Jan 13, 2012
The Eastern Mediterranean has never been considered a promising hydrocarbon region, except for the Nile Delta area offshore Egypt. Moreover, most of the countries in the region, such as Cyprus, Lebanon and Israel have historically been heavily dependent on primary energy imports.
This story changed quickly, however, when huge offshore natural gas fields started to be discovered, one after another, offshore Israel and Cyprus, in what is called the Levantine Basin. Estimates show that the region could have oil and gas reserves that are comparable to the prolific oil and gas exporting Nile Delta region to the south.
The exploration and development of these reserves will be challenging not only from the technical and financial point of view, but because of the conflict-laden geopolitical landscape of the region. Although geographically distant from the Balkans, the new energy hot spot in the Levantine Basin already is already having an impact on the Southeast European countries.
Frontier Exploration in the Eastern Mediterranean
On 29 December 2010, Noble Energy, a US-based oil and gas company, announced a significant natural gas discovery at the Leviathan prospect in the Rachel exploration block about 130 km offshore the Israeli city of Haifa. Noble Energy has been leading since 1998 various exploration consortia in the offshore exclusive economic zone (EEZ) of Israel and started producing natural gas from the Mari-B field in 2004, the first offshore gas produced in the country.
The relatively small Mari-B field, with initial recoverable reserves of about 35 billion cubic meters (bcm) of gas, was followed in 2009 by the much larger Tamar discovery, with 255 bcm of natural gas reserves and the smaller Dalit field, with a bit more than 14 bcm of gas reserves. According to Noble Energy, Tamar was the world’s largest deepwater natural gas discovery in 2009.
Still, it was the Leviathan discovery, announced at the very end of 2010 that confirmed the discovery of a major new hydrocarbon production frontier. Noble Energy announced in December 2011, based on the appraisal work executed during the course of the year, that the Leviathan field has estimated recoverable reserves of 481 bcm. To put these discoveries into perspective, Tamar, Dalit and Leviathan have total gas reserves of 750 bcm, while Romania, the largest natural gas producer in the Balkans, currently has only 630 bcm of gas reserves!
Just before Leviathan was announced in December 2010, Israel and Cyprus signed an agreement delineating each country’s exclusive economic zone (EEZ) and their common maritime border. This agreement was necessary as the Leviathan field is located close to the agreed maritime border.
The Cyprus government had already awarded an exploration license to a consortium led again by Noble Energy for the 3,240 square km Block 12 in the Cyprus EEZ, bordering the Rachel block that includes the Leviathan field. At the end of summer 2011, the consortium started exploration drilling on the Cyprus A prospect in Block 12.
Very recently, on 28 December 2011, Noble Energy announced that the Cyprus A field has a reserve range of 142-228 bcm of natural gas, with a probable mean of 200 bcm. Moreover, the Cyprus government has also announced a second offshore exploration licensing round that is expected to be launched by early 2012. The Cyprus exploration moves have infuriated Turkey, because of the unsettled question of Northern Cyprus. As soon as the Cyprus A drilling started, Turkey sent a ship to carry out geological surveys off northern Cyprus and warned that any resources discovered in the Greek Cyprus EEZ belong to all Cypriots.
Balkanalysis.com originally reported on Cyprus’ plans for energy exploration back in 2007, when Turkey also responded in an aggressive manner. This fits a similar pattern of responses that goes back to 1987, when Greece and Turkey briefly went on a war footing over energy exploration plans in the Aegean, as an upcoming Balkanalysis.com review will discuss.
The Levantine Basin: High Stakes, Many Players
This is probably just the beginning of a wider regional push for offshore hydrocarbon exploration in the offshore geological region that is called the Levantine Basin.
Lebanon strongly opposed the exploration activities offshore Israel since the beginning, based on the lack of a maritime border agreement between the two countries. However, pragmatism prevailed and a 2012 offshore licensing round is now being prepared by the Lebanese government, with smaller independent oil and gas companies already expressing interest. Lebanon was also approached by the Cypriot government during fall 2011 to discuss their exclusive economic zones (EEZ) and common maritime border.
