How important are the Eastern Mediterranean gas discoveries for European energy security?
Large natural gas discoveries in the eastern Mediterranean have raised hopes that the region could serve EU energy needs, helping it to fulfil its goals of energy diversification, security, and resilience.
SUMMARY
• But there are commercial and political hurdles in the way. Cyprusʼs reserves are too small to be commercially viable and Israel needs a critical mass of buyers to begin full-scale production. Regional cooperation – either bilaterally or with Egypt – is the only way the two countries will be able to export.
• Egypt is the only country in the region that could export gas to Europe independently because of the size of its reserves and its existing export infrastructure. But energy sector reforms will be needed to secure investor confidence in this option.
• There are now two options for regional export: to build a pipeline that connects Israel and Cyprus to southern Europe, or to create a network of pipelines into Egypt, from which gas could be liquefied and exported.
• The EU should explore regional prospects by strengthening its energy diplomacy, developing more projects of common interest, working to resolve the Turkey-Cyprus dispute, and incentivising reforms in Egypt.
There has been a great deal of excitement over the past few years around newly discovered gas reserves in the eastern Mediterranean, and rightly so.With confirmed recent reserves reaching close to 2,000 billion cubic metres (bcm) of gas, and the possibility of more discoveries to come, the Levantine Deep Marine Basin has the potential to offer two things of value to the European Union: energy security, and an improvement in regional cooperation between Middle Eastern countries.
The diversification of Europe’s gas supply has long been a priority for the European Union. With gas wars taking place between Russia and EU member states in 2006 and 2009, and a major escalation of diplomatic tension following Russia’s annexation of Crimea in 2014, efforts to address this issue have accelerated in recent years.The prospect of reducing the EU’s dependency on Russian gas by securing supplies from within Europe’s geographical vicinity could help the EU build energy resilience – a stated goal of its Energy Union strategy.
Gas discoveries in the eastern Mediterranean have also led to hopes that mutual economic benefits could be a catalyst for closer relations between various states in the Levant.Whether this means facilitating Israeli economic integration with Arab neighbours, or catalysing rapprochement between Cyprus and Turkey, these discoveries initially seemed like promising means of greater stability and reduced volatility in the region.
The prospects of energy security and regional cooperation merit further exploration, as initial optimism regarding these discoveries has been tempered by the political, economic, and logistical realities on the ground. Many experts believe that the initial hype around natural gas discoveries in the region has been overstated. In a relatively short period of time, excitement has been replaced with scepticism and the sense that reserves are likely to remain stranded unless major developments,such as additional discoveries or diplomatic breakthroughs – take place. However, opinion is split: there are others who continue to stress that countries in the region have enormous potential to become leading players in global energy. At the very least, most experts and officials interviewed for this study agree that gas reserves can be used within the region, even if plans to export fail.
How important are the eastern Mediterranean gas discoveries for European energy security?
Currently, more than half of all the energy consumed within the EU is imported from abroad, making it heavily reliant on external supply. In the case of natural gas, the proportion of energy imported is closer to two/thirds.
Germany, Italy, France, Belgium, and Spain are the biggest importers of natural gas, the majority of which comes from Russia, Norway, Algeria, and Qatar. But Norway’s production is gradually declining and future prospects for Algerian gas remain unclear, because key contracts will end in 2019 and 2020. Qatar will likely remain an important supplier of Liquefied Natural Gas (LNG) to the EU, particularly to western European states that have the requisite capacity for regasification – the process of converting LNG to gas − in their LNG terminals. But it is Russia that supplies the lion’s share of gas, accounting for around one-third of European gas imports. Member states vary in their dependency on Russia according to internal factors such as domestic production and fuel mix, and external factors such as geographic proximity, geopolitical relationships, and the availability of alternative supply options. According to the latest figures, countries in eastern Europe such as Estonia, Finland, Latvia, and Lithuania are particularly exposed, as they import all of their natural gas from Russia.
A longtime goal of the EU has been to increase energy security, here loosely defined as the ability to reliably secure access to uninterrupted supplies to meet local demand. Crucial to achieving energy security is ensuring the uninterrupted flow of gas, Russian or otherwise, to Europe. The majority of imported Russian gas currently transits through networks in Ukraine,although pipelines such as Nord Stream and Yamal provide additional security by offering alternative transit routes. European gas disputes with Russia climaxed in 2014 when Gazprom, Russia’s state-owned gas supplier cut off exports to Ukraine.This led to severe energy crises in several eastern European states, some of which depend wholly on Russian supplies. That same year, the EU put forward the European Energy Security Strategy, which outlined the need to enhance EU resilience to such crises. Alongside diversifying supply routes, the EU seeks to: diversify sources of supply; ensure access to flexible fuel alternatives, such as LNG; and reform internal European markets to allow for greater mutual support, for instance, by enabling pipelines to carry gas in both directions. Europe’s roadmap for achieving energy security also includes boosting domestic production and increasing the use of sustainable energy.
