MEI scholars Mirette Mabrouk and Rauf Mammadov join host Alistair Taylor to discuss the region’s energy boom, how significant recent finds are to the global market, and the challenges facing regional energy cooperation.
Alistair Taylor [00:00:09] Welcome to Middle East Focus. I'm Alistair Taylor, MEI's Editorial Director, and today we're going to be talking about energy and geopolitics in the eastern Mediterranean. There's been growing interest in the region's energy resources over the past decade driven by major offshore discoveries like the Tamar and Leviathan fields in Israel in 2009/2010, the Aphrodite field in Cyprus in 2011, and Zohar field in Egypt in 2015, as well as more recent finds. The politics of regional energy cooperation, however, are complicated, and to discuss the situation I'm joined by two of my colleagues here at MEI: Mirette Mabrouk and Rauf Mammadov. Mirette is the head of the Egypt program here, and Rauf is an energy policy expert.
Alistair Taylor [00:00:53] Mirette, Rauf, thank you both for joining me today, and welcome to the program.
Rauf Mammadov [00:00:57] Thank you.
Mirette Mabrouk [00:00:57] Thank you.
Alistair Taylor [00:00:58] Rauf, let's start with you. There's been a lot of excitement in the region about an energy boom, but can you give us some kind of context for how big these finds actually are and how important the Eastern Mediterranean is from a kind of global energy perspective?
Rauf Mammadov [00:01:12] These are very significant developments findings, as we call them, for different reasons. First of all, not so many conventional fields left to be explored by the major companies, although new volumes are coming from shale or from very deep water pre-salt wells and fields in Brazil or any other parts of the world. So from that perspective this is very, very significant finding. Another important factor is the proximity of the found fields to the major markets and the location of the fields on the crossroads of the routes to the major markets. In this case it's Europe, one of the largest consumers of gas, and East Med fields are located within almost thousand kilometers of the European shores. And another important factor is the locality of the issue: how these fields are important for the developers and the countries that own these areas because there's a pattern we see that most of these countries that own these fields and have been leased to major companies, they used to be major importer of gas or oil. And from that perspective, it's major development for them to become not only self-sufficient, but also exporter of the gas.
Alistair Taylor [00:02:27] Absolutely. Mirette, on that point, how much of an impact have these discoveries had within the kind of eastern Mediterranean? Egypt I know is a particularly instructive case because it went from being a kind of importer to now an exporter as of the end of last year. How much of an impact has it had?
Mirette Mabrouk [00:02:42] It's had a significant effect, but not for the reason that people sometimes think. I think Rauf outlined everything very clearly, but you want to bear in mind that these discoveries actually make up about one percent of the world's total. But they are important for the region not only because many of these countries are going to go to self-sufficiency. For Egypt, it's especially important because not only was Egypt an importer, it was finding it difficult to get the gas. I mean we have pipelines that were attacked 17 times in one year after the 2011 revolution, and everyone in Egypt remembers — especially the government and especially businesses — remembers factories operating at 40 percent consistently for most of the year and blackouts that lasted 46 hours many cases. So this has been a huge relief, but it's not just a relief in terms of the actual gas. In Egypt's case it's going to be self-sufficient and will be able to export a little gas. But the biggest gains I think are going to be political because it does set up a new regional power play, which Egypt intends to be center stage in.
Alistair Taylor [00:03:56] Rauf, who's involved in the offshore exploration and production in the region? Is there a lot of international IOC interest?
