markets via Greece. Despite all the brouhaha about the pipeline project that replaced Gazprom’s initial South Stream proposal, which was supposed to take the Russian gas directly to Bulgaria, instead of Turkey), significant setbacks provided a reality check on the pipeline’s feasibility.

Question marks have been raised about Moscow’s plans to double the capacity of the Nord Stream pipeline that carries Russian natural gas to Germany underneath the North Sea, given both financial constraints and potential regulatory issues in accessing the European market. The negotiations for the pipeline were frozen as of September 2015[37] and Gazprom CEO Alexei Miller announced in October that the pipeline’s capacity would be reduced by half.[38] Also, the attractiveness of the TurkStream for Europe is limited since the EU’s main goal is supply diversification. Despite the successful track record in compartmentalizing different aspects of bilateral relations, geopolitical challenges in the region such as Syria and Russia’s growing role there (which raised awareness of Turkish over-dependence on Russia for its natural gas imports) could hinder potential increases in Russian supply. [39]

The Eastern Mediterranean region also recently emerged as a potential major supplier of natural gas in Turkey’s region after significant discoveries were made offshore from Cyprus and Israel over the past five years. However, the commercial challenges and domestic policy and regulatory issues have affected the development of the fields and the export capacity. Additionally, the political obstacles in Cyprus and the deterioration of bilateral relations with Israel make exports from the region to Turkey unlikely in the short term.

Turkmenistan, with its massive estimated reserves of 17.5 tcm, could also be an important potential supplier of natural gas for Turkey. Turkmenistan has been a priority for Turkey’s energy policy, as the idea of transporting Turkmen gas via a Trans-Caspian pipeline to Turkey and Europe goes back to the early 1990s. Despite political support from the EU and the US, the plans never reached a mature stage due to disagreement among the Caspian littoral states on the delimitation of the Caspian Sea.

Turkey’s Natural Gas Strategy Going Forward

Turkey’s natural gas strategy has correctly identified its shortcomings, but there usually is a gap between targets and actual policies. This has weakened Turkey’s hand in its quest to increase energy security. Turkey’s overreliance on Russia for gas supply has, in short, restricted its ability to conduct foreign policy. There are challenges hampering Turkey’s efforts toward further supply diversity but they are certainly not insurmountable. Ankara is quickly becoming a more adept natural gas consumer and negotiator. It is clear that diversity of suppliers is and will remain crucial, therefore energy diplomacy and foreign policy will continue to be at the forefront of Turkey’s natural gas strategy. But a proactive and pragmatist approach in energy policy can be a strength only if it is balanced with a more cool-headed and sustainable foreign policy approach. It is also very important to be realistic in targets and policy goals. The concept of Turkey as a natural gas hub might still be in the cards, but only in the medium- and long-term. Rhetoric and geopolitical ambitions can be self-defeating in that respect, as the natural gas sector tends to be dominated by grandiose infrastructure projects and ambitious themes that may not come to fruition. It is important to consider actual market mechanisms, financial and economic considerations, and basic supply-demand fundamentals when assessing new projects and planning for the future.

Emre Tunçalp is a Senior Advisor at Sidar Global Advisors (SGA), a Washington, D.C.-based research and risk advisory firm.

[1] Gürcan Gülen, Izak Atiyas, and Tamer Çetin, Reforming Turkish Energy Markets: Political Economy, Regulation and Competition in the Search for Energy Policy (New York: Springer-Verlag, 2012).

[2] By way of comparison, Turkey’s consumption was only 4.5 bcma in 2002 whereas Germany and the United Kingdom consumed 63 bcm and 56.4 bcm, respectively. See Dr. Gareth Winrow’s excellent paper for more on this topic: http://www.brookings.edu/~/media/research/files/papers/2014/04/realization-turkeys-energy-aspirations-winrow/turkeys-energy-aspirations.pdf

[3] “BP Statistical Review of World Energy 2015,”BP, 2015, http://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html

[4] Gülmira Rzayeva, “Natural Gas in the Turkish Domestic Energy Market: Policies and Challenges,” The Oxford Institute for Energy Studies, February 2014, http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/02/NG-82.pdf

[5] “Turkey’s Energy Strategy,” Ministry of Foreign Affairs of Turkey, http://www.mfa.gov.tr/turkeys-energy-strategy.en.mfa

[6] “BP Statistical Review of World Energy 2015,” BP, http://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html

[7] “2014 Natural Gas Market Report,” Republic of Turkey Energy Market Regulatory Authority (EMRA), http://www.epdk.org.tr/documents/dogalgaz/rapor_yayin/DPD_RaporYayin2014.pdf