Russian gas is somewhat of a poisoned chalice for the EU: it is cheaper than almost any other supply Europe could purchase, be they pipeline or LNG imports, yet depending on Russia weakens the EU’s own energy security.
One energy expert noted that there is little getting away from this, and that Europe will continue to rely on Russia as its principal supplier of imported gas even if Europe successfully pursues alternative suppliers.This will be the case particularly if Gazprom reduces its prices further to safeguard its European market share.There is geostrategic value in diversification, but the EU as a political and bureaucratic body can only intervene on the policy level and ensure regulatory frameworks allow for the emergence of a competitive market environment. Whether such markets then meet the EU’s diversification policies depends almost entirely on commercial factors.
The EU’s energy mix, alongside its desire for diversification and security,influence the manner in which it perceives Eastern Mediterranean gas. While the EU is pursuing a strategy of supply diversification, it is also investing in its domestic resilience, as well as putting in place a longer-term strategy for reduced dependence on gas. Supply from the Eastern Mediterranean could help fulfil these goals – after all, the EU is likely to remain a strong consumer of gas in the medium-term, even if overall consumption is slowly falling.But Europe also has alternative options for non-Russian gas.There are other reserves in Mozambique and Tanzania that remain undeveloped; cheap LNG from the United States and, as recently as January 2017, announcements were made regarding gas reserves off Africa’s western coast, in Senegal and Mauritania. Which option Europe chooses will largely depend on cost factors, assuming extraction and exporting is feasible in the first place.
One of the most important trends that could impact the EU’s decision-making process is the arrival of American LNG onto the world stage following the so-called shale gas revolution.As a result of this, global LNG markets are now in flux because the sheer volume of American exports has created a shortterm supply glut.This is likely to continue for some time, with 130 billion cubic metres (bcm) of export capacity coming from the US and also Australia in the near future.This gas glut could have several longer-term implications,including shifting the pricing models for LNG in the different markets (Asian, European, and American) reducing the appetite for longer-term contractual gas supply arrangements; undermining prospects for capital-intensive LNG projects elsewhere in the world; and reducing the commercial feasibility of developing new gas reserves.Given that this glut is expected to continue for four-to-five years, it will impact developments in the Eastern Mediterranean, where projected exports would have to compete with American LNG.It is unclear whether the EU can absorb all American LNG exports in the next five years, even if European regasification capacity reaches its projected estimate of 275bcm per year by 2022. After this period, gas prices could increase again, making projects in the Eastern Mediterranean, and elsewhere,viable.
The discovery of Zohr injected much needed gas into Egypt’s energy balance, as it is projected to produce between 20- 30bcm per year for two decades.
Given Egypt’s domestic demand, the bulk of Zohr’s gas will probably be directed to internal markets.Yet the size of the gas field suggests that, at maximum production, a surplus could be set aside for export, allowing Egypt to resume its role as a regional exporter by 2020-2021, after the current LNG glut has passed.
There is also optimism that, given the wealth of resources in the Eastern Mediterranean region, additional offshore reserves on Egypt’s western coastline might be discovered. This could increase Egypt’s export capacity all the more.
The main question now is how much additional gas Egypt will be able to export after local demand has been met(?)
Some experts take a conservative view, suggesting that Egypt has very high absorption capacity and is unlikely to be in a position to export its own gas, using nearly all of it for domestic purposes.On the other side of the debate, government officials and international corporations have been optimistic about Egypt’s resumed role as an exporter.
Eni and BP,which now own 10 percent of Zohr, have indicated that Egypt is their top country for investment over the next five years.The assurance provided by Eni and BP has allowed production from Zohr to move forward very quickly, with gas flows expected to commence by the end of 2017. Egyptian government officials have declared plans to increase Egypt’s production capacity by 50 percent by 2018, with aspirations to re-enter the export market by 2019.57 Officials have suggested that the Idku terminal could be running at full capacity by 2021, although these estimates are ambitious.It is more likely that Egypt will resume its role as an exporter by 2021-2022, when production would have sufficiently expanded and balanced out domestic demand.