Syria, which has an EEZ that covers parts of the Levantine Basin, had announced an offshore licensing round in March 2011 as well, but put it on hold due to the internal political turmoil there.
The stakes are high: the Levantine Basin could contain yet-undiscovered technically recoverable reserves of 3.465 trillion cubic meters of gas and 1.7 billion barrels of oil. This could radically change the geopolitical landscape in the region and could provide the much-touted energy independence to countries, such as Cyprus and Israel which are heavily dependent on primary energy imports. Starting in November 2011, according to press reports, Israel started boosting naval patrols around the Tamar and Leviathan fields, replicating the security approach used for the Yam Thetys production facilities in the Mari-B field.
2012 will be a decisive year for proving that the Levantine Basin is a viable new hydrocarbon production region that can overcome the technical, financing and –most importantly – political challenges of producing hydrocarbons on a large scale.
Further exploration work in the region will hopefully improve the understanding of the real gas (and maybe oil) potential of this region. The gas resources discovered offshore Israel are more than the country can consume for the foreseeable future, and thus open the door to potential future exports; the same is the case for Cyprus, as the Block 12 exploration results have proven.
Consumption and Export Estimates, and LNG Terminal Options
Engineering and long lead time procurement is ongoing for Tamar, which is supposed to be commissioned by the end of 2012. The consortium partners have also started assessing production and export options for Leviathan, which should come online sometime around 2016-17. Even with increased gas consumption in Israel, between 5 and 10 bcm of gas would be available for export once all the major fields (Tamar, Dalit and Leviathan) are online.
As reported by press, Cyprus (where there is no natural gas market yet) would not consume more than 1 bcm of gas per year. Industry experts estimate that this would allow Cyprus to build an LNG export terminal with a capacity of 15 million tonnes of LNG per year (the equivalent of 20-21 bcm/year); the caveat is that building such a terminal would require almost a decade and would cost from 18-24 billion USD for an onshore LNG export terminal; therefore, a floating LNG terminal with a smaller capacity might turn out to be a better and cheaper option. The main gas export options from the region will be through floating LNG terminal(s), onshore LNG terminal(s), pipelines or a combination of LNG terminals and pipelines.
Pipeline export can give the exporter an advantage, since pipelines are usually built based on long-term export contracts, but are not flexible in case the exporter wants to diversify its customer base or the importer reduces the imported volume.
LNG terminals offer flexibility to the exporter in terms of the destination of the exports, but sometimes LNG exporters are forced to sell the gas on the spot market. Further, the above does not include any potential reserves yet to be found, not only in Israel and Cyprus, but also offshore Lebanon and Syria.
Turkey’s Role and Concerns
Turkey is one of the countries directly concerned by the offshore oil and gas potential in the Eastern Mediterranean. It is clear already that starting in around 2017 there will be significant natural gas volumes (5-25 bcm/year) available for export from the Levantine Basin. And, as exploration continues, the companies involved believe that there will be more gas and potentially oil discoveries in the same area. As the Leviathan gas field is very close to the Cyprus A field, a common export infrastructure might be developed for the two fields.
Turkey is very interested in natural gas, both as a customer and as a transit country to European markets. According to the BP Statistical Review of World Energy 2011, natural gas consumption in Turkey has rapidly increased from 14.6 bcm in 2000 to 39 bcm in 2010, most of it imported as the domestic production is still marginal.
In the future, gas consumption is expected to increase as more regions in Turkey are connected to natural gas distribution networks and new gas-fired power generation capacity continues to be installed in the country.
Most of the gas is currently imported by pipeline from Russia and Azerbaijan, but Turkey also has 2 LNG import terminals. On the transit side, virtually all of the various pipeline projects planned to move the Caspian natural gas to the European markets involve Turkey as a transit country – Nabucco, ITGI, TAP, SEEP, the Trans-Anatolian Pipeline newly announced by Azerbaijan’s SOCAR, even South Stream (its offshore portion would pass through the Turkish EEZ in the Black Sea).
