Legal, Political and Energy Disputes in the Eastern Mediterranean

INSS, Washington DC, September 2013

1

Summary

• East Mediterranean gas discovered to date ~1000 BCM

• Moderately significant in EU (444 BCM in 2012), global context

• Very significant in regional context

• Regional markets can absorb some, but not all, gas discovered

• Other regional and international competition for markets

• Complex, disputed borders in region mostly not delineated

• Cross-border fields less important than obstacles to export

• Choice of export routes is governed by

• Politics

• But also by technical and commercial realities

• The best routes are not the most feasible, and vice versa

• Gas is an ambiguous gift – can:

• Exacerbate conflict

• Encourage rivals to cooperate

• Foster badly-needed regional economic growth

• Also potential for oil…

• Do we take a narrow definition of energy security – or an expansive one?

Resources

Regional Resource Potential

BCM Discovered to date 2010 gas demand

Demand 2013-30

Israel 978 4.8 229

Palestinian territories 40 1.1 26

Cyprus 142-227 1.5 35

Lebanon 0 (1059 potential) 3.6 84

Syria 241 16.2 317

Jordan 6 3.2 109

Egypt 2180 53.1 1404

Total 3672 (4731) 83.5 2204

• Gas demand assumes conversion of all oil-fired power to natural gas

• USGS estimates 122 Tcf (3544 BCM) recoverable gas and 1.7 billion bbl oil

from the Levant Basin

• May be conservative as pre-dates Leviathan & Aphrodite

• Abundant resources for domestic/regional markets + export Sources: Manaar research (Jordan, Egypt); Wood Mackenzie; company reports

Exploration and gas activities

Israel/ PA Lebanon Syria Cyprus

1993 Seismic acquisition

1999 Seismic acquisition

2000 Gaza Marine & Mari-B discoveries 2D seismic survey of EEZ

2003 RoC demarcates offshore border with Egypt

2004 Mari-B starts production

2005 Seismic acquisition

2006 Construction of Egypt pipeline

2007 Demarcates offshore border with Cyprus

1st offshore bid round – no awards

RoC 1st bid round – Block 12 awarded

2008 Start of Egypt gas imports

2009 Tamar & Dalit discoveries Report on EEZ endorsed

2010 Leviathan discovery Lebanon oil law passed RoC demarcates offshore border with Israel

2011 2nd offshore bid round planned

Aphrodite discovered; TNRC-Turkey border delineated

2012 Cancellation of Egypt gas imports; Shimshon discovery

First bid round planned Civil war RoC 2nd bid round

2013 Karish discovery First bid round delayed Aphrodite appraisal; Egypt to annul border?

Lebanon and Syria offshore prospective for gas (and oil?)

• Seismic data shows potential for both gas and oil offshore Syria and

Lebanon (Bowman 2011; PGS 2012)

Borders

Regional setting

Republic of Cyprus’s borders

Turkish Republic Northern Cyprus (TRNC)-Turkey border

Turkish view on Turkey/Egypt delimitation

Overlap of Turkey/RoC claims

Blocks awarded by RoC and TRNC

Aphrodite

Turkey and TRNC licences granted to TPAO

Border Demarcation

• June 2010: Nabih Berri, speaker of the Lebanese parliament said Israel’s gas wells encroached on Lebanon’s economic zone • January 2011 (shortly after Leviathan discovery): Lebanese Foreign Minister Ali Shami asked the UN to protect Lebanon’s territorial rights • July 2011: Hezbollah leader Hassan Nasrallah declares Israel would not be allowed to ‘steal’ Lebanon’s resources • Israel’s Minister of National Infrastructure Uzi Landau responded that the discoveries were entirely within Israel’s Exclusive Economic Zone • UN spokesman said the mandate of the UN Interim Force in Lebanon/SCR1701 did not include delineating the maritime border

Karish

Border Demarcation

• Tamar and Leviathan do not cross into disputed/Lebanese waters • Karish may • Aphrodite probably crosses into Israeli waters • Borders also an internal Lebanese political talking-point • Cross-border fields can be handled by unitisation or JDAs

The forgotten player? Egypt

Regional gas markets and export routes

Growing Middle East Gas Imports 1990-2010

Source: U.S. Energy Information Administration , International Energy Statistics

• Little intra-regional gas trade other than Dolphin (Qatar UAE/Oman) and Arab

Gas Pipeline (Egypt Jordan, Israel, Syria, Lebanon). Why?