As far as the EU is concerned, Egypt’s northern terminals are the most probable sources of gas supply in the entire region.Egypt has the largest natural reserves and already has the infrastructure in place to export. In this sense,Egyptian LNG would be cheaper than either Cypriot or Israeli gas, because no large capital investment is needed. No supply can compete with the price of Russian pipeline gas, but Egyptian gas could be competitive with American LNG, and provide an option for greater diversification of the EU’s energy mix, lessening dependence on Russian supply.
It is also entirely possible that Egyptian LNG exports could be sent through under-utilised European LNG terminals in Greece, Spain, Turkey, and elsewhere in Southern Europe.Egypt’s ability to resume its export role will depend on a number of factors, including the health of the Egyptian economy and the energy sector at large, and the ability of Zohr to meet domestic demand and save enough surplus supply for export.If the Egyptian regime is able to maintain political stability and a healthy economy, it would be possible for Egypt to become the sole exporter from the eastern Mediterranean.
Regardless of these dynamics, the EU has been encouraged by the gas reserves on its doorstep. On the face of it, these discoveries have the potential to be a cheap source of secure gas that could underpin Europe’s projected medium-term consumption, all the while reducing its dependency on Russia.
They also have the potential to address other areas of political importance for Europe, such as internal cohesion and energy integration, particularly in Southern and Eastern Europe.There have already been signs that the EU is taking these possibilities seriously. The most explicit was the EU’s decision to designate the EastMed pipeline − a pipeline linking reserves in the region to Greece − as a project of common interest(PCI) between the EU and the region,which means that the project can receive a host of benefits,including “accelerated planning and permit granting”, “lower administrative costs”, and “increased visibility to investors.For a project to be designated a PCI, it must meet a number of criteria. It must: impact the energy markets in at least two EU countries; enhance competition within the EU market;contribute to internal energy integration; diversify sources and contribute towards Europe’s renewable goals. As the EU considers ways of strengthening its energy security within an ever-evolving global energy market, the Eastern Mediterranean has the potential to become a key player in this transition. However, its role is far from guaranteed and many hurdles remain.
CONCLUSION
The prospect for the region to transform into a source of energy and security for Europe will increase the more Europe is willing to engage. Given the relatively favourable global energy market in which the EU currently finds itself, the Eastern Mediterranean might not be its top priority right now, but sustained engagement at this early stage could yield results in the future – not only in terms of supporting the EU’s own energy provision and diversification, but also for improving regional cooperation and security in the Middle East. The EU should play the long game and invest early in formulating policies that can assist the eastern Mediterranean transition into a politically stable economic powerhouse.
• Egypt is the only country in the region that could export gas to Europe independently because of the size of its reserves and its existing export infrastructure. But energy sector reforms will be needed to secure investor confidence in this option.
• There are now two options for regional export: to build a pipeline that connects Israel and Cyprus to southern Europe, or to create a network of pipelines into Egypt, from which gas could be liquefied and exported.
• The EU should explore regional prospects by strengthening its energy diplomacy, developing more projects of common interest, working to resolve the Turkey-Cyprus dispute, and incentivising reforms in Egypt.
There has been a great deal of excitement over the past few years around newly discovered gas reserves in the eastern Mediterranean, and rightly so.With confirmed recent reserves reaching close to 2,000 billion cubic metres (bcm) of gas, and the possibility of more discoveries to come, the Levantine Deep Marine Basin has the potential to offer two things of value to the European Union: energy security, and an improvement in regional cooperation between Middle Eastern countries.
The diversification of Europe’s gas supply has long been a priority for the European Union. With gas wars taking place between Russia and EU member states in 2006 and 2009, and a major escalation of diplomatic tension following Russia’s annexation of Crimea in 2014, efforts to address this issue have accelerated in recent years.The prospect of reducing the EU’s dependency on Russian gas by securing supplies from within Europe’s geographical vicinity could help the EU build energy resilience – a stated goal of its Energy Union strategy.
Gas discoveries in the eastern Mediterranean have also led to hopes that mutual economic benefits could be a catalyst for closer relations between various states in the Levant.Whether this means facilitating Israeli economic integration with Arab neighbours, or catalysing rapprochement between Cyprus and Turkey, these discoveries initially seemed like promising means of greater stability and reduced volatility in the region.
The prospects of energy security and regional cooperation merit further exploration, as initial optimism regarding these discoveries has been tempered by the political, economic, and logistical realities on the ground. Many experts believe that the initial hype around natural gas discoveries in the region has been overstated. In a relatively short period of time, excitement has been replaced with scepticism and the sense that reserves are likely to remain stranded unless major developments,such as additional discoveries or diplomatic breakthroughs – take place. However, opinion is split: there are others who continue to stress that countries in the region have enormous potential to become leading players in global energy. At the very least, most experts and officials interviewed for this study agree that gas reserves can be used within the region, even if plans to export fail.