In this context, Turkey cannot turn a blind eye to the Levantine Basin and its future gas export potential. As the combined European gas markets constitute the second global market in the world, due to the relative proximity of the Levantine Basin, it is clear that the developers of the region’s gas fields are looking at Europe as a primary target.
Current Consortium Preferences
At the present time the Leviathan consortium seems to prefer a liquefied natural gas (LNG) export solution. The main options currently being assessed are: a floating LNG export facility close to the fields; a pipeline to the Cyprus coast where a new LNG terminal would liquefy and export the gas; pipelines to either or both existing Egyptian LNG export terminals (Egyptian LNG and SEGAS LNG); a pipeline to a new LNG terminal on the Israeli coast where some of the gas would be liquefied and exported, the rest being sent by another new pipeline to the Israeli Red Sea coast, where a second new LNG terminal could export the gas to the Asian markets avoiding at the same time the transit through the Suez Canal.
Turkey, Israel and Cyprus: Cooperation Unlikely
In an ideal world, there would be another option, one that would have an impact on the Balkan region. The Levantine Basin gas could complement the Caspian Sea gas for some of the above-mentioned pipeline projects going to Europe.
In such a case, a relatively short offshore export pipeline (400-500 km) would be built from the Leviathan/Cyprus A fields to connect to the Turkish gas transmission network in Ceyhan, Mersin or the Antalya region and from there would be moved towards Western Turkey and Europe.
Politics makes the real world, unfortunately, far from ideal and the Eastern Mediterranean region even less so. Turkey’s relations with the government of the Cyprus Republic remain a powder keg over the Northern Cyprus issue. Moreover, the traditionally good relations between Turkey and Israel have soured since 2010 and the Gaza flotilla incident, and no one knows when and if they will get back to where they were. Under these circumstances, any gas export and transit cooperation scheme between Turkey, Cyprus and Israel seems highly unlikely.
Gauging Turkish Strategy
It will be interesting to follow Turkey’s strategy in this complex geopolitical context. The initial steps taken by the Turkish government were to vocally oppose the Cyprus/Israel common maritime border agreement in December 2010. Due to conflicting maritime claims and the Turkish Cyprus issue, Turkey has not concluded any EEZ or maritime border agreements with Greece and Cyprus).
A second tactic was the exploratory drilling in the Block 12 offshore Cyprus, saying that any exploration by Greek Cyprus violates the rights of the Turkish Cypriots. When the news about the start of the drilling in Block 12 broke in fall 2011, Turkey immediately deployed a geological survey ship, Piri Reis, to conduct offshore surveys in the waters north of Cyprus.
The next step for Turkey was to announce in November 2011 an exploration agreement of the national oil company TPAO with Shell that would cover areas offshore the southern province of Antalya, which is very close to the Levantine Basin. Press reports link this move to the drilling offshore Cyprus in the Block 12 and also quote a Turkish official stating that Turkey is moving its strategic focus from the Black Sea to the Mediterranean Sea.
It is clear that by these moves in the energy exploration sphere that Turkey has acknowledged the potential game-changing significance of the Levantine Basin hydrocarbons and wants to both understand the economically recoverable oil and gas resources of the region, and signal that it should not be left out of any hydrocarbon export scenario.
Seeking Self-Sufficiency: Cyprus and Israel
On the other hand, it is clear that Turkey cannot stop the development of the Levantine Basin hydrocarbon reserves. For Cyprus and Israel, having reliable natural gas domestic supplies is a vital issue, much more important even than creating a long-term gas export revenue stream. Cyprus is fully dependent on imports for its primary energy needs and on highly-polluting oil-based fuels, which are politically unacceptable according to the European Union climate-change policies. Moreover, its main power generation asset, the Vassilikos power plant, was badly damaged in the July 2011 catastrophic explosion at the nearby naval base.
Israel started developing its gas-fired power plant capacity with the commissioning of the Mari-B field in 2004. However, 40% of the country’s needs are already covered by gas imports coming from Egypt, and Israel’s consumption will more than double in the next 5-7 years, as the country is building new gas-fired power plants and is switching most of the existing ones from coal and oil fuels to natural gas.