Rauf Mammadov [00:04:04] We haven't seen major companies start the process for the same reason that it was an unchartered territory. It's very difficult for major companies to include these unknown fields to their balance sheet and then try to develop it. So what started with Houston-based Noble, which is a medium-size oil company — It's not one of those major seven sisters — and Delek, the Israeli company. Then it shifted towards, in Egypt's case, for example, it was more companies that has been involved in Egypt for a long time, and also in Lebanon as well. For instance, EMI has been in Egypt for decades — for seven decades already — Aand it's their backyard. And TOTAL has been in Lebanon for 60, 70 years for different purposes. But overall we see companies more interested now. And that's one of the reasons why these projects are very important because it tracks more interest. One of the companies are showing great significance to the region is Exxon. They've been drilling in Cyprus, in Israeli waters, in the East Med basin, and more companies are involved. We'll see many other companies come as well. Having said that, Russian companies are very active. Rosneft has bought 30 percent of Zohr. Novatek also won bidding for Lebanese locks. And we see a lot of Russian interests in the region. These are major companies: both Rosneft and Novatek. Novatek actually became the largest supplier of LNG to Europe in the first quarter of 2019, and Rosneft is increasing LNG portfolio in their overall balance. So we see interest, but the companies are careful for the same reasons as Mirette mentioned: for geopolitical reasons or some commercial reasons as well. If findings are big for the region but in a global scale it's only one percent. These are up to 200 PCM billion cubic meters, 800 billion cubic meters in case of Zohr, up to 1 trillion which are considered as elephant fields as we call them in the industry, but they're far from being South Pars, which is 51 trillion. So these aspects are factored in when the major companies enter the market. There is an interest, but they're taking it very slowly.
Alistair Taylor [00:06:07] Not a new Qatar, but significant for the region certainly. Mirette, we're talking about Egypt off shore, we're talking about Lebanon, we're talking about Cyprus, we're talking about ultimately a pretty diverse group of producers across a wide area. How do you tie all that together and ultimately get the gas to the consumers in Europe?
Mirette Mabrouk [00:06:24] Very carefully. The big players here ultimately are Egypt, Israel, and Cyprus. And everyone's talking about pipelines, but there is one existing pipeline. And then the pipeline that they're talking about between Egypt, Israel, and Cyprus is supposedly going to be finished in 2024, 2025. The big Israeli pipeline will almost certainly never be built because it just won't make sense, and you have to bear in mind that the technology is changing now for transportation. Egypt has two LNG platforms already existing at Idku and Damietta. They're great. But again, the technology is changing, so certainly no one's going to be making any big infrastructure investments because you don't know what it's going to look like in four years' time. So I think what people want to look at, in a more holistic sense, is the amount of gas being produced. And even though it's small, I mean, since 2009 in the region over — you can correct me on this if I'm wrong — it's like 2.1 trillion cubic meters. And so for clarification, in 2017 Europe imported 410 billion. So there is an enormous amount here, and the market is really — you have to look at the geography — the market is really Europe. And that's really what you want to look at, not so much the physics, which is maybe down the road in some cases, but secured in others. But really, it doesn't have to go that far.
Rauf Mammadov [00:07:52] Yeah, the comparison is great. Russia supplied only 200 billion cubic meters to Europe. If you look at the numbers, what the region has, the potential is there. Regarding the Idku and Damietta terminals, when they were actually exporting gas before Egypt started importing gas in 2013 I guess, most of the world just went to Asia. With the new contracts signed between Cyprus and Idku, between Cyprus' government and Shell, who operates the terminal, and with the arbitration settled between Damietta, gas, and then the government, the new ones will definitely deliver to these terminals, and given that the price difference between the Asian benchmark and Europe has declined significantly, and we see that more American gas is going to Europe for the same reason, I agree with Mirette that when the gas is there, more of the volumes will be directed to Europe, which is becoming more dependent on import gas, although the consumption rates are remaining relatively steady. We don't see much growth, but since the declining production within the Europe, from the Netherlands from North Sea, requires more LNG and more gas to be imported. And this is where is East Med can play in.
Alistair Taylor [00:09:08] Mirette, what are the kind of major factors helping or hindering energy cooperation?