How important are the eastern Mediterranean gas discoveries for European energy security?
Currently, more than half of all the energy consumed within the EU is imported from abroad, making it heavily reliant on external supply. In the case of natural gas, the proportion of energy imported is closer to two/thirds.
Germany, Italy, France, Belgium, and Spain are the biggest importers of natural gas, the majority of which comes from Russia, Norway, Algeria, and Qatar. But Norway’s production is gradually declining and future prospects for Algerian gas remain unclear, because key contracts will end in 2019 and 2020. Qatar will likely remain an important supplier of Liquefied Natural Gas (LNG) to the EU, particularly to western European states that have the requisite capacity for regasification – the process of converting LNG to gas − in their LNG terminals. But it is Russia that supplies the lion’s share of gas, accounting for around one-third of European gas imports. Member states vary in their dependency on Russia according to internal factors such as domestic production and fuel mix, and external factors such as geographic proximity, geopolitical relationships, and the availability of alternative supply options. According to the latest figures, countries in eastern Europe such as Estonia, Finland, Latvia, and Lithuania are particularly exposed, as they import all of their natural gas from Russia.
A longtime goal of the EU has been to increase energy security, here loosely defined as the ability to reliably secure access to uninterrupted supplies to meet local demand. Crucial to achieving energy security is ensuring the uninterrupted flow of gas, Russian or otherwise, to Europe. The majority of imported Russian gas currently transits through networks in Ukraine,although pipelines such as Nord Stream and Yamal provide additional security by offering alternative transit routes. European gas disputes with Russia climaxed in 2014 when Gazprom, Russia’s state-owned gas supplier cut off exports to Ukraine.This led to severe energy crises in several eastern European states, some of which depend wholly on Russian supplies. That same year, the EU put forward the European Energy Security Strategy, which outlined the need to enhance EU resilience to such crises. Alongside diversifying supply routes, the EU seeks to: diversify sources of supply; ensure access to flexible fuel alternatives, such as LNG; and reform internal European markets to allow for greater mutual support, for instance, by enabling pipelines to carry gas in both directions. Europe’s roadmap for achieving energy security also includes boosting domestic production and increasing the use of sustainable energy.
Russian gas is somewhat of a poisoned chalice for the EU: it is cheaper than almost any other supply Europe could purchase, be they pipeline or LNG imports, yet depending on Russia weakens the EU’s own energy security.
One energy expert noted that there is little getting away from this, and that Europe will continue to rely on Russia as its principal supplier of imported gas even if Europe successfully pursues alternative suppliers.This will be the case particularly if Gazprom reduces its prices further to safeguard its European market share.There is geostrategic value in diversification, but the EU as a political and bureaucratic body can only intervene on the policy level and ensure regulatory frameworks allow for the emergence of a competitive market environment. Whether such markets then meet the EU’s diversification policies depends almost entirely on commercial factors.
The EU’s energy mix, alongside its desire for diversification and security,influence the manner in which it perceives Eastern Mediterranean gas. While the EU is pursuing a strategy of supply diversification, it is also investing in its domestic resilience, as well as putting in place a longer-term strategy for reduced dependence on gas. Supply from the Eastern Mediterranean could help fulfil these goals – after all, the EU is likely to remain a strong consumer of gas in the medium-term, even if overall consumption is slowly falling.But Europe also has alternative options for non-Russian gas.There are other reserves in Mozambique and Tanzania that remain undeveloped; cheap LNG from the United States and, as recently as January 2017, announcements were made regarding gas reserves off Africa’s western coast, in Senegal and Mauritania. Which option Europe chooses will largely depend on cost factors, assuming extraction and exporting is feasible in the first place.
One of the most important trends that could impact the EU’s decision-making process is the arrival of American LNG onto the world stage following the so-called shale gas revolution.As a result of this, global LNG markets are now in flux because the sheer volume of American exports has created a shortterm supply glut.This is likely to continue for some time, with 130 billion cubic metres (bcm) of export capacity coming from the US and also Australia in the near future.This gas glut could have several longer-term implications,including shifting the pricing models for LNG in the different markets (Asian, European, and American) reducing the appetite for longer-term contractual gas supply arrangements; undermining prospects for capital-intensive LNG projects elsewhere in the world; and reducing the commercial feasibility of developing new gas reserves.Given that this glut is expected to continue for four-to-five years, it will impact developments in the Eastern Mediterranean, where projected exports would have to compete with American LNG.It is unclear whether the EU can absorb all American LNG exports in the next five years, even if European regasification capacity reaches its projected estimate of 275bcm per year by 2022. After this period, gas prices could increase again, making projects in the Eastern Mediterranean, and elsewhere,viable.
