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Edition 11 Volume 10 - March 15, 2012

The Eastern Mediterranean gas discoveries: conflict or cooperation?

Potential conflict  - Nizar Abdel-Kader
Israel and Lebanon can benefit tremendously from these resources.

A significant strategic development for Israel  - David Brodet
The changes dictated by the discovery and production of natural gas pertain to the military sphere as well.

Cyprus: there may be some truth to the rumors  - an interview with Chris Pelaghias
A liquefaction plant in Cyprus could change the balance of energy power in the region.

The jury is still out  - Mamdouh G. Salameh
The dispute is mostly a demarcation issue.

Potential conflict
 Nizar Abdel-Kader

In January 2009, Israeli oil company Delek and US Noble Energy Company discovered (some 55 miles off the coast of Haifa) a large natural reservoir known as "Tamar", which holds an estimated eight trillion cubic feet of gas. Early in 2010, another offshore gas field called "Leviathan" with a potential of 16 trillion cubic feet was discovered. Once exploited, these two fields could provide Israel with more than its domestic demand and turn Israel into a major exporter of natural gas.

Subsequently, in 2012, Cyprus, with the help of an Israeli company and Noble Energy, discovered a gas reservoir that could make the small island energy independent for 200 years. This gas find of eight trillion cubic feet was called "historic" by the Cyprus government. According to a press announcement by Charles D. Davidson, Noble Energy's president, this was the fifth natural gas field discovered by Noble Energy in the Levant Basin. A US geological survey published in 2009 claimed that there were 122 trillion cubic feet of recoverable gas off the coasts of Syria, Lebanon, Cyprus, Israel and Gaza, in addition to 1.7 billion cubic meters of oil.

Awakened by the Israeli gas discoveries, Lebanese politicians made a series of provocative statements, and Hizballah issued a warning pledging to defend Lebanon's natural resources. Israel responded in kind, stating that its military would not hesitate to protect the gas fields.

After several months of political bickering, Lebanon's parliament endorsed in August 2011 a draft law demarcating the country's maritime boundaries with Israel and Cyprus. A few months later, the Israeli government unilaterally mapped out Israel's maritime boundaries with Lebanon, which Lebanese authorities (as well as Hizballah) argue infringe on Lebanon's economic zone by 850 square kilometers. As a matter of fact, Lebanon earlier reached an agreement with Cyprus, but the agreement was never ratified by Lebanon due to fears that the Turkish government might express reservations, thus jeopardizing economic interests between Turkey and Lebanon. Lebanese authorities have asked the United Nations to help in establishing a temporary sea boundary between Lebanon and Israel, a maritime line equivalent to the blue line established by the UN in 2000, but the UN has been reluctant to assume this potentially thankless task.

Both Israel and Lebanon have trillions of cubic feet of underwater natural gas and can benefit tremendously from these resources. However, the problem remains that they need UN assistance in facilitating indirect negotiations between them to help demarcate the boundary line. Such a process usually occurs through bilateral negotiations or mutually-agreed arbitration. However, because the two countries remain in a state of war, no such opportunity exists. Experts advise that Lebanon and Israel could exploit the gas in the disputed area jointly through what is called "unitization" by dividing the gas then together developing the reservoir according to each side's relative portion. Otherwise, each side could drill separately, but this practice would be damaging to the reservoir.

Turkey, in turn, has placed additional pressure on Cyprus by declaring the island's maritime agreement with Israel null and void. According to the Turkish government, Turkish Cypriots also have rights and jurisdiction over maritime areas of Cyprus. The Turkish official position went as far as to start Turkish exploration around Cyprus.

Taking into consideration the conflicting positions of the various nations involved, one can see that the issue of gas and oil discoveries in the Levant Basin is a highly complicated matter politically, legally and strategically. Of course, it remains within each state's authority to defend its rights with regards to its own exclusive economic zone, which should be set based on the 1982 United Nations Convention on the Law of the Sea. But such steps might not be enough to solve the clash of interests among the various states involved, and there may be a need for a regional conference sponsored by the UN with the main task of facilitating negotiations between Lebanon and Israel, as well as between the Turks and Greek Cypriots. Such international negotiations and arbitration appear necessary to avoid future military conflict.

The discoveries of gas fields by Israel and Cyprus are stirring the pot of regional turmoil and provoking various reactions from the other players in the Eastern Mediterranean. It looks as if the region is on the verge of a very volatile and highly complicated situation.

