Thu. Sep 24th, 2020

FPI

COVID-19 PUT THE EASTERN MEDITERRANEAN’S HYDROCARBON DREAMS ON HOLD

Taktik

On Tuesday, Greek Prime Minister Kyriakos Mitsotakis will do something pretty unusual in the age of COVID-19 — travel overseas. Mitsotakis will meet with Prime Minister Benjamin Netanyahu in Israel to discuss the resumption of commercial flights between their countries, as well as regional energy politics — two things which have been dramatically disrupted by the pandemic. Cypriot President Nicos Anastasiades is also expected to visit Israel later this month.

The discovery of offshore hydrocarbons in the Eastern Mediterranean over a decade ago has sparked intense diplomatic activity. Hoping to maximize the sea’s riches, many of the region’s governments have proposed ambitious projects that would transport the natural gas to Europe via undersea pipelines. Encouraged by U.S. administrations that saw energy development as a vehicle for strengthening ties between its allies, the rough edges of a new regional framework for cooperation slowly took form in January 2019, when the governments of Egypt, Cyprus, Greece, Israel, Italy, Jordan, and the Palestinian Authority established the Eastern Mediterranean Gas Forum, a multinational body tasked with developing a regional gas market and mechanism for resource development.

BECOME A MEMBER

COVID-19 has scuttled this momentum. The pandemic’s impact on the global energy market has damaged the conditions for Eastern Mediterranean states to profitably export their gas, and has caused a massive rethink amongst policymakers about how to make the most out of the circumstances. Although regional actors may no longer be bound to building pipelines, energy still has the potential to propel greater regional cooperation in the coming decade. American diplomatic support and engagement would go a long way to turning this opportunity into a reality.

Israel’s Stake in the Eastern Mediterranean

This is a bitter pill for all of the region’s actors to swallow, but perhaps none more so than Israel. Historically bereft of fossil fuels, the discovery of the Tamar and Leviathan fields (in 2009 and 2010, respectively) were seen as a potential game-changer for the Jewish State. The Netanyahu government committed to the concept of gas exports as a strategic boon to Israel, and aggressively pursued a regional policy that embraced partnerships with Greece and Cyprus, as well as export deals with Jordan and Egypt. Israeli Energy Minister Yuval Steinitz spent most of the last five years promoting the “East Med pipeline” — a 1,900-kilometer undersea pipeline that would link Israel to Italy via Greece and Cyprus.

However, the East Med pipeline — which upon completion would be the longest undersea pipeline in the world — was always more of a political project than a serious commercial endeavor. Not only did the path of the proposed pipeline run through disputed waters between Turkey, Greece, and Cyprus, but also active geological fault lines and deep trenches. These geopolitical and technical challenges could theoretically be overcome, yet industry experts argue that the biggest obstacle to the East Med pipeline is its commercial feasibility. With an estimated $7 billion price tag, there are doubts that Israeli and Cypriot gas would remain competitive by the time it arrived in Europe. For several years the European Commission has been exploring the possibility of committing to the pipeline, but at this stage is unlikely to back it financially.

The collapse of global energy prices brought on by the combination of an oversupplied market, warmer-than-average winter, and the coronavirus pandemic, has buried the East Med pipeline and put Israel in a serious quandary. Committed to a contract with Tamar and Leviathan’s developers that no longer meshes with the current economic circumstances, Israel is paying three times the global average for its own gas. The price discrepancy is so sharp that the Israel Electric Corporation is buying imported liquid natural gas at half the price of domestic supply. It is no wonder, then, that Steinitz began his second term in office with declarations that Israel would accelerate its construction of solar energy infrastructure.

The Position of Jordan, Egypt, Lebanon, and Turkey

Israel is not alone in this predicament. Almost the entire Eastern Mediterranean is wrestling with similar questions.