Mirette Mabrouk [00:09:13] Okay so, helping: The bottom line is always a huge motivator. And these countries stand to make more money working together than not. There's also the fact that countries like Cyprus, which are smaller and significantly more vulnerable, have a lot to gain from cozying up to larger countries like Egypt or Israel. And Egypt, Greece, and Cyprus signed a security agreement back in 2015 that really just sort of talks about, it's more economic than military, but although they do military exercises, none of this is NATO-based. No one is going to go to war to protect anyone else. But still, there are some very serious commercial ties. So it would be a hindrance to any sort of aggression, but what it really boils down to is is money. These countries stand to make a lot of money working together. I mean, they have resources that are all in common and in some cases, some countries have an existing infrastructure that the others can sort of piggyback on. So it works out well for everyone. Hindering is really regional tensions. I mean, I think Rauf can speak better to that. But Turkey's position at the moment is tossing up a fair amount of concern. I think that's the biggest hindrance.
Alistair Taylor [00:10:31] The main issue. We'll get into that a little bit more detail in a second, but I wanted to — on that had a more positive regional cooperation front — touch on one of this year's big developments, which was the launch of the Eastern Mediterranean Gas Forum in January, as hosted by Egypt. Can you kind of maybe delve into that a little bit more? Who was involved? How big a deal is that as you see it?
Mirette Mabrouk [00:10:52] OK. So it was actually a fairly big deal, and I think it was a big deal in two senses: one on the commercial side and one on the political side. And on the political side it's easier. Egypt is trying to reclaim a regional role and regional prominence that has been quite seriously knocked since the 2011 revolution. On the commercial side, what these countries did was they put together a forum, which essentially works out how and why and when to excavate to dig up money to cooperate. They talked about creating systemic dialogues and independence and benefits, and what that really means is cooperation. That's what's called a forum rather than anything else, because it needs to be fairly loosey-goosey so that it can develop as things come up whether it's technology or aggression or or anything else. But it was — it is — very, very important, and all the energy ministers of all the countries were there. I think it was Egypt, Israel, Cyprus, Greece, Jordan, Palestine. There's one: Italy, not Lebanon. Exactly. Well there are there are two big things missing. One is Lebanon, because of course Lebanon is at war with Israel. And the other one is Turkey because, you know, Turkey. So again Rauf could probably go into detail about that. So it is important. I mean if you look at it as another geopolitical commercial hub to offset, you know, whether it's European claims or U.S. claims or Russian claims, it's important.
Rauf Mammadov [00:12:27] It's important also because the East Med is so fragmented, politically and commercially. And we see this simultaneous process going on in southeastern Europe, which is also fragmented infrastructurally and less politically, although there are differences. It's important to see these two hubs try to create some coherence at the same time. And then, if it goes well when there's gas, then these two hubs can be merged, which can be helpful both for the suppliers and the importers as well in terms of making money and for Europe decreasing its dependence on Russia.
Alistair Taylor [00:13:04] On the kind of Turkey point that has been raised a couple of times, it does seem to be the the biggest odd man out of this whole dynamic. What's your kind of read on that? How does Turkey factor into that kind of broader equation?
Rauf Mammadov [00:13:15] Ankara feels disenfranchised from whole process for different reasons. First of all, Turkey has been struggling to find its own oil and gas reserves since I remember.
Alistair Taylor [00:13:24] There's virtually no reserves whatsoever.
Rauf Mammadov [00:13:26] And they have failed. You know, we have this Canadian company,, Valera I think drilling in Black Sea. There have been some other times, both onshore and offshore, but so far to no avail. And also politically, geopolitically, Turkey had issues with Israel, with Cyprus for the obvious reasons, and Turkey doesn't recognize any border delimitation or economic zones between all the agreements made between Cyprus and Israel, Egypt and Israel, Egypt and Cyprus. They did not recognize it. I'm a little bit optimistic in terms of their actions, and I've seen some progress. You know, they have called back the Barbarossa, that famous vessel that I've been trying to hinder the process. It will be difficult to bring Turkey into this community because of those differences. But again, the bottom-line factor, if it's there and if international community — all these countries — build their strategy on the idea that not only zero-sum approach, but on the idea that both Egypt and Greece and Turkey can be major hubs and transit countries, and their connection, their coordination will only enhance their positions and make them more susceptible to this process. In that case, Turkey can come to the board. But I think it will require more package deal, more comprehensive approach. There are outstanding issues that has been there for decades, for longer than I have lived. And it will require more in-depth negotiation with Turkey to bring them on the table.