It is perhaps no surprise that the sudden interest of Hizballah in the potential hydrocarbon wealth of the Israeli and Lebanese coastlines could turn the Mediterranean into a new theatre of conflict along the lines of the conflict over the Shebaa Farms. It remains the responsibility of the Lebanese government to approach the gas fields in a practical (not political) way, as it did with the Shebaa Farms.

To avoid future tensions between Lebanon and Israel and to prevent Hizballah from creating another border conflict, the US government is advising both Lebanon and Israel to focus on benefitting from the gas reserves instead of using them as the grounds for a new dispute. Of course, the US priority is centered on regional stability and the protection of US companies working for Israel and Cyprus.

All governments concerned should realize that in order to exploit such huge underwater gas reserves, they will all need to attract immense foreign investment that will not be available unless they manage to promote a peaceful and stable environment among them.-Published 15/3/2012 © bitterlemons-international.org

Nizar Abdel-Kader is a political analyst/columnist at Ad-Diyar newspaper in Beirut. He has authored four books on Lebanon and regional political and strategic issues.

A significant strategic development for Israel
 David Brodet

From Israel's very beginnings as a modern state, its economy was defined around the fact that it had no significant natural resources and all its energy and mineral needs were supplied through imports. This reality to a large extent determined the country's economic strategy: development that is not dependent on raw materials, high dependency on energy supply, and heavy influence of energy prices on the economy, the cost of foreign currency and the balance of payments.

The blanket requirement for imported energy was significant at the national strategic level. The 1979 peace treaty with Egypt contained special provisions for the supply of Egyptian oil. Over the decades, the state of Israel invested large sums in oil storage depots and entered into long-term agreements with oil suppliers in order to ensure the constant flow of oil and avoid any possible disruption of normal life.

During the past decade, a substantive change has been registered in Israel's energy situation: natural gas fields were discovered in the sea near Israel's Mediterranean coast. The first field was "Yam Tetis" near Ashkelon, which supplied a portion of the country's energy needs and reduced its dependency on imports. This has now been followed by the discovery of additional fields, the most accessible of which is "Tamar", estimated at a capacity of close to 300 billion cubic meters, which will begin supplying gas to Israel in early 2013. Tamar can answer all of Israel's natural gas needs for approximately the next 20 years, during which the country's estimated annual gas requirement is 15 BCM.

This is a significant strategic development for Israel in terms of both energy and the economic aspects of foreign currency needs. In the commercial-economic sector, the past year witnessed a fundamental change in the government's royalties and tax policy regarding the gas discoveries, whereby the government's income will increase steadily over the coming years. The government is deliberating the terms under which this additional income will accumulate in a special fund to be invested strictly in areas related to Israel's national well-being over the coming generations.

Israel's maritime exploitation zone holds even greater potential. The "Leviathan" natural gas field, whose estimated capacity is 500 BCM--bigger than Tamar--is destined entirely for export. Additional maritime gas fields--Noa, Tanin, Dolphin, Meri and Dalit--are estimated to hold at least 200 BCM, while the fields Sarah, Mira, Daniel, Ruth, Shimshon and Alon and additional concessions have yet to be explored. Geological surveys point to huge reserves of natural gas; the experts believe the area between Israel and Cyprus holds one of the world's largest gas fields.

Israel is about to confront complex economic, political and security issues it has never before dealt with. The immediate markets for gas exports are in Europe; gas can flow there directly through pipelines to Cyprus and Greece. This will create new challenges--not only economic and commercial but also political and even security-related. Israeli gas exports to Europe via Greece and Cyprus will create a positive dynamic of cooperation with these countries. But they also risk exacerbating tensions with Turkey, due to the situation in (Turkish-controlled) Northern Cyprus, and with Lebanon, which has laid claim to a sector of Israel's maritime exploitation zone.

Moreover the Leviathan field, and additional future Israeli fields, will compete with the current sources of gas flowing to Europe, mainly from Russia. The Russians, recognizing the ramifications of competition, are already looking into the possibility of entering into commercial partnerships for exploiting Israel's gas concessions, including Leviathan. Herein lies both commercial and political potential or, alternatively, tension with Russia.