Unfortunately, there is a risk that the Egyptian gas deliveries, coming through an onshore pipeline that crosses the northern Suez peninsula, could become less and less reliable in the future or could even stop; in less than ten months since the regime change in Egypt in February 2011, the pipeline has been attacked no less than ten times and subsequently shut down for days and even weeks. As seen above, both Cyprus and Israel have very strong incentives to develop the Levantine Basin hydrocarbon resources. Therefore, Turkey will be motivated to be involved in these developments, both as a potential customer, and – perhaps – as a transit country.
Greece is the other Balkan country that is directly concerned by the Levantine Basin hydrocarbon discoveries, due to its desire to become a major energy transit link on the way to European markets and, not least, due to its cultural, political and economic links to Cyprus. As Balkanalysis.com reported in December 2011, the country has an extensive portfolio of energy exploration projects for the future, though its financial crisis has put a damper on these for now.
Greece’s domestic natural gas consumption is also steadily increasing- from 2 bcm in 2000 to 3.7 bcm in 2010 according to the BP Statistical Review of World Energy 2011, most of the gas being imported by pipeline and the Revithoussa LNG terminal.
Greece is involved in most of the gas pipeline projects mentioned above that are aimed at bringing Caspian (and potentially Middle East) natural gas to the European markets.
Greece also realized quickly the huge potential of the Levantine Basin, and therefore started discussions with Israel in early 2011 to explore opportunities for transiting Israel’s natural gas exports to Europe. Media sources have even started talking about a Cyprus-Israel-Greece energy triangle.
This is an interesting concept, but hardly feasible without some sort of participation or at least tacit agreement from Turkey. Beside the question of distributing the gas and the export revenues between Greek and Turkish Cyprus, a direct pipeline from Cyprus to Greece would have to be very long in order to avoid any Turkish territorial waters, or waters under conflicting claims. Turkey and Greece have no agreement on their long maritime border and have conflicting claims in many areas.
Such a pipeline would also be very expensive, as it would partially be installed in very deep waters (more than 2,000 m), at least until it reaches the shallower waters of the Dodecanese archipelago.
Although it is very difficult to estimate costs at this early stage, a Cyprus-Greece pipeline would probably be twice as long as the offshore portion of the South Stream gas pipeline in the Black Sea which would carry natural gas through deep waters as well, and which could cost 25-30 billion euros, according to industry estimates.
The other option would be to export LNG from the Levantine Basin to the Revithoussa LNG terminal in Greece. That currently has a capacity of a slightly more than 5 bcm/year, but these exports would only cover the import requirements of Greece, and potentially the import needs of some of the smaller Western Balkans countries neighboring Greece.
Therefore, mass re-exports from Revithoussa to further European markets would not make sense, as they would be more expensive than gas coming through one of the previously mentioned transit pipelines or by LNG in one of the Italian, French or Spanish terminals.
Greece has no choice but to tread carefully in its energy discussions with Cyprus and Israel so that Turkey does not feel excluded. Otherwise, Turkey could retaliate by delaying or blocking the existing pipeline project plans that include Greece, such as ITGI, TAP or even South Stream in favor of those that leave Greece out, such as Nabucco or the South-East European Pipeline (SEEP) recently proposed by BP.
One possible strategic approach for Greece and Cyprus would be to raise awareness in the European Union regarding the future gas exports from the Levantine Basin as a new supply source contributing to improving EU energy supply security, an objective much-touted by the Union.
The next step would be to get the EU to include on its priority gas projects (as part of the Southern Gas Corridor) a pipeline from the Leviathan/Cyprus A gas fields or from Cyprus to the Turkish coast, further feeding into the pipeline that will be chosen to carry the Caspian gas to Europe- Nabucco, or a reduced version of it, such as SEEP or the Trans-Anatolian Pipeline proposed by SOCAR.
This option would be cheaper than a direct Cyprus-Greece offshore pipeline and would ensure the cooperation of Turkey, while maintaining the viability of other projects in which Greece is interested, such as the TAP and ITGI pipelines. Such a pipeline would also develop a natural gas market in both Greek and Turkish Cyprus and would create value for Turkey through new gas imports and transit fees, hopefully contributing to a general improvement in the complex political relations in the region.