[8] “Turkey Country Report 2013,” International Energy Agency, https://www.iea.org/publications/freepublications/publication/2013_Turkey_Country_Chapterfinal_with_last_page.pdf

[9] For the definition of an energy hub, see: Ksenia Krauer-Pacheco, “Turkey as a Transit Country and Energy Hub: The Link to Its Foreign Policy Aims,” Working Papers of the Research Centre for East European Studies, University of Bremen, December 2011. An energy hub is a country that buys energy resources in its borders and then re-exports them to other purchasers. In doing so it sets the selling conditions (theoretically) independently from the original producers and final buyers. Another component of an energy hub is the bigger infrastructure that is constructed for the production of petrochemicals for export,

[10] Ministry of Foreign Affairs of Turkey, http://www.mfa.gov.tr/turkeys-energy-strategy.en.mfa

[11] Simone Tagliapietra, “The EU-Turkey Energy Relations After the 2014 Ukraine Crisis,” Fondazione Eni Enrico Mattei, 75 (2014), http://www.feem.it/userfiles/attach/201499948154NDL2014-075.pdf

[12] See: Nikos Tsafos, “Europe’s Dangerous Distraction: Pipelines,” The National Interest, 2 July 2015, http://nationalinterest.org/feature/europes-dangerous-distraction-pipelines-13242

[13] “Russia and Turkey sign pact for nuclear reactor,” The New York Times, 12 May 2010, http://www.nytimes.com/2010/05/13/world/europe/13turkey.html

[14] For a good summary and analysis of this rapprochement, see: Gareth Winrow and Cenk Sidar, “Turkey and South Stream: Turco-Russian Rapprochement and the Future of the Southern Corridor,” Turkish Policy Quarterly, Vol. 10, No. 2 (Summer 2010), http://turkishpolicy.com/Files/ArticlePDF/turkey-and-south-stream-turco-russian-rapprochement-and-the-future-of-the-southern-corridor-summer-2011-en.pdf

[15] “First step toward setting free trade zone with Russia,” Daily Sabah, 23 August 2014,

 http://www.dailysabah.com/money/2014/08/23/first-step-toward-setting-free-trade-zone-with-russia

[16] “The Future of Eastern Med Gas: Interview with Dr. Tim Boersma,” Natural Gas Europe, 23 February 2015, http://www.naturalgaseurope.com/eastern-mediterranean-gas-tim-boersma-brookings

[17] “How Isreal turned a gas bonanza into an antitrust headache,” Reuters, 1 October 2015, http://www.reuters.com/article/2015/10/01/israel-economy-natgas-idUSL5N11Q0BB20151001

[18] “Turkey-Israel relations: a political low point and an economic high point,” Brookings Institution, 19 February 2015, http://www.brookings.edu/blogs/markaz/posts/2015/02/19-israel-turkey-trade-business-economy

[19] “10 bids for Leviathan export tender to Turkey,” Globes, 23 March 2014, http://www.globes.co.il/en/article-10-bids-for-leviathan-export-tender-to-turkey-1000926526

[20] “Iraq Energy Outlook 2012,” International Energy Agency, http://www.worldenergyoutlook.org/media/weowebsite/2012/iraqenergyoutlook/fullreport.pdf

[21] For more details on the Erbil-Ankara economic rapprochement, see: Soner Çağaptay, Christina Bache-Fidan, and Ege Cansu Saçıkara, “Turkey and the KRG: An Undeclared Economic Commonwealth,” The Washington Institute, http://www.washingtoninstitute.org/policy-analysis/view/turkey-and-the-krg-an-undeclared-economic-commonwealth

[22] “Iraq bars minister’s plane from landing in Arbil amid tensions,” Today’s Zaman, 4 December 2012, http://www.todayszaman.com/latest-news_iraq-bars-ministers-plane-from-landing-in-arbil-amid-tensions_300121.html

[23] It is important to note that the deterioration in Ankara-Baghdad relations during Al-Maliki’s era also had to do with sectarian impulses that dominated foreign policy discourse on both sides. See for more details: Henri Barkey, “Turkey-Iraq Relations Deteriorate With Accusations of Sectarianism,” Al-Monitor, http://www.al-monitor.com/pulse/originals/2012/al-monitor/turkey-iraq-ties-sour-brover-syr.html#

[24] “Turkey, Iraqi Kurdistan clinch major energy pipeline deals,” Reuters, 6 November 2013, http://uk.reuters.com/article/2013/11/06/uk-turkey-iraq-kurdistan-idUKBRE9A50HN20131106

[25] “Turkey’s Ministry of Energy and Natural Resources Strategic Plan 2015-2019,” http://www.enerji.gov.tr/File/?path=ROOT%2f1%2fDocuments%2fStrategic+Plan%2fStrategicPlan2015-2019.pdf

[26] Turkey’s Ministry of Energy and Natural Resources Strategic Plan 2015-2019.

