Can the Eastern Mediterranean’s Gas Potential Translate Into Reality?

In May 2023, the Baker Institute hosted its third Middle East Energy Roundtable, a part of a collaboration between the institute’s Center for Energy Studies and Edward P. Djerejian Center for the Middle East. Held under the Chatham House Rule,[1] the discussions focused on ​​monetization strategies for Eastern Mediterranean gas and brought together oil and gas experts and industry leaders from Idrisi Advisors, Eni, and Chevron. This brief is intended to serve as an aide-mémoire for those who took part and a general summary of discussions for those who did not.

The roundtable focused on the various diplomatic, commercial, and national interests that influence energy investment decisions in the Eastern Mediterranean region. Participants explored whether shared interests in gas could foster cooperation between states that have been at conflict in the past and are facing unresolved areas of tension in the present. They also discussed the numerous hurdles for investors in natural gas (including the two international oil companies, or IOCs, represented) seeking to export gas from the Eastern Mediterranean to markets outside the region, particularly the European Union. In addition, participants explored the implications of the latest election results in Turkey and Greece, the recently formed governments in Cyprus and Israel, and the ongoing political impasse in Lebanon, identifying key trends to monitor.

 Key points that emerged from the meeting included:

• The Eastern Mediterranean region possesses natural gas resources in a strategically advantageous location. The reserves, which are mainly offshore, are attractive for commercialization, but there are challenges for pipeline development due to contested maritime boundaries and legal issues around access and trade.
• Launched in February 2022, Russia’s full-scale invasion of Ukraine has pushed Europe to find new sources of gas to replace Russian flows. The Eastern Mediterranean is one of the most promising sources due to its geographic proximity.
• Commercial considerations are as important as geopolitical ones in developing gas resources. The immediate focus is on near-term monetization through natural gas development to feed liquefied natural gas (LNG) exports from the region.
• For now, the best current and future LNG export opportunities remain the underutilized Egyptian terminals at Damietta and Idku, which could be key to expanding supply to Europe and Asia. A floating liquefied natural gas (FLNG) ship could provide added liquefaction capacity if needed.
• The continued lack of a diplomatic solution to the Cyprus question — the division of the island and the unrecognized but de facto Turkish claims on land and sea — remains a key obstacle to more robust offshore development in the region. This includes offshore exploration as well as undersea pipeline construction.

Pipeline and LNG Prospects in the Eastern Mediterranean

With access to ports and a growing market in need of gas, the Eastern Mediterranean region holds considerable energy resources. Historically, Egypt exported oil and natural gas to Israel. Over the past decade the dynamics have shifted, with Israel now sending offshore gas to Egypt and Jordan via pipelines. However, the potential for further pipeline development is hindered by numerous contested maritime boundaries and complex discussions surrounding international maritime law.

Chevron has a significant presence in critical countries such as Israel, Egypt, Cyprus, and Jordan, while Eni operates Egypt’s largest offshore gas field as well as the LNG export terminal at Damietta. Idrisi Advisors has long experience working in the region. There was consensus among speakers that pipeline development beyond the immediate region faces too many current obstacles to be feasible and that investors see their best opportunities in a focus on LNG. The current environment lacks the commitment of sovereigns to invest in and protect long-distance pipeline projects, leading to a focus on purely commercial ventures such as expanding existing pipelines (de-bottlenecking) and leveraging and increasing LNG export capacity.

Egypt, with its functioning facilities and current stable environment, offers LNG prospects but faces challenges. Its hurdles include summer gas demand spikes, when gas is diverted to Egypt’s domestic market at lower prices than those available to LNG exporters. Moreover, Egypt's demographic challenges, including un- and underemployment and population growth, raise concerns about long-term gas demand reducing both political stability and gas for export as LNG.

The lack of defined maritime boundaries between the Republic of Cyprus and Turkey around Turkish-controlled northern Cyprus suggests that undersea pipelines to the EU from gas fields in the Southeast Mediterranean remain untenable. A further opportunity for a pipeline from offshore Israel to Turkey via Lebanese and Syrian waters remains another unlikely prospect, with speakers suggesting that few, if any, commercial entities would consider such an expensive project given the overwhelming political risk. For these reasons, viable commercial considerations are seen as paramount, and LNG represents the best insulation from long-distance ocean pipeline political risk.