Alistair Taylor [00:14:59] It does seem certainly that Turkey would have a lot to offer in the sense of being kind of a large regional country. Geographically, of course, it's kind of in the middle of where all these things want to happen. It's a huge importer of gas as it stands. So it seems like if they can find a way, there would be a lot of upsides to tying them in all of this as well.
Rauf Mammadov [00:15:16] One clarification about Turkey. Unlike Egypt, Turkey — and here I'm talking about from a technical standpoint — unlike Egypt, which has more chances to become a gas hub, Turkey still had to work on the technical side as well. There is a difference between being a gas hub and a gas transit country. And the different lies in the fact that you have to have liberalized market, which Egypt has been doing for last three or four years, hasn't finished it yet but still doing it. And what's more important, Egypt has a lot of gas storages, which Turkey doesn't have. So you have to have these two components in order to become flexible to load the gas.
Alistair Taylor [00:15:53] Also on the Turkey front, politics plays a role between Turkey and Egypt, too. Certainly been kind of longstanding conflict there. How does that factor in, Mirette?
Mirette Mabrouk [00:16:02] OK so, relations between Egypt and Turkey have been fractious, to put it politely, since the ouster of former President Mohamed Morsi, where things took a steep nose dive and have not yet pulled up. However, Turkey is currently getting about three percent of its gas from Egypt. So it would be to Turkey's advantage to hop on the wagon here, all right? Now, on the one hand, it may be that these issues will distract from various issues that Turkey is having at home. It's always a good political ploy. However, it really would be in Turkey's interest to hop on the wagon here. Now, there are for example, Turkey doesn't recognize the treaty between Egypt, Greece, and Cyprus that was signed back in 2013. It doesn't recognize it. But I don't know it's in Turkey's interest or that Turkey will have the bandwidth to continue to antagonize Egypt, Israel, Cyprus, Greece, Italy. Now, you could argue that it already has fairly fractious relations with all of them anyway. But still, during a time when it really would be in Turkey's interest to perhaps try and inject a little prosperity back home into an already uncertain economic situation, it would probably serve Turkey well. And certainly on the Egyptian side, this government has made it extremely clear they are not in the slightest bit interested in any military conflicts or any conflicts, really, of any sort anywhere. So it would take a lot to move anyone, and it doesn't hurt that Egypt is the region's largest land army. But just on the commercial side, it would be better if everybody got on. But I think Turkey is going to have to step up, if it chooses to do so. I don't know that it chooses to do so at the moment. I don't really see it much. I'm not a Turkey expert. But it is getting three percent of its gas from Egypt, so this may be an opportunity.
Rauf Mammadov [00:17:56] Along not it gets three percent of its gas from Egypt, but it's also relying more on imported LNG from Algeria, from Qatar. And now these countries have better proximity to Turkey than Qatar or Algeria in that case. And we see the current price environment dictates, you know, preference to LNG. And this case, these countries can only benefit that. And one example I can give: When that famous dispute between Erdogan in Davos, where he made that scandal, after that you know the relationship between Israel and Turkey has gone nose down. But regardless, the trade turnover between the two countries actually doubled since then. So money matters. Money talks here, and I hope that will be the case with East Med and Turkey as well.
Alistair Taylor [00:18:42] Absolutely. Circling back to the kind of EU role in all of this, can you maybe speak, Rauf, a little bit about how the eastern Mediterranean fits into the EU's kind of bid to diversify and secure its supplies and diversify away from Russian spies in particular?
