Disputes delay Mediterranean gas projects, expectations take back seat
Beirut - High expectations following natural gas discoveries in the eastern Mediterranean have taken a back seat as the collapse in oil price has led companies to review planned energy projects.
Approximately $200 billion worth of upstream hydrocarbon projects have been cancelled or postponed. The delays involve eastern Mediterranean gas fields, including Israel’s Leviathan and Cyprus’s Aphrodite fields.
The development of Leviathan’s first stage is estimated to cost $6 billion. A Noble Energy-led consortium, which includes Israel’s Delek Group, is responsible for the development of both Leviathan and Aphrodite fields. It has also delayed development of Israel’s smaller gas discoveries. Tamar is Israel’s only producing gas field so far, with supplies dedicated to the domestic market.
Economic disputes are common between producing countries and oil firms. Disagreements surface during negotiations or even after conclusion of contracts, causing delays.
In Israel, the head of the Antitrust Authority (ATA) stated in December 2014 that Noble’s consortium constituted a monopoly jeopardising the interests of Israeli consumers.
ATA argued that the consortium had discovered nearly all the ten gas fields in northern Israeli waters, including Tamar and Leviathan. ATA asserted that the consortium’s control of gas supplies to the Israeli market would enable it to fix the prices of gas and electricity.
Israel’s plans are for gas to be the main fuel for power stations. Accordingly, ATA demanded that consortium firms divest their shares in several fields. Consortium members refused to adhere to ATA’s demand but agreed later to a compromise that provided for a much smaller divestment.
Israeli Prime Minister Binyamin Netanyahu opposed ATA’s policy, arguing the conflict with the consortium hurt Israel’s strategic and economic interests. During the dispute, which extended throughout 2015, the consortium delayed development of Leviathan. Most of the agreements signed with Egypt and Jordan, as well as the Palestinian Authority, were stalled or annulled because of lack of clarity over the firms operating the fields.
In Cyprus, oil firms asked Nicosia to modify drilling commitments, arguing that no commercial discoveries were made after Aphrodite was found. The companies were under pressure from parent firms to reduce expenses in light of the oil price collapse. After months of talks, it was agreed the companies would drill in different blocks.
Oil-producing countries also encounter differences among their political parties and groups over profits to be achieved by oil firms. In Lebanon, political differences surfaced even before the first bidding round has taken off.
Israeli political differences were sparked by ATA in December 2014. ATA proposed changing contract terms just as firms were about to develop the Leviathan field. Netanyahu opposed ATA’s policy and defeated his opponents in the Knesset, who argued in favour of consumers. The head of ATA resigned.
The dispute delayed the development of Leviathan. The consortium studied the possibility of a joint development of Israel’s Leviathan and Cyprus’s Aphrodite. Production plans for Leviathan have been postponed from 2018 to 2019.
Lebanon has encountered a score of political challenges since 2014. The cabinet failed to give priority to the gas project, deadlines to go ahead with the first bidding round are three years behind schedule and several oil firms lost interest in the bidding process.
EU countries have expressed interest in importing eastern Mediterranean gas, despite its relatively limited reserves, estimated at about 1% of global reserves. EU countries declared their intent to increase gas utilisation, for environmental reasons. The United States supports the European Union’s policy to reduce dependence on Russian gas. Russia has the largest gas reserves globally.
Several projects have been proposed to export eastern Mediterranean gas to Europe.
The export of Israeli and Cypriot gas by pipeline, from Israel through Cyprus to Greece, would serve Greece and feed into the EU gas grid. A major hurdle meeting this project is the sea depth between Cyprus and Greece.
The extension of a pipeline from Israel through Cyprus to Turkey, exporting both Cypriot and Israeli gas, would join in Turkey with one of the East-West gas pipelines to the European Union but the project would need the resolution of political disputes between Cyprus and Turkey and between Israel and Turkey.
The construction of a liquefied natural gas (LNG) plant in Cyprus, serving both Cypriot and Israeli gas was delayed after the Cypriot financial crisis.
Israel is also considering exporting electricity to the European Union through a cable across Cyprus to Europe.
Talks are ongoing concerning these proposals. There are competing security, national and commercial interests in support of each proposal. None of the projects would make a dent in Russia’s gas market in the European Union.
Egypt’s Shorouk field discovery by Italy’s ENI in August 2015 changed the geopolitics of eastern Mediterranean gas. Plans include meeting Egyptian domestic gas demand; turning Egypt with its existing gas facilities and two LNG plants into an eastern Mediterranean gas hub; collecting supplies from Egyptian and neighbouring small gas fields to export to Italy via Shorouk in an undersea pipeline through Libyan waters, using facilities from two ENI offshore fields with an existing pipeline to Italy and connecting with the EU gas grid.