• Regional political rivalries and relations

• Security of supply issues

• Pricing expectations for pipelined gas

• Nevertheless, the economic dynamics should drive more intra-regional trade

• Gas shortages in some countries; high oil prices

• Gas surpluses in Iraq, Eastern Mediterranean offshore

0

200

400

600

800

1000

1200

BC

F

United Arab Emirates

Syria

Oman

Kuwait

Jordan

Israel

Iran

Turkey’s Vital East-West Role

20

South Stream

Blue Stream

TAP SCP

Existing Gas Pipeline Planned Gas Pipeline

TANAP

Iran

Russian Gas -West

Source: Manaar; European Rim Policy and Investment Council (ERPIC)

Iraq / KRG

Nabucco

Cyprus-Turkey

Israel-Turkey

Turkish market large & gives access to EU: 2020 figures

21 Source: Manaar; European Rim Policy and Investment Council (ERPIC)

Domestic demand 66

BCM

Export options

Pro Con

Israel

LNG • One-country control • Avoids borders

• Land use? Probably needs to be floating • Expensive; market glut (?) • Issues at Eilat (land, security, export route)

Regional pipelines (PA, Jordan, Egypt)

• Fast, low-cost • Builds regional relations

• Political opposition • Sabotage • Markets limited; competitors

Pipeline to Turkey • Large, liquid market • Low cost • Repairs relations

• Political disputes • Has to transit Cypriot territory

Cyprus

LNG • One-country control • Avoids borders

• Needs additional volumes to be economic • Expensive; market glut (?)

Pipeline to Turkey • Large, liquid market • Low cost • Political solution

• Needs (interim?) solution to Cyprus dispute

Pipeline to Greece • Political compatibility • Very expensive • Border disputes (avoiding Turkey lengthens

route)

Political implications

Israel

• Cannot sell or transit gas to Syria or Lebanon without a dramatic political realignment

• Israeli gas supply to the Palestinian territories, Jordan and maybe Egypt would further

increase its political and economic influence there

Cyprus

• Could sell gas to Lebanon (and Syria), and cooperate with Israel but (currently) not

Turkey

• LNG a likely fall-back

Lebanon

• Major need for gas given debt load, power shortages, oil dependence and Israeli

successes

• However political deadlock, corruption and spill-over from Syria likely to slow progress

• But best-placed geographically/politically for exports

Turkey

• Transit role is potentially key, but hampered by Syrian uprising, Cyprus dispute and

cold relations with Iraq

• Needs (interim?) deal with RoC to receive Cypriot or Israeli gas

Political implications – other players

Syria

• Civil war will prevent any progress on gas exploration or transit

Iraq

• Major, low-cost potential supplier to the Mashreq countries, and could compete with

Egypt and Israel to supply Jordan

• But needs policy decision – has not awoken to reality of East Mediterranean

competition, and its potential role

Egypt

• Influence waning due to diminishing availability of gas for export, and cut-off of

supplies to Israel

• Cut-off of Israel exports is extremely popular in Egypt, but Egyptian public (and

expert) opinion has not awoken to the fact this was only a short-term setback for

Israel

• May even import Israeli gas (or toll it through LNG)

Conclusions

• Gas discussions hostage to wider political issues

• Cyprus division

• Arab-Israeli peace

• Egypt-Israel relations

• Turkey-Israel relations

• Syrian conflict & Lebanese politics

• But political debates on gas easily forget technical & commercial realities

• Competition for regional markets

• LNG/EU gas windows

• Need for LNG sites

• Pricing; domestic vs export markets

• Expense of subsea pipelines

• Do we take a narrow definition of energy security – or an expansive one?

• Narrow definition favours single-country or bilateral solutions (LNG, domestic

use)

• Wide definition favours regional interconnections, multilateral deals (maybe

interim), shared facilities, export pipelines – and regional economic growth

Contact Details

Robin Mills,

Head of Consulting,

Manaar Energy Consulting,

Dubai, United Arab Emirates

+971 4 326 6300

robin.mills@manaarco.com

www.manaarco.com

Key facts: Israel

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• Mari-B field sole source of domestic gas

• Noa North field under development despite small reserve

• Gas imports from Egypt suffered repeated sabotage and cancelled in April – short term shortages and higher electricity costs

• Development of Tamar gas field (255 BCM) for domestic use targeted for late 2013

• Discovery of Leviathan field in 2010 (453 BCM)

• Development expected to focus on LNG export.

• Delimitation Agreement with Cyprus.

• In dispute with Lebanon over maritime border delineation

• More exploration on the way (and oil)

• More gas consumption (replacement of oil/coal) Source: CIA Fact book, BP Statistical Review.