Rauf Mammadov [00:18:58] Yes, we know Russia supplies almost 37, 36 percent of Europe's imports. And despite the sanctions, they have actually break the record of supplies for last two years. It's a huge problem. It's a pipeline gas, which is a lot cheaper than LNG, and it's very hard to compete. The only pipeline project they have at the moment is from Azerbaijan — from my home country — of South Caucasus pipeline. But the capacity is only 10 billion cubic meters, compared to up to 200 billion cubic meters to Europe and Turkey. Having said that, southeastern Europe is, as I mentioned before, is very fragmented. But also from the upper hand, is that the import capacity, and also the consumption in these countries except Italy, is not that much. For instance, Bulgaria only consumes three billion cubic meters, which is not that much compared to what Italy or what Egypt consumes: almost 70 billion cubic meters. So it makes sense to include this region, to use it as alternative supply. But however, from all the agreements we have seen and read — Mirette mentioned some of them — all the pipeline agreements have been so far not to north but to the west, towards Egypt. Jordan, whether it's contracts or MOUs, Memorandum of Understandings, or any kind of agreements, it's either been with the Palestinian Authority, Jordan, and most of them have been between Cyprus and Egypt, Israel and Egypt. The only reason is that the infrastructure is there. The Pan-Arab pipeline is there. It has been built a decade ago. It hasn't been functional for obvious reasons. But the companies will always choose to use the existing pipelines and existing infrastructure because these projects, when you make a final investment decision for these projects, first priority is the logistics. How will you get your gas to the market? And the companies will always go for the most cost-efficient way. And that's the existing pipelines. If you want to build a pipeline, the Eastern Mediterranean pipeline that they talk about, it's 1200 kilometers. Just to put it in context, it's from here to Key West, Florida. Subsea pipeline, seven billion dollar price tag with a lot of geopolitical issues, where it will go through, who will build the pipeline, who will finance it. Yes, Europe has allocated some resources as a project of interest to East Mediterranean pipeline, but it's less than a hundred million dollars. It's just for research. So, as Mirette mentioned, bottom line is very important. The commercial feasibility of the pipeline is very important. There is a potential to connect the pipeline, to tap Trans-Adriatic pipeline, which has a spare capacity, which is a scalable pipeline, which means adding several pipes, you can expand the capacity. But so far we have only seen all the logistical solutions towards Egypt, towards neighboring countries, and using the existing infrastructure.
Alistair Taylor [00:21:47] We're running short on time but, Mirette, where do you think things will go from here?
Mirette Mabrouk [00:21:52] I'm actually quite hopeful. We keep saying the bottom line, but it really is in everyone's interest to get things going. So there's been international interest, and the U.S. finally caught on to the fact that this might be a good idea, I think. And I think it's actually asked for observer status on the Eastern Mediterranean Forum. I don't know that they'll get it, basically because if you allow the U.S., then you should allow everyone else. It might just get messy. But I do think that what you're looking at, at the very least, is the ability for many of these countries to work on their research and development. I mean, a lot of these countries are investing in renewable energy as well because, I mean, everyone knows that it's it's foolish to count on natural resources because they run out, and a lot of these countries have rapidly expanding populations. And I think what this will do is give them the breathing space to be able to sort out other issues that they're going to have down the road. It's not like they're going to make oodles of money, but it does allow them — and this is where the geopolitics comes in — it allows them breathing space, and it allows them a certain amount of independence. So there's going to be less pressure from other internationals. I think that that's the most important thing.
Alistair Taylor [00:23:05] We'll have to leave things here, but Mirette, Rauf, thank you both for joining me on the program today.
Mirette Mabrouk [00:23:09] Thank you for having us.
Alistair Taylor [00:23:11] And thank you as well to our audience for listening in and to our production team for their work on today's program. We will see all of you next week.