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EastMedGas in geopolitics

Turkey and Mediterranean Gas

What does it mean for Europe

Turkey and Mediterranean Gas Turkey and Mediterranean Gas
Grafik: Energlobe

… judged from purely geological figures one would say not much. The Eastern Mediterranean basin is thought to hold some 3.4tcm of natural gas – roughly one per cent of Iran’s total reserves. Israel’s 680bcm would represent some 0.4% of the world’s total, compared to Iran’s 18%, Russia’s 17.6% or Qatar’s 13.4%. If Israel’s are small, Cyprus’ Aphrodite 145bcm are then even smaller.

Judged from a political perspective, however, we get an altogether different narrative. The argument that is frequently mooted is that a pipeline to Turkey from Israel and Cyprus is not only commercially viable but also politically advantageous as it would enmesh these three countries with a history of animosities – into a web of cooperation and mutual support.

The problem with peace pipelines is that they may not be as peaceful as they are touted to be. The much-vaunted Baku-Tbilisi-Ceyhan oil pipeline may have brought Azerbaijan, Georgia and Turkey into closer partnership, but talk to analysts and they will tell you how unhappy Turkey is about transit fees it collects from this project. Moreover, the Baku-Tbilisi-Erzurum gas pipeline which can carry up to 6.6bcm/year of gas from Azerbaijan to Turkey does have the mysterious tendency to see gas curtailments during peak winter season. Interestingly, the curtailments happen either during times of price renegotiations or amid Ankara’s tentative rapprochement with Armenia. Both Ankara and Baku have consistently denied reports of political undertones in any gas cuts experienced over the years.

Besides, if we were to judge matters purely from the peace factor, a pipeline that would fit the bill is the Arab Gas Pipeline. Thanks to the existing El Arish- Ashkelon spur, Israel could not only reverse flows and start exporting gas to Egypt – a country in great need of the fuel – but also feed volumes through the main line travelling to the Jordanian port of Aqaba and then north through Lebanon and Syria and head to Turkey. En route it would collect Cypriot, Lebanese and Syrian gas through the two spurs linking to Tripoli in Baniyas in Lebanon and Syria respectively before reaching Turkey. Such a pipeline would most certainly accommodate the political vision of regional peace, helping to put an end to what one may arguably call a Biblical conflict between Jews and Arabs.

If the commercial factor were to inform the decision-making process then of course the LNG option is by far the more attractive thanks to the prospect of selling volumes to East Asia.  Compared to the price that Israel may sell into Turkey – reportedly around $360.00/1000kcm, East Asian prices are by far more competitive at around $600.00/1000kcm.

In a study carried out for the German Marshall Fund of the US last year, Simon Henderson points out that the costs of such a project may be high – a one-train LNG facility at Vassilikos in Cyprus for example may cost $9bn, but any additional trains would cost another $3bn would make such a project feasible. It has been argued that Cyprus alone does not have enough gas to make the LNG option viable. However, if Vassilikos were to become a hub it could ramp up exports – expected to be around 7bcm/year in 2020 to 35bcm/year in 2025 and to 50bcm/year in the long term if it were to take in Israeli and Lebanese gas.

Israel has also been considering a floating LNG option and has an agreement with Daewoo Shipbuilding and Marine Engineering for the development of such a project. In March 2012 the Swiss arm of Russia’s Gazprom signed a letter of intent with the marketing team of Tamar LNG partners including Daewoo Shipbuilding and Marine Engineering for offshore gas supplies.

But such an option comes under serious security doubts. If we thought that the security fears related to the discharge of LNG tankers delivering for the Israeli Electric Corporation at Israel’s import terminal – as a matter of fact satellite trackers never reveal the position of these vessels approaching the Israeli coast precisely for this reason – then you can imagine the security fears related to an FLNG platform which, Henderson notes, is expected to have the size of four aircraft carriers and is vulnerable even to rocket-propelled grenades.

Moreover, the LNG option itself is under serious doubt. The passage of Israeli LNG vessels through the Suez Canal heading to the Far East should happen freely under international law. The change in government in Cairo should have also helped to warm up relations between Israel and Egypt, but as analysts have pointed out there is always the possibility that Egypt may stage politically –motivated inspections on spurious environmental grounds that may block or delay the passage.