Natural Gas

Proved Reserves 25 TCF/708 BCM

BCM

Production 1.55

Consumption 3.25

Exports 0.0

Imports 1.7

Crude Oil

Proved Reserves 1.9 million Barrels

Barrels/Day

Production 4 029

Consumption 238 000

Exports 86 000

Imports 282 200

Key facts: Palestinian Territories

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• Gaza Marine offshore field: Reserves 1.4 TCF (39 BCM) as of 2002. No known gas resources in the West Bank

• BG Group signed 25-Year Exploration and Development Agreement with Palestinian Authority in November 1999

• Israel insisted that natural gas production be piped through Ashkelon to Gaza Strip

• BG Group broke off negotiations with Israeli government

• No further development

• Power demand • Gaza 350 MW; current generating capacity 120 MW. Requires 0.1-0.33 BCM/year • West Bank 885 MW; current generating capacity 62.5 MW. Requires 0.06-0.8

BCM/year

Key facts: Lebanon

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• Imports all its hydrocarbons

• Passed Hydrocarbon Law in 2010

• Petroleum Administration should have been formed before end-2011 but still in progress

• Plans first Licensing Round in 1Q 2012.

• Has signed Delimitation Agreement with Cyprus, not ratified.

• Difficult political situation exacerbated by Syrian crisis

• Maritime border with Israel not agreed

Source: CIA Factbook, BP Statistical Review.

Natural Gas

Proved Reserves 0

BCM

Production 0

Consumption 0

Exports 0

Imports 0

Crude Oil

Proved Reserves 0.0

Barrels/Day

Production 0

Consumption 106 000

Exports 0

Imports 78 760

Key facts: Cyprus

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• First Licensing Round in February

2007 – Block 12 awarded to Noble

• Aphrodite discovery ~7 Tcf (198 BCM)

• EU Member Cyprus has received

international support for offshore exploration.

• Exploration activity disputed by Turkey, described by Ankara as ‘illegal’

• Second Licensing Round 1Q 2012.

• Possible LNG Exports

Source: CIA Factbook, BP Statistical Review.

Natural Gas

Proved Reserves ~200 BCM (?)

Bn Cu Ms

Production 0.0

Consumption 0.0

Exports 0.0

Imports 0.0

Crude Oil

Proved Reserves 0

Barrels/Day

Production 0

Consumption 61 000

Exports 0

Imports 61 000

Key facts: Egypt

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• Gas policy since early 1990s was highly successful in expanding production, domestic use and exports

• LNG plants at Damietta (5 Mtpa), Idku

(7.2 Mtpa), but running under capacity • Exports gas through Arab Gas Pipeline

(AGP) to Jordan, Syria, Lebanon, with original plans to extend to Turkey

• Was exporting gas to Israel through Al-

Arish – Ashkelon offshore pipeline until deal cancelled in April (corruption, pricing and political opposition)

• Growing domestic demand – impact on

future ability to export gas. Current political situation prevents strong action on gas consumption or pricing

• Indeed, Egypt may become a gas

importer (from Israel?)

• Maritime border with Cyprus demarcated

Natural Gas

Proved Reserves 78 TCF/2.2 TCM BCM

Production 62.69 Consumption 44.37 Exports 18.32 Pipeline 5.46 LNG 9.71 Imports 0.00

Crude Oil Proved Reserves 4.4 billion barrels

Barrels/Day Production 662 000 Consumption 740 000 Exports 163 000 Imports 177 000

Source: CIA Fact book, BP Statistical Review.

Key facts: Syria

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• Hydrocarbon production significantly

reduced due to sanctions, sabotage and conflict

• Current crude oil production around 270 000 barrels/day

• Exports of 150 000 barrels/day of Souedie

(heavy) crude curtailed

• EU sanctions imposed against Syrian crude imports in September. Sanctions imposed by Arab League

• Increasing need for gas imports, partly met by Arab Gas Pipeline prior to curtailments

• Failed bid round in 2007 (one bid, not accepted)

• Offshore Licensing Round planned for 2011 will clearly be indefinitely delayed

Source: CIA Fact book, BP Statistical Review.

Natural Gas

Proved Reserves 240.7 BCM

Bn Cu Ms

Production 6.19

Consumption 7.1

Exports 0.0

Imports 0.91

Crude Oil

Proved Reserves 2.5 Billion Barrels

Barrels/Day

Production 401 000

Consumption 292 000

Exports 263 000

Imports 55, 280