The Impact of Geopolitical Considerations on Regional Dynamics

Another issue examined was the Russian invasion of Ukraine and its significant domino effects, particularly on the energy sector in Europe. The war triggered a major rebalancing of the EU energy landscape, highlighting the lack of a backup plan for supply security. The EU’s travails present an opportunity for the resource-rich Eastern Mediterranean as well as sub-Saharan Africa and Algeria, Libya, and Morocco. The war was described as reshaping the EU’s pathway to achieving net-zero emissions.

Diplomatically, the 2022 United Nations Climate Change Conference (known as COP27) in Sharm El Sheikh brought Egyptian resources to the fore, while the COP28 summit in Dubai later this year should provide clarity on the transition to net zero in the United Arab Emirates and perhaps other Middle Eastern oil and gas exporters. Cooperation and a long-term perspective are essential for overcoming above-ground issues and establishing a framework for energy to contribute to peace. The Eastern Mediterranean Gas Forum and recent agreements between Israel and Lebanon show positive steps, emphasizing the potential for monetizing energy resources through cooperation and diplomacy. Other political dynamics, such as growing UAE-Israel connections in the energy sector, including in the Eastern Mediterranean, may also begin to reshape the landscape of the industry.

New players in the region include national oil companies (NOCs) from the Gulf states. The NOCs of Abu Dhabi and Qatar have both expanded their international presence successfully, but strategic thinking among oil firms in the wider Middle East and North Africa region remains lacking.

One speaker posited that it would be a matter of time before Saudi Aramco became an investor in the region, suggesting that the massive NOC could play a valuable role in the Eastern Mediterranean. Saudi Arabia’s ambition extends beyond its borders, with Saudi companies increasingly engaging in corporate ventures outside of the country. It is possible that Saudi corporate entities, including Aramco, will get involved in hydrogen production in Egypt and invest in Lebanese offshore projects within the next decade. Not wishing to be confined within its own borders, the Saudi government is willing to push Aramco to undertake initiatives that it might not pursue independently. The NOC remains a crucial entity in Saudi Arabia’s economy.

Expanding Operations and Navigating the Energy Landscape in Critical Countries

Chevron operates Israel’s offshore fields and maintains operations in other states in the region, supplying natural gas to countries such as Jordan, Egypt, and Israel. Israel now supplies gas to Egypt, mainly for reexport. Chevron is also engaged in drilling operations in Cyprus, focusing on the Aphrodite field. If the conditions are favorable, gas from the field can be transported to Egypt via undersea pipeline and reexported through Egyptian liquefaction plants. Other multinational oil and gas companies have begun drilling around Cyprus; their growing presence in the Eastern Mediterranean suggests profitable opportunities to increase gas exports to Europe as a replacement for lost Russian volumes.

There is a lot of hope surrounding gas exploration in Lebanon, especially after the conclusion of its September 2022 maritime agreement with Israel and with Eni playing a key role in its offshore drilling. If a commercial discovery is made, the resulting revenues could help stabilize the country. However, the utilization of the pipeline from Egypt to Syria to Lebanon is hindered by U.S. sanctions. Eni and TotalEnergies are working to establish an agenda for the region.

Roundtable participants also emphasized the importance of reliable long-term LNG contracts for the viability of the enormous capital investments required for gas production and liquefaction capacity. One participant suggested that EU buyers were unwilling to enter into long-term LNG contracts due to a preference for hedging among potential suppliers. Some EU firms expect an eventual rapprochement between the EU and Russia that will allow idled Russian gas pipelines to restart, bringing imports at more competitive prices than those associated with LNG.

Conclusion

The Eastern Mediterranean gas market is commercially attractive for Europe, which needs gas for its industry, power generation, and building usage (mainly for heating). Whether this potential can translate into reality will depend on the outcome of multiple dialogues related to the energy sector, geopolitical dynamics, the role of key multinational players, and Europe’s need to replace Russian natural gas supplies. From the region’s considerable energy resources to the potential posed by floating liquefied natural gas in Israeli or Cypriot waters, it is evident that the energy landscape in the Eastern Mediterranean has the potential to undergo notable transformation should this set of political and economic issues be resolved.

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