The other LNG alternative – developing an LNG terminal at Eilat or Aqaba that would bypass the Suez may not be seen favourably by Israel for Aqaba or by Saudi Arabia and Qatar for Eilat.

That then leaves us with the Turkish option and the implication of an emerging relationship between this country, Israel and Cyprus for the region and the world.

We have seen that as far as Israel and Cyprus are concerned neither the Arab Pipeline as a peace project nor an LNG option as a commercially viable alternative would tick the required boxes, prompting both to look at a third solution – exports to Turkey. A 470km pipeline linking Israel’s Leviathan field to Turkey appears to have greater chances of success especially if Cyprus were to be convinced of the attraction of selling gas north and opening its waters to the pipeline.

But what is the attraction for Turkey – a country that expects to import 6bcm/year from Azerbaijan at least another 10bcm/year from northern Iraq and possibly crank up volumes from Iran. Its consumption is tipped to increase, but last year it dipped by 0.5bcm/year to 46.5bcm/year and its economy is growing, although at a more moderate pace? Why one would ask would Turkey need more gas when it could source volumes at some of cheapest prices anywhere in the world from northern Iraq. Turkey is expecting to import volumes at $280.00/kcm from the Kurdish Region of Iraq.

There are two overwhelmingly important reasons.

Firstly, a stronger Turkish-Israeli relationship underpinned by physical infrastructure - ie a pipeline -  would help guarantee greater stability in the Middle East. Such a relationship is highly important to the US at a time when it feels constrained to look more to East Asia amid fears of China as an emerging military power. America could empower both Turkey and Israel – with who it already has a close relationship – to ensure that regional stability.

Secondly a strong Turkish-Israeli relationship could also counter Russia in Europe’s eastern flank as well as the resurgence of Russian power in the Middle East as recently seen in Syria.

However, in order to challenge Russia’s grip over eastern European countries where it continues to remain the main supplier of gas, Turkey will have to reform its market entirely to ensure that the flow of natural gas responds to the logic of demand and supply rather than political diktats. It is important to stress here that Turkey thanks to its size, proximity to three quarters of the world’s conventional hydrocarbon reserves and growing population is the ONLY country in the region capable of establishing a gas hub that could challenge Moscow’s powerful weapon – the oil indexation.

This fact is well understood by Turkey’s private gas sector and I am told that the pricing for Israeli gas exports to Turkey may include an NBP linkage. In fact, over the next few days there will be an announcement regarding the launch of a consortium of Turkish and foreign companies that will undertake the responsibility of sell the gas from Israel.

The liberalisation of the Turkish gas market is therefore of vital importance not just to Turkey but also to producers such as Israel and Cyprus which need reliable markets that are impervious to political volatility. In order to ensure that liberalisation, the EU has an absolute obligation to open the energy chapter for Turkey and Cyprus as well as France which may block such an action should understand in the eleventh out that it is in everyone’s interest to reach that goal.

The emergence of more supplies of gas – be they Romanian, Azerbaijani, Iraqi, Israeli, Cypriot, Iraqi or Iranian should be celebrated in the region.  However, the events of recent weeks, have shown that Russian gas is not just any gas. It is gas with strings attached and few realise that under the Kharkiv Agreement of 2010 and subsequently the 17 December 2013 agreement Ukraine extended the lease for the use of the military base at Sevastopol and relinquished to the Russian navy the Kerch peninsula on Crimea in exchange for cheap gas.

Therefore a liberalised Turkish gas market enjoying diversity of supply as well as flexible pricing would be the only one capable of challenging Russia’s show of power in the region as well as Moscow and possibly Tehran’s attempts to establish a gas cartel – being the two most powerful producers in the region.

In sum. What would Turkey’s relationship with Israel and Cyprus mean for Europe and the world?

It would bring greater stability to the Middle East and help to challenge Russia’s dominance in eastern Europe through a combination of multiple sources of supply and flexible pricing aligned with those of Europe.

Aura Sabadus is editor of the ICIS Turkish Hub Daily, a London-based news agency focusing on energy markets. This article for ENERGLOBE is a result of a presentation by Aura Sabadus at a workshop of the European Centre of Energy and Resource Security (EUCERS) at the King's College in London.




Henry Kissinger,„World Order“, August 2014