The vanishing prospects for the East Med pipeline are as disconcerting for Greece and Cyprus as they are for Israel. Both countries are essential partners in the project. In January 2020, leaders from the three states met in a public demonstration of their commitment to the pipeline (they reportedly signed an agreement but this document has not been made public). Cyprus hoped to link its modest offshore discoveries to the East Med pipeline, and Greece was eager to function as a conduit to Europe. The important difference is that Cyprus’ natural gas fields are not yet operational. In early May, Italy’s ENI, France’s Total, and ExxonMobil announced a year-long suspension of drilling activities in Cyprus’ waters. There are no guarantees that the developers will return with the same interest as they once did, and the remaining export options are costly.

Even operational energy partnerships are facing tough choices. For example, Jordan’s energy arrangement with Israel (45 billion cubic meters over 15 years at an estimated $10 billion) is deeply unpopular because it normalizes ties with a country seen by most Jordanians as a belligerent. With a global energy market that is driving liquid natural gas prices to historic lows, the monarchy is under mounting pressure to find cheaper alternatives. If Israel continues with its plans to partially annex the West Bank, Amman may sacrifice the deal as a symbolic gesture of disapproval even if the underlying causes are economic. Jordan might hope that it could fall back on the United States, as a guarantor in the deal, to cover its debts.

Egypt hoped that offshore discoveries would transform it into a regional energy hub, converting Israeli and Cypriot gas at its liquid natural gas facilities in Idku and Damietta and then shipping them off to Europe. Today, Egypt is struggling to find buyers, has frozen activity at one of its liquid natural gas sites, and cut production at Zohr field. While the Egyptian domestic market is diverse enough to absorb some Israeli imports, this isn’t the long-term arrangement the two parties envisioned some 16 months ago.

No matter where you turn, the Eastern Mediterranean energy picture is bleak. Debt-ridden Lebanon was dismayed by news in late April that initial explorations failed to uncover a meaningful gas field. Politicians in Beirut dreamed that offshore discoveries would deliver an instant economic windfall. But with energy companies announcing a suspension of activities in Cyprus’s waters just a week later — the same companies exploring Lebanese waters — the Lebanese government will have to search elsewhere for a financial bailout.

Meanwhile, Turkey appears to be taking advantage of the regional turmoil by continuing to send exploratory and drilling vessels into Eastern Mediterranean waters. However, these vessels’ purpose is more political than commercial. Spurned by the Eastern Mediterranean Gas Forum and with no resolution to the Cyprus conflict in sight, President Recep Tayyip Erdogan has positioned his military — on land and at sea — to protect Turkish claims to the continental shelf and break what is perceived as strategic containment of Turkey by the region’s actors. Turkish intervention in the Libyan civil war is at least partially driven by Ankara’s desire to break the will of its neighbors and force them into direct negotiations. Not only has this strategy put Turkey at loggerheads with longtime rivals Greece and Cyprus — with whom Turkey shares a long history of maritime boundary disputes — but other actors as well, including the United States.

In the long run, low liquid natural gas prices could become the norm. Some forecast that the present gas glut may continue for nearly a decade as other projects come onto the market. International projects that require costly infrastructure are going to find it difficult to compete with existing liquid natural gas providers and a growing renewable energy industry. Although COVID-19 appears to have undone significant progress in the Eastern Mediterranean, it ironically may have rescued Eastern Mediterranean states from shortsighted investments. Policymakers have benefited from a rare mulligan and can now reassess their regional prospects.

Post-Pandemic Energy Strategy

The first, and most obvious, post-coronavirus strategy, is to keep the gas local. Rather than prioritizing export markets in Europe, the challenge for Eastern Mediterranean states is to diversify their domestic infrastructure and economies to be more gas friendly. This is especially relevant for Egypt, whose domestic demand is only going to increase as its population grows. Emphasizing the regional market will require intense discussions between the main developers and governments to find the appropriate contractual language that suits the involved parties.

But would organizing a regional market assume that all actors can benefit? Over the last decade, offshore hydrocarbons were as much as cause for confrontation between Eastern Mediterranean states as they were an incentive for cooperation. Now that it is clear the gas bonanza won’t arrive as quickly as anticipated, perhaps the region’s actors will consider a recommitment to regional diplomacy and conflict resolution. From the ongoing Libyan civil war to the maritime disputes between Greece and Turkey, there is no shortage of opportunities for those willing to decouple their energy aspirations from their interest in creating a functional regional space.