The European Union and the Levantine Basin: Strangely Quiet
The European Union has been strangely quiet on this major discovery, and the future of the Levantine Basin hydrocarbon resources, though it is very vocal about diversifying its gas imports away from Russia by strongly pushing the Southern Gas Corridor pipeline projects that would source their gas in the Caspian Region.
The problem is that the main gas pipeline project supported by the EU, the Nabucco pipeline, was planned – at 31 bcm/year capacity – around the assumption that gas would be supplied not only from Azerbaijan, but also from Turkmenistan and the Middle East (mostly Iraq, as Iran is not currently an option).
However, a closer look shows that the Nabucco project in its current configuration will not be economical, as it would work much under its design capacity. The main reasons are that Nabucco’s only probable source of gas at this point would be Shah Deniz II (not more than 10-15 bcm/year would be available for Europe starting in 2017).
Iraqi gas exports seem to be feasible only in a more distant future, while gas exports from Turkmenistan to Europe could be challenging, as a pipeline would have to carry it first across the Caspian Sea to Azerbaijan, and neither Russia or Iran have any interest in agreeing to such a project. As a reminder, the status of the Caspian Sea waters remains hotly debated, as it is not considered a sea from the international maritime law point of view and its riparian countries have conflicting views of how to share it. At present, it is much easier – politically and economically – for Turkmenistan to export gas to Iran, China or Russia.
These assumptions have been confirmed by recent events – such as BP and SOCAR proposing, in the fall of 2011, pipeline projects to Europe that would be smaller than Nabucco (10-16 bcm/year) and mainly supplied by the second stage of the Shah Deniz gas field in Azerbaijan.
Other Players at the Table
On the other hand, the gas fields in the Leviathan and Block 12 area could by commissioned by 2017, around the same time as Shah Deniz II. The estimated volume available for export from the Levantine Basin would be up to 25 bcm/year, based only on the fields that have already been discovered and appraised. This would complement Shah Deniz II nicely to fill the Nabucco pipeline at design capacity.
Otherwise, Nabucco, which continued too lose steam throughout 2011, could lose the race to be the first pipeline of the Southern Gas Corridor to be commissioned. As a side note, the other Balkan countries that are participating to the Nabucco project, Bulgaria and Romania, could benefit from the Levantine Basin gas being connected to Nabucco. This project is their main chance to benefit from the Southern Gas Corridor initiative, as most of the other projects proposed as part of the initiative, such as TAP or ITGI, would leave them out.
The EU should take a position with regards to the Levantine Basin gas as soon as possible, especially if the Union still considers Nabucco a viable project. As a next step, if interested in importing gas from the region, the EU should include any connected infrastructure projects on its priority energy project list, which would mean significant political and financial support for the development of the Levantine Basin resources.
Otherwise, EU countries will probably have to buy the Levantine Basin gas as liquefied natural gas on the spot market – usually, priced higher than pipeline gas – or see it all go as LNG to the markets in Asia. The clock is ticking, as the Block 12 exploration advances and the Leviathan consortium will select the best development option by end March 2012 [PDF].
At a regional level, most if not all of the Balkan countries have a vested interest in seeing the Levantine Basin gas flowing through one of the Southern Gas Corridor pipelines, as this would diversify their gas imports and bring some of them transit revenues: Nabucco and SEEP for Turkey, Bulgaria and Romania, ITGI for Turkey and Greece, TAP for Greece and Albania.
The year 2012 could prove to be a decisive year for the future of the Levantine Basin hydrocarbon resources. In a last twist that only highlights the complexity of this Mediterranean hydrocarbon saga, media reported in October 2011 that Russia is interested in exploration and development licenses in the Levantine Basin, and that it supports Greek Cyprus in its exploration approach.
Moreover, Russia in November 2011 sent an aircraft carrier to the Eastern Mediterranean region for joint naval exercises with Israel, close to the Leviathan gas field, and it intends to develop the Tartus maintenance and supply base it has been leasing from Syria since 1971 to serve as a base for guided-missile cruisers and even aircraft carriers.
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