[27] See for a good discussion on the prerequisites for Turkey to become a “good” energy transit state: Gareth Winrow,  “Realization of Turkey’s Energy Aspirations,” Brookings, April 2014, http://www.brookings.edu/~/media/research/files/papers/2014/04/realization-turkeys-energy-aspirations-winrow/turkeys-energy-aspirations.pdf

[28] “The Natural Gas Market Law 4646 (full text in Turkish),” http://www.mevzuat.gov.tr/MevzuatMetin/1.5.4646.pdf

[29] A revised version of the law later modified this target to the more realistic 50 %.

[30] By way of comparison, the same ratio for countries like Italy, France, and Germany is around 20-30 % level. See: Gulmira Rzayeva, “Natural Gas in the Turkish Domestic Energy Market,” Oxford Institute of Energy Studies, http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/02/NG-82.pdf

[31] “Turkey to give $10 billion incentives for new gas storage facility,” Platts, 15 October 2015, http://www.platts.com/latest-news/natural-gas/istanbul/turkey-to-give-10-billion-incentives-for-new-26241615

[32] “The Natural Gas Market Law 5367 (full text in Turkish),” http://www3.epdk.org.tr/documents/dogalgaz/mevzuat/kanun/Dpd_Kanun_20050616_5367.doc

[33] In fact, research shows that Turkey saves 4 billion dollars for every 10 dollars drop in the price of oil. However, the pass-through to consumers has been limited due to high taxes: “Turkey not reaping benefits of free-falling oil prices,” Today’s Zaman, 18 december 2014, http://www.todayszaman.com/business_turkey-not-reaping-benefits-of-free-falling-oil-prices_367386.html

[34] “Statistical Review of World Energy 2015,” BP, http://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html

[35] “Iran says will announce oil and gas contracts in Nov and Feb,” Reuters, 10 October 2015, http://www.reuters.com/article/2015/10/10/iran-oil-contracts-idUSL8N12A0HD20151010

[36] “Turkey, Iran need new gas deal for price discount,” Hürriyet Daily News, 24 June 2015, http://www.hurriyetdailynews.com/turkey-iran-need-new-gas-deal-for-price-discount.aspx?pageID=238&nID=84467&NewsCatID=348

[37] “Turkish Stream first line launch postponed due to political crisis in Turkey: Gazprom,” Hürriyet Daily News, 14 September 2015, http://www.hurriyetdailynews.com/turkish-stream-first-line-launch-postponed-due-to-political-crisis-in-turkey-gazprom.aspx?pageID=238&nID=88462&NewsCatID=348

[38] “Russia’s Gazprom declines Turkey’s request for 3 bcm of gas via Blue Stream pipeline: CEO,” Hürriyet Daily News, 9 October 2015, http://www.hurriyetdailynews.com/russias-gazprom-declines-turkeys-request-for-3-bcm-of-gas-via-blue-stream-pipeline-ceo.aspx?pageID=238&nID=89624&NewsCatID=348

SOURCE

Global oil and East-Med natural gas | in-cyprus.com (Cyprus Weekly)

Global oil and East-Med natural gas

Charles Ellinas — 13/12/2015

This article is based on a presentation I made at the fourth Energy Symposium organised by the Institute of Energy for South East Europe (IENE) and Financial Media Way (FMW) on December 7-8 at the Hilton-Park in Nicosia.

The symposium was opened by President Nicos Anastasiades, who called for regional cooperation for the development of East-Med gas resources.

It started with a review of Cyprus’ energy sector, followed by presentations on strategies for the exploitation of natural gas, operation of the liberalised electricity market, renewables and energy efficiency.

East-Med overview

Israel is hoping to overcome its regulatory problems soon and reconsider development of Leviathan in the light of the discovery of the huge Zhor gasfield. But the award of an arbitration settlement by the International Chamber of Commerce (ICC) of $1.76 billion to Israel Electric Corporation, and Egypt’s immediate response of suspending any gas import negotiations with Israel complicates the East-Med picture, unless things are resolved soon.

The eventual decision may also complicate the resolution of the regulatory problems in Israel as it is based on invoking Article 52, which can only be used to bypass the Antitrust Commissioner in cases of national security and importance. Israel’s Energy Minister Yuval Steinitz is already considering other gas export options from Israel to other countries in the region, thought to include Turkey.

The discovery of Zhor by ENI has given Egypt a massive boost but has turned East-Med plans and thinking upside-down. Given the favourable prices it has secured for its gas, ENI will proceed with development of Zhor as a matter of priority.

