Israel and Cyprus: Untying the Gordian Knot on East Mediterranean Gas

Gas exploration and drilling activities in Israeli and Cypriot waters along with licensing rounds for blocks near the super-giant Zohr gas field raise the likelihood for large gas discoveries in the East Mediterranean. Israel and Cyprus speed up efforts for the development of energy resources to be primarily channeled to Europe.

Europe is considered as prime export destination for regional supplies of liquefied natural gas given that the continent is seeking to enhance energy supply and transit security.

Israel seems to be taking two steps forward and one step back on natural gas. A renewed Israeli gas regulation framework has portended a competitive market as new companies acquire offshore drilling rights. It is in this context that a Greek company,  Energean Oil and Gas has secured full ownership of Israeli Karish and Tanin gas fields at the price of 148 million dollars aiming to deliver 88 billion cubic meters (bcm) of natural gas to the Israeli market in the next forty years. The Greek company has submitted a field development plan to the Israeli government and secured sales agreements for more than 3 bcm annually at a 20 percent price discount compared to Leviathan partners’ pricing to Israeli power provider Dalia Power Energies and its sister company Or Power Energies. This arrangement has set the stage for competition that will benefit consumers and the Israeli economy.  

Reservations however are high over the smooth development of the Leviathan gas field due to the fact that the field’s partners – Noble Energy, Avner Oil Exploration, Ratio Oil Exploration and Delek Drilling – abandoned initial plans at the first stage of development to build a floating offshore platform over the field’s wells thus narrowing gas exports to Jordan, the Palestinian Authority and the domestic Israeli market. No doubt that prospects for the field’s first stage development are benefited by the $10 billion contract signed between Leviathan gas field partners and Jordan’s National Electric Power Company to sell gas to the latter for the next fifteen years.

A prime challenge is that Leviathan field partners are likely to develop transportation infrastructure that will be used exclusively by Leviathan blocking out competitors and endangering prospects for future gas discoveries in Israel. The reason is that without Leviathan’s economies of scale, competitors will have to finance their own transportation infrastructure thus raising at prohibitive levels the costs of developing smaller fields. An additional challenge is related to the new Egyptian legislation, called Resolution No. 196 of 2017, that foresees the establishment of a gas regulatory authority and permits private companies to import gas from third countries like Israel. Despite the new legislation, the likelihood for direct export of Israeli gas to Egypt is minimal because of the Egyptian government’s position that gas agreements with Israel can procced only if the latter’s companies withdraw from arbitration that has ordered Egypt to pay 3 billion dollars in compensation for losses sustained when gas supplies to Israel halted in 2012.

To overcome current challenges, Israel should urge the joint use of Israeli Leviathan field’s transportation infrastructure or alternatively support the development of joint national infrastructure to overcome prohibitively high costs associated with developing smaller fields in Israel like the Dalit and the Simshon gas fields. The Israeli government should also address risks that worry investors like force majeure and export sustainability by guaranteeing a certain amount of financial recovery though the existing compensation mechanism.

In search of commercially viable levels of hydrocarbon resources, Cyprus posesses a central position in the regional setting. Nicosia’s 3rd international licensing round for three blocks within its Exclusive Economic Zone (EEZ) resulted in the awarding of licenses to Italian ENI and French Total for Block 6; ENI for block 8; and, American Exxon Mobil and Qatar Petroleum for block 10. Notably, the attraction of international majors and the subsequent awarding of exploration blocks signal a vote of confidence in the island’s EEZ. The July drilling in block 11 that was commissioned to Total and ENI in the 2nd licensing round has been critical as first results show that the geology of Egypt’s Zohr gas field extends into Cyprus’s EEZ. This assessment raises expectations for the findings of the two drillings scheduled for the second half of 2018 in block 10 that lies in close proximity to the super-giant Zohr field. It is estimated that oil majors’ plans center on connecting gas discoveries in Cyprus with Egypt’s by pipeline and re-export reserves as liquefied natural gas by utilizing the Egyptian Idku and Damietta LNG facilities.

There is widespread belief that political tensions as consequence of the collapse of the Cyprus Peace talks and competing EEZ claims between Cyprus and Turkey can impact negatively regional energy cooperation. The resolution of the Cyprus conflict is viewed by many as prerequisite for the construction of a pipeline that would connect Israeli Leviathan field to the Turkish coast given that the pipeline will have to cross through the island’s EEZ. A number of energy experts insist that “the Philippines arbitration case vs China over South China Sea” can serve as model for the settlement of competing EEZ claims between Cyprus and Turkey, while others consider the Malta-Libya arbitration case as more approrpiate given that Turkey is not signatory to the United Nations Convention on the Law of the Sea (UNCLOS).

The development of energy resources is a demanding process thus the government of Cyprus should support the joint monetization of Cypriot and Egyptian gas on the basis that economies of scale reinforce profitability and produce higher government revenues; and, pass legislation that foresees establishment of a National Investments Fund where revenues from hydrocarbon exploitation will be deposited for the benefit of Greek Cypriots and Turkish Cypriots.

Gas can remain under-developed for years to come if challenges are not properly addressed by Israel and Cyprus. To unleash the full potential of their wealth, consultation between Tel Aviv and Nicosia could allow a coordinated development of fields due to their close geographic proximity given that international investors long for a stable political environment for capital-intensive projects to proceed. Making the best use of existing underused export infrastructure with a number of promising fields in both Israel and Cyprus can be the key to unlocking the region’s energy potential.

Antonia Dimou
Antonia Dimou
Antonia Dimou is Head of the Middle East Unit at the Institute for Security and Defense Analyses, Greece; and, an Associate at the Center for Middle East Development, University of California, Los Angeles