The discovery of Zohr injected much needed gas into Egypt’s energy balance, as it is projected to produce between 20- 30bcm per year for two decades.
Given Egypt’s domestic demand, the bulk of Zohr’s gas will probably be directed to internal markets.Yet the size of the gas field suggests that, at maximum production, a surplus could be set aside for export, allowing Egypt to resume its role as a regional exporter by 2020-2021, after the current LNG glut has passed.
There is also optimism that, given the wealth of resources in the Eastern Mediterranean region, additional offshore reserves on Egypt’s western coastline might be discovered. This could increase Egypt’s export capacity all the more.
The main question now is how much additional gas Egypt will be able to export after local demand has been met(?)
Some experts take a conservative view, suggesting that Egypt has very high absorption capacity and is unlikely to be in a position to export its own gas, using nearly all of it for domestic purposes.On the other side of the debate, government officials and international corporations have been optimistic about Egypt’s resumed role as an exporter.
Eni and BP,which now own 10 percent of Zohr, have indicated that Egypt is their top country for investment over the next five years.The assurance provided by Eni and BP has allowed production from Zohr to move forward very quickly, with gas flows expected to commence by the end of 2017. Egyptian government officials have declared plans to increase Egypt’s production capacity by 50 percent by 2018, with aspirations to re-enter the export market by 2019.57 Officials have suggested that the Idku terminal could be running at full capacity by 2021, although these estimates are ambitious.It is more likely that Egypt will resume its role as an exporter by 2021-2022, when production would have sufficiently expanded and balanced out domestic demand.
As far as the EU is concerned, Egypt’s northern terminals are the most probable sources of gas supply in the entire region.Egypt has the largest natural reserves and already has the infrastructure in place to export. In this sense,Egyptian LNG would be cheaper than either Cypriot or Israeli gas, because no large capital investment is needed. No supply can compete with the price of Russian pipeline gas, but Egyptian gas could be competitive with American LNG, and provide an option for greater diversification of the EU’s energy mix, lessening dependence on Russian supply.
It is also entirely possible that Egyptian LNG exports could be sent through under-utilised European LNG terminals in Greece, Spain, Turkey, and elsewhere in Southern Europe.Egypt’s ability to resume its export role will depend on a number of factors, including the health of the Egyptian economy and the energy sector at large, and the ability of Zohr to meet domestic demand and save enough surplus supply for export.If the Egyptian regime is able to maintain political stability and a healthy economy, it would be possible for Egypt to become the sole exporter from the eastern Mediterranean.
Regardless of these dynamics, the EU has been encouraged by the gas reserves on its doorstep. On the face of it, these discoveries have the potential to be a cheap source of secure gas that could underpin Europe’s projected medium-term consumption, all the while reducing its dependency on Russia.
They also have the potential to address other areas of political importance for Europe, such as internal cohesion and energy integration, particularly in Southern and Eastern Europe.There have already been signs that the EU is taking these possibilities seriously. The most explicit was the EU’s decision to designate the EastMed pipeline − a pipeline linking reserves in the region to Greece − as a project of common interest(PCI) between the EU and the region,which means that the project can receive a host of benefits,including “accelerated planning and permit granting”, “lower administrative costs”, and “increased visibility to investors.For a project to be designated a PCI, it must meet a number of criteria. It must: impact the energy markets in at least two EU countries; enhance competition within the EU market;contribute to internal energy integration; diversify sources and contribute towards Europe’s renewable goals. As the EU considers ways of strengthening its energy security within an ever-evolving global energy market, the Eastern Mediterranean has the potential to become a key player in this transition. However, its role is far from guaranteed and many hurdles remain.
CONCLUSION
The prospect for the region to transform into a source of energy and security for Europe will increase the more Europe is willing to engage. Given the relatively favourable global energy market in which the EU currently finds itself, the Eastern Mediterranean might not be its top priority right now, but sustained engagement at this early stage could yield results in the future – not only in terms of supporting the EU’s own energy provision and diversification, but also for improving regional cooperation and security in the Middle East. The EU should play the long game and invest early in formulating policies that can assist the eastern Mediterranean transition into a politically stable economic powerhouse.
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