And together with BP’s North-Alexandria and Atoll, Shell’s shale-gas finds, and Egypt’s 77tcf of proven gas reserves, there is enough gas to supply Egypt’s additional future domestic needs, and replace liquefied natural gas (LNG) imports, and also to supply the two idle LNG plants at Damietta and Idku. Egypt plans to stop LNG imports by 2020 and resume LNG exports by 2022.

And then there is Turkey

It was stated last month in conferences in Istanbul and Tel-Aviv that Turkey expected to obtain 10-12bcm of gas per year from the East-Med for its future needs.

That was before the recent incident and the standoff between Turkey and Russia. As a result of this, Turkey is now looking for alternative gas supplies from the East-Med to lessen dependence on Russia. It has, for example, signed preliminary agreements to import gas from Qatar and Kurdistan.

Should the Cyprus problem be resolved, Israel and Cyprus could jointly supply more than 20 bcm per year to Turkey, should this be acceptable and provided the price is right. And markets and prices matter, given the glut of oil and gas now in the global markets.

Oil markets

The International Energy Agency (IEA) released last month its annual World Economic Outlook (WEO-2015), covered in the Cyprus Weekly on November 20, and it makes grim reading as far as oil prices are concerned.

The IEA expects oil demand to rise by less than 1% per year between now and 2020, and only by 0.7% thereafter, a slower pace than necessary to quickly mop up the oil glut that has driven prices to such lows. As a result, prices will stay low for longer, leading to major cuts in spending.

East-Med is not immune to this. Investment by oil and gas companies is expected to be selective and only projects with strong commercial viability and low risk will be funded.

The decision by OPEC last week to maintain its current policies is reinforcing low prices. As a result, the price of Brent crude is now hovering near $40 per barrel and Goldman Sachs predicts it could go substantially lower before it goes up again.

Impact on natural gas markets

Similar arguments apply to gas prices, through oil-price linkage in long-term sales contracts and a glut in the global supply of LNG. By 2018, global liquefaction capacity is set to grow by over 140 bcm per year, which is 28% over 2014 levels, and another 40-50 bcm per year is expected by 2020, mainly from Australia and the USA.

This is in addition to a glut of LNG already in the market, which has led to global LNG prices tumbling to current very low prices. It is now a buyers’ market, with buyers renegotiating unfavourable long-term contracts and dictating supply terms.

Wood MacKenzie expects the LNG-glut to be deeper and last longer than anticipated and to persist for some years. In Asia, LNG prices may bottom-out by 2019 at $5 per mmBTU and in Europe by 2020 at about the same level and recover slowly after 2022. Societe Generale makes similar forecasts.

European gas prices are subject predominantly to the actions of Gazprom. Its low gas cost base and the devaluation of the ruble allow it to compete and dictate prices. Russian gas exports can be viable even at $5 per mmBTU. And in Europe LNG imports have to match piped gas to be competitive.

Russian piped-gas prices in western-Europe are now down to $6.2 per mmBTU and are expected to remain low for quite some time.

The reduction of Gazprom prices has led to a massive increase in Russian gas imports to Europe over the last six months – 41% up year-on-year in October – and a drop in LNG imports from other countries.

And that despite sanctions and the EU drive for diversification away from Russian gas to other suppliers.

It is no wonder that Germany, in addition to supporting Nord-Stream 2, is now pushing for EU rapprochement with Russia in the investment and energy sectors.

Gas buying in Europe is carried out by gas-traders and gas-companies and it is evidently driven by commercial factors, not by EU politics. Something the East-Med must be aware of and aim to be competitive at such prices if it is to be able to export gas to Europe.

Impact on East-Med gas exports

Europe is a market which in terms of gas usage is stagnating, at least for the foreseeable future. In recent meetings with ministries in Berlin and Brussels it was made clear to us that prices and timing matter. East-Med gas must meet these to gain firm sales.

East-Med, and Cyprus, will have to compete with these low gas prices, $6-$7 per mmBTU, at least to the end of this decade, but very likely beyond 2020, if the various export projects currently being mulled are to become commercially viable.

When the vision of the future is uncertain, you’re better off being flexible, keeping all your export options open. East-Med and Cyprus must do the same, and, while negotiating with Egypt, leave their options open and include floating liquefied natural gas (FLNG) and marine-compressed natural gas (CNG) in re-developing future export plans.

And in the longer term, possibly in 10-years, with more gas discoveries and a price recovery, LNG exports from Vasilikos may return as an option.

If and when the Cyprus problem is resolved it may open up exports to Turkey, possibly in cooperation with Israel. But this should not end up being the only option as it could make negotiations one-sided.There are opportunities for the region to export its gas, but not at any price or at any time!

Sooner than later, East-Med and Cyprus will have to face and meet commercial realities if they are to succeed.

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