This is where the Eastern Mediterranean Gas Forum comes into play. Whereas the forum’s original purpose was to deal with matters pertaining to natural gas, post-COVID it could serve as a platform for discussion on a host of issues, from tourism to environmental protection to pandemic support to alternative energy cooperation and security. If a global pandemic instructs states about anything, it is that neighbors remain neighbors regardless of the boundaries placed between them. In short, it behooves Eastern Mediterranean states to support one another.

America’s Role in the Region

The United States should play a central role in this process. Not only is Washington the preferred mediator for many of the region’s conflicts, but American support for the development of offshore hydrocarbons and regional cooperation in the Eastern Mediterranean has been a rare point of bipartisan consensus during both the Obama and Trump administrations, who saw the region’s gas as way to strengthen the position of its Eastern Mediterranean allies while also reducing European dependency on Russian gas. Continued engagement with Eastern Mediterranean actors will allow the United States to guide its partners towards a more cooperative future, help develop deconfliction mechanisms, and discourage interference from outside actors like Russia, Iran, and China.

This should happen in a number of different ways. First, the United States should reengage Eastern Mediterranean states in the process of maritime boundary delimitation. This issue a priority for all of the region’s actors, including European heavyweights France and Italy. In particular, Turkey’s signing of a maritime boundary agreement with Libya’s Government of National Accord in November 2019 sparked considerable protest throughout the region and entangled the ongoing civil war in the Eastern Mediterranean’s energy politics. While the Libyan civil war isn’t the source of all of the region’s tensions, American mediation between the aggrieved parties — notably NATO member states Turkey and Greece — on the issue of maritime boundaries would start rolling back tensions and create a more constructive environment for future negotiations between Turkey and Cyprus. The signing of a maritime boundary agreement between Italy and Greece on June 9 was widely seen as a maneuver to check Turkey’s advance. U.S. diplomats should also encourage Israel and Lebanon to resolve their outstanding maritime issues, which would allow foreign companies to feel more comfortable exploring in Lebanese waters whenever they decide to resume activities. A semi-enclosed maritime space like the Eastern Mediterranean requires delimitation agreements in order to avoid conflict. Ideally, the United States would bring all region’s actors to the negotiating table simultaneously. However, the present conditions necessitate a flexible, hands-on approach to certain disputes.

Additionally, the United States can empower the nascent Eastern Mediterranean Gas Forum by investing more diplomatic resources in the organization, and incentivizing collaboration between members states. One way of doing this is by expanding the language of the 2019 Eastern Mediterranean Security and Energy Partnership Act (also known as the Menendez-Rubio Bill) in a manner that offers potential avenues for participation by Eastern Mediterranean actors not mentioned in this legislative package, specifically Egypt, Jordan, the Palestinian Authority, Lebanon, and Turkey. The United States-Eastern Mediterranean Energy Center described in the Menendez-Rubio Bill could be a conduit for multinational research and development in the myriad topics that are directly and indirectly impacted by offshore hydrocarbon exploration. This could open channels of communication between American and Eastern Mediterranean industries, strengthening both economic, cultural, and strategic interests.

Going Forward

For the better part of the last decade, it was expected that energy would transform the Eastern Mediterranean. However, the pandemic’s aftershocks have disrupted the prospects for regional cooperation. A collective pivot — with American support — away from the uncertain promises of energy could be a blessing in disguise. It provides regional states the opportunity to embrace a shared future that emphasizes energy diversification, multinational cooperation, and conflict resolution.

Although the United States appears committed to reducing its presence on the global stage, it should preserve and expand energy-centric multilateral diplomacy in the Eastern Mediterranean that enjoys bipartisan support. The region is rich with American partners — a lasting foreign policy legacy would be finding a formula that would allow them to settle their own disputes and find new ways to cooperate.

 

This article taken from warontherocks.com

This article written by Gabriel Mitchell.

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