Israeli gas exports beyond Europe, for example, to Asia with its heavy energy needs, are possible only if special liquefaction facilities are constructed. The price of Israeli liquefied natural gas in Asia would be high, thereby explaining the commercial rationale for constructing an LNG installation. Israeli entrepreneurs, among others, are currently developing this project in Cyprus; cooperation of this sort could enhance the two countries' partnership. Until recently Cyprus, and indirectly Greece, had avoided close ties with Israel. Now they share a strategic interest.

The changes dictated by the discovery and production of natural gas pertain to the military security sphere as well. Threats have emerged to new strategic interests, and Israel has to defend those interests by deploying an enhanced naval, air and intelligence presence. These security issues also generate a regional interest in cooperation to defend production facilities.

Thus we see that within a short period of time new economic, political and even security conditions have emerged that present both opportunities and risks. These require a fundamental rethinking of certain Israeli policies and interests. Israel's gas discoveries are a treasure reserved for Israel. A lot depends on how well they are managed.-Published 15/3/2012 © bitterlemons-international.org

David Brodet is chairman of Bank Leumi and former director general of the Ministry of Finance.

Cyprus: there may be some truth to the rumors
an interview with  Chris Pelaghias

BI: Does Cyprus see its newfound natural gas wealth within the context of Middle Eastern or European geopolitics?

Pelaghias: More in the context of European energy requirements and energy security policies.

BI: Cyprus doesn't see the emergence of a new regional strategic alignment due to Mediterranean-based energy wealth?

Pelaghias: Not much thought has been put into that issue yet. The government is still trying to make sense of the new possibilities. It is considering new alignments, perhaps with Israel, and what they would mean for Cyprus and Greece but also for Israel's security. But it has not yet reached any firm conclusions.

Development plans are just beginning. The most important issue is whether a liquefaction facility for the gas will be based in Cyprus. This could change the balance of energy power in the region. Currently, Turkey is the energy hub. If liquefaction plans contemplated by [Houston-based] Noble Energy, Delek [an Israeli energy firm] and the Cyprus authorities come to fruition, this could change.

Meanwhile, drilling in Cypriot waters at Block 12 has not yet produced the hoped-for discoveries. The terrain is more difficult at the Cypriot end [of the Israel-Cyprus corridor] and it's harder to explore.

BI: Wouldn't liquefaction be directed primarily toward export to the Far East?

Pelaghias: If the facility is in Cyprus, it will probably concentrate on export to Europe. A similar facility in Eilat would cater to the Far East. Everyone is weighing the commercial viability and investment requirements.

BI: How does Cyprus plan to use its newfound energy wealth?

Pelaghias: The plan is to establish a sovereign fund, along the lines adopted by other countries that are in the same situation.

BI: How do you explain the tensions with Turkey over the natural gas exploration issue?

Pelaghias: Turkey is concerned over a number of issues, from geopolitical to commercial. The Turks have invested in turning their country into an energy transportation avenue to Europe for gas from Russia and the Caspian Sea, improving their EU prospects by offering energy security to Europe. So from a commercial and political point of view, Turkey is worried about the advent of an alternative source of gas and a new transport route. They're trying to prevent major companies from entering the Cyprus energy field by threatening to ban them from any business activities with Turkey. I'm not sure whether this is working or not. We'll see if the "majors" enter Cyprus' second bidding round that was announced a few weeks ago.

Then there is the issue of Northern Cyprus. Turkey is protecting its interests by claiming [to protect] the interests of Turkish Cypriots. This is a pretext, lacking much credence, because Cyprus has clarified that any economic benefits will be shared by its sovereign fund with the people and infrastructure needs of the north. This is in line with the European Union position of encouraging both sides [in Cyprus] to cooperate and have a single economy. Of course, it will take about 10-12 years before the fund can begin to function and benefits will come on line.

There is also a potential area of trouble [with Turkey] west of Cyprus and in the western Aegean/eastern Mediterranean region, where the exclusive economic zones are still "grey" zones: they have not been delineated between Greece and Turkey, Cyprus and Turkey and Cyprus and Greece. The Turkish National Oil Company has just begun drilling in Northern Cyprus as well as off-shore there, in the area between Northern Cyprus and Turkey. The area just west of the coast of Cyprus promises to be very rich in all sorts of resources.

Turkey is also worried about a possible realignment of Israel and what this means strategically.

BI: Apropos military tensions with Turkey over the energy issue, is there any truth to the rumors that Turkish drones are overflying Cyprus' exploration sites and the Israel Air Force has been granted landing rights at Paphos? Obviously, the rumors increase tensions around the Cyprus natural gas project in a Middle East context.

Pelaghias: Official sources deny both: reports of escalation around the fields as well as Israeli use of the Paphos military airstrip. But if one uses common sense, there may be some truth to the rumors.-Published 15/3/2012 © bitterlemons-international.org

Chris Pelaghias is chairman of the European Rim Policy and Investment Council (ERPIC) in Cyprus.

The jury is still out
 Mamdouh G. Salameh

In 2006, American oil company Noble Energy of Houston and Israeli company Ratio Oil Exploration received a license to explore "Leviathan", a deep-water gas field in the Mediterranean about 130 kilometres from Israel's coastline. At the end of 2010, the two companies announced that Leviathan contains 450 billion cubic metres of natural gas reserves, making it the world's largest offshore gas find of the past decade.

Leviathan and two smaller offshore gas fields not only could make Israel self-sufficient in gas needs but could also mean a bonanza in royalties and tax revenues for the government. Some Israeli cabinet ministers are even talking about a new regional balance of power in the Middle East. But a surge in the world's reserves of natural gas in recent years will make it difficult for Israel to export its gas. And a new boundary dispute stemming from the discovery is now brewing with Lebanon, which says that Israel is violating its maritime rights.

Facing an Arab boycott for decades, Israel's energy needs have always been supplied through shadowy dealings and imports. In the 1960s and 1970s, crude oil came from Iran, but dried up when the Iranian revolution overthrew the shah. For about a decade, Israel tapped oil wells in the occupied Sinai desert until it returned the area to Egypt under the 1979 peace treaty. More recently, much of Israel's oil needs have flowed from the former Soviet Union states.

The Leviathan field contains enough gas reserves to meet Israel's energy needs for decades, with more left for export. Experts estimate the value of the reserves at $90 billion. But natural gas is a complicated resource--difficult to extract and expensive to transport. Israel would have to build a liquefied natural gas facility where ships could be loaded and dispatched to markets across the world. The project would likely cost billions and take years to complete. Whether it would be a worthwhile investment is an open question. In the past few years, large shale and other gas discoveries in the US and elsewhere have created a glut in the market and cut the price of gas by 20 percent.

If the export question is eventually resolved, there is still the problem of Lebanon, which asserts that up to a third of Leviathan extends into its territory. In January 2011, Lebanon sent a letter to United Nations Secretary General Ban Ki-moon, urging the international body to monitor Israel's offshore drilling and exploration. Hizballah leader Sheikh Hassan Nasrallah went even further by declaring that the conflict with Israel was entering a new frontier: the sea. He also threatened to target any vessels heading for any port on the Israeli coastline from the north to the farthest point south. In response, Israel said it would not hesitate to use force to protect its ships.

The dispute is mostly a demarcation issue. When Israeli troops withdrew from Lebanon in 2000, the UN-sanctioned blue line became the de facto land border between the two countries. Israel unilaterally extended a line of buoys out into the sea to approximate a maritime border. But Lebanese officials say the angle Israel took from the shore gives it more territorial water than it deserves. "Shifting this line slightly above or below can mean billions of dollars for one party or the other," says Ali Haidar, a geology professor at the American University of Beirut, who worked on the issue extensively. Lebanon and Israel have not defined their maritime border since the withdrawal of Israeli troops in 2000, leaving a slice of contested territory. Lebanon says that up to one-third of the Leviathan gas field could be inside its maritime border. If that is the case, the two countries will eventually have to agree on a demarcation line by negotiation.

Another potential dispute is brewing between Turkey and Cyprus over the exploration for oil and gas in the Eastern Mediterranean. When Cyprus tried last year to send exploration vessels to explore for oil and gas in its territorial waters, Turkey threatened to send warships to stop the exploration vessels to safeguard the rights of Northern Cyprus.

The huge gas discoveries in the Eastern Mediterranean could either exacerbate an already very tense and dangerous situation between Lebanon and Israel or could lead to a reduction of tension and mutual benefits if Israel agrees to a fair demarcation line with Lebanon, worked out and monitored by independent international experts under UN supervision.-Published 15/3/2012 © bitterlemons-international.org

Mamdouh G. Salameh is an international oil economist, a consultant to the World Bank in Washington DC on oil and energy and a technical expert for the United Nations Industrial Development Organization (UNIDO